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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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Economic Forecasts: Lies or Idiocy? Part I

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Originally published at BullionBullsCanada.com

There was an interesting report from Reuters today, which (for the first time) takes an aggregate look at the utterly futile/incompetent “forecasts” which have been inflicted upon us by Western “economists” and “experts” over the past four years. It is nothing less than a litany of failure and disgrace.

There are two aspects to this piece which make it very useful. First, it provides a considerable list of anecdotes illustrating the mind-numbing incompetence of these mainstream prognosticators. Then it goes one step further and offers an explanation for such pervasive failure. Let’s begin with the former.

The May U.S. non-farm payrolls report and Philly Fed Index both reported numbers worse than the lowest “forecast” of the dozens of “experts” who participate in those surveys for the mainstream media

In June 2008, not one of the “top-24” economists in the UK predicted a recession (with “similar” figures in the U.S.)

None of the 24 “experts” polled by Reuters predicted that the UK economy would contract in the fourth quarter of 2010.

Those same “experts” were too optimistic on 20 out of 27 categories of economic statistics for the U.S., UK, and the Euro zone for both the months of April and May

More generally, the margin of error for these pseudo-experts in their predictions for GDP have gone from 0.1% (pre-crisis) to 0.5% (today). Put another way, their forecasting of this vital economic statistic is now only 20% as reliable as it was a mere four years ago. What Reuters fails to add is that the huge increase in the bias/inaccuracy of these forecasts is invariably to the up-side.

Obviously, when an entire flock of “experts” demonstrates a large, consistent bias toward “optimism”, one explanation immediately leaps out to explain this sudden lapse in accuracy: these experts are in fact nothing but market-pumping shills, continually telling the investing community that “things are getting better” in order to lure them (and their money) into the banksters’ casinos (i.e. our equity markets).

The two Reuters writers who compiled this piece were (strangely) unable to identify the motive which I found so obvious, however (to their credit) the writers come up with an explanation which also plausibly accounts for the sudden and horrendous inaccuracy of economists and market experts. They label this phenomenon as assumptions of “mean reversion”.

The premise is quite simple. The “reason” why all these economists/experts have suddenly and consistently displayed a grossly over-optimistic bias for the past four years is that they “expect” our economies to “revert to the mean”. In other words, rather than restricting their analysis to the actual data in front of them, they are allowing their analysis to be biased/clouded by assuming that our economies “must” move back toward the long-term trend of economic performance. Of course there is an even simpler term which accurately describes what these experts and economists have been doing for the past four years: they have been guessing.

To this point in my analysis, we are presented with two explanations as to how/why all of our experts and economists have suddenly and consistently had the accuracy of all of their forecasting plummet by 80%, all the while demonstrating a clear and unmistakable bias to the up-side:

1) The obvious explanation: our “economists” and “experts” are nothing more than market-pumping shills.

2) The Reuters explanation: that this esteemed collection of experts has either suddenly reverted to merely making guesses on their forecasts for our economies, or that they have always been simply guessing – we just never had economic data extreme enough to expose these charlatans until the last four years.

Before I offer two deeper, darker explanations of my own for this phenomenon, let me spend a little time expanding on my “simplification” of the Reuters explanation as implying mere guesswork by the Western world’s most highly-respected “voices” on our economies.

Critics will argue that I am over-simplifying if not ‘twisting’ the facts here. They will argue that an assumption of “mean reversion” is not mere guessing, but rather that these predictions represents sensible “expectations”, or (at worst) that they should be labeled as “educated guesses”. Such criticism is entirely without merit.

I have consistently written that “nothing has been fixed” and that the only possible economic trend for our debt-bloated economies is lower – and such analysis has been consistently validated. To my credit, I have four years of economic study to support such analysis. However, there have been many other non-mainstream commentators who have made similar arguments, without any formal training in this field of any kind.

The reason why even non-professionals and non-experts have been able to “predict” the performance of our economies with enormously greater accuracy than all of the mainstream pundits is because the deterioration of our economies has reached such extreme proportions that the continued, downward spiral of these economies is now merely a matter of simple arithmetic.

