Wednesday, January 04, 2006

what's in store?

I'm fond of Richard Pearlstein's business columns in the Washington Post. Today's is both typical and especially useful. He starts by reviewing the consensus prediction for the U.S. economy this year and then worries it, bit by bit, to reveal areas of probable overconfidence.

If you look to the right, you'll notice that my current reading includes The Wisdom of Crowds, which explains why expert projections are so frequently worse than random ones. For this reason, I had been growing uncomfortable in reading economic projections for '06 and sighed with relief on reading this Pearlstein column.

Here's a citation and extracts:

With Rosy Predictions, Pundits Missing 2006's Warning Signs
By Steven Pearlstein
Wednesday, January 4, 2006

The consensus view, in case you've been on a beach reading Dan Silva spy novels these past two weeks and missed it, is that everything is going to be peachy-keen in 2006. ... [L]ast year did turn out better than we worrywarts would have imagined. The economy's ability to withstand energy-price spikes, hurricanes and the Republican political meltdown was truly impressive. ...

But reduce it to its bare essentials, and the story of 2005 was that oil producers proved just as willing to lend us the money to buy oil that we otherwise could not afford as the Japanese and Chinese have been to lend us the money to buy cars, jeans and flat-screen TVs. The arrival of this newest credit card from the Middle East may have allowed us to live above our means for yet another year. But let's not fall into the trap of confusing that with long-term economic health.

He goes on to give a more cautious prediction than his peers: Dramatic slowdown in economic growth, increase in inflation and interest rates. Continued decrease in the value of the dollar and, as a result - finally - an increase in exports. And a "newfound reluctance of foreigners to invest their trade surpluses in dollar-denominated Treasury bonds."

In concluding he lists some warning signs and risks and says: "Will things play out exactly this way? Surely not. But if history is any guide, the odds in favor of it are no worse, and probably a bit better, than the remarkably rosy scenario embraced by Washington and Wall Street."

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