From: Tiberius