Contrary to the “wisdom” of mainstream experts and economists, the economic fundamentals for a nation are ultimately no different than those of an individual household. If I owe $1 billion, then there is nothing “sensible” about assuming that my personal finances will experience “mean reversion” – i.e. one morning I will wake-up and magically discover that everything is “back to normal”.

In such a scenario, there is no plausible reality where I could ever return to solvency. I could never possibly be bailed-out by getting a “raise” at work, receiving an inheritance from a “rich uncle”, or even winning a lottery. In any and all plausible realities I would remain hopelessly insolvent, and so it is with many/most Western economies.

We can demonstrate this conclusively by expanding upon what “mean reversion” actually implies for our economies. It implies that people will have the same amount to spend in the future as they always have. It implies our economies will generate just as many jobs in the future as they always have. And it implies that (as a result) our governments will take-in the same levels of revenues which they always have. It is the simplistic expectation that, like a car which has just received a tune-up, our economies will now operate at the same level of performance/output as is consistent with long-term trends. In fact, it is a totally ludicrous expectation, yet without assuming all of this “mean reversion”, these forecasts are literally nothing but wishful thinking.

To expect our debt-saturated economies to perform at the same level of efficiency as when they were debt-free (or nearly so) goes beyond any definition of idiocy, and enters the realm of insanity. Again, this is all just simple arithmetic. Our governments are now using (roughly) between 15 cents and 30 cents out of every dollar of revenue they receive simply to service our mountains of debt. Note that there is no “economic benefit” of any kind in wasting $trillions every year in servicing these debts. Our governments might as well be lighting a match to every third or sixth dollar which they take in as revenues.

On that basis alone, there is no possibility of our economies operating at a level of efficiency which reflects long-term trends. The ‘albatrosses’ of debt hanging around the necks of our governments impede and impair their abilities to manage our economies (and optimize performance) at every step. Yet to all the “experts” and “economists” who populate the mainstream media, apparently these debts are totally invisible – as this is what their “predictions” directly imply.

Of course, our economies are weighed-down with much more than “national debts”. Regional and local levels of government are also saturated with debt, severely impairing their ability to supply “essential services” such as schools, health-care, and adequate policing of our streets. Meanwhile at the household level, average debt-levels are at all-time highs. This is illustrated best by looking at the worst of the deadbeat-debtors: the United States.

The U.S. currently sits with a total public/private debt of approximately $60 trillion. Five percent of the global population are burdened with a mountain of debt greater in size than global GDP. And this massive total doesn’t include one penny of the $100 trillion (or so) in “unfunded liabilities” which the U.S. government hides “off-balance sheet” like some sleazy Wall Street bank. The most oft-cited authority for the total of all of these debts and liabilities is Professor Lawrence Kotlikoff, who estimates the grand total as roughly $200 trillion – nearly four times the size of global GDP.

However, even if we focus exclusively on existing U.S. debt, we immediately see the hopeless insolvency of the U.S. on display. While the Federal Reserve (and its mouthpiece B.S. Bernanke) continue to talk about an “exit strategy”, the reality is that raising U.S. interest rates merely from 0% to 1% would drain an additional $600 billion in interest payments out of the U.S. economy – every year. As I have explained on many occasions, such a massive capital-drain out of the crippled U.S. economy would result in an immediate downward spiral into bankruptcy.

In other words, the U.S. has now become such a totally “deadbeat” economy that charging any interest at all on its massive debts will inevitably lead to bankruptcy. Even with the official interest rate frozen permanently at 0% (as low as it can possibly go), the current $1+ trillion annual deficits of the U.S. economy are totally unsustainable, and there is no possibility of revenues ever rising enough to reduce that budget-gap without the largest tax increases in the history of the world.

Expecting the performance of the U.S. economy to “revert to its long-term mean” isn’t the “sensible expectation” of an expert, rather it is nothing but the absurd guess of individuals who either refuse to view economic parameters as they really are, or are simply unable to understand those parameters.

In the conclusion of this commentary, I will offer two additional explanations for the “herd mentality” exhibited by these economists and experts, and the woeful inadequacy of that “herd” which are even less complimentary of these individuals than my analysis to this point.

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