Making Accurate Predictions About the Economy

With the new year upon us, so too are the predictions for the United States Economy for the new year from all the Economic "Experts" and Pundits. Well, you can take all of those predictions and throw them right out the window (or as my friend is fond of saying as he stands over the trash can and dumps unwanted material, "file them") because they are all worthless. If any of them are accurate, it is due entirely to pure luck. How do I know this?

The overwhelming factor that determines how the Economy will do today is the Federal Reserve. By manipulating the money supply and interest rates, the Federal Reserve causes changes in economic behavior, which causes changes in economic growth rates. The Federal Reserve can, and frequently does, change policy course at moments notice. If someone makes a prediction about the Economy without taking this into consideration, the only way that that person's prediction could possibly be accurate is through sheer dumb luck.

As we head into the new year, no one, including the policy makers at the Federal Reserve, knows what the Federal Reserve is going to do this year. Anybody who tries to predict what the Economy will do over the coming year without knowing, or at least having a very good idea of, what the Federal Reserve will do this year has no hope of being correct, beyond sheer dumb luck (and sheer dumb luck has caused a few prognosticaters to gain unwarrented guru economic status over the years). This is why I have argued for a long time now that the Federal Reserve should follow a crystal clear policy path based upon sound logic and historical facts, and not upon the whim of a handful of Academicians and Bankers, who often make policy decisions based upon the flavor of the month currently popular in economic circles at the time ("anything under 6% unemployment will cause inflation" - God help those in the hands of such people).

When I made an accurate prediction for the Economy back in October of 2005 (see previous posts), it was clear to me what policy course the Federal Reserve was on, and so I was able to make an accurate prediction for the Economy. (Over the years I have had an uncanny knack of accurately predicting what the economy will do, which has caused a number of people to ask me for predictions about the Economy. If I have a clear idea of what the Federal Reserve is going to do I will tell them, but most times my answer is, "Tell me what the Federal Reserve is going to do over the next six months, and I'll tell you what the Economy is going to do.")

In October of 2005, I predicted that the Federal Reserve would likely keep raising interest rates until it had choked off all economic growth. That did not happen. Why? In the weeks prior to when the Federal Reserve stopped raising interest rates, I sent a copy of my October 2005 prediction to the current Federal Reserve Chairman, Ben Bernanke. I also gave him this site's web address. So far, the Federal Reserve changed course before they did choke off all Economic growth. The risk that they may go back to such an unwise, and historically inaccurate, policy remains.

We head into the new year with great uncertainty regarding what policy course, or courses as the case may be, the Federal Reserve will follow over the coming year. Without knowing what the Federal Reserve will do this year, it is impossible to make any accurate forecasts or predictions for the Economy in 2007, beyond sheer dumb luck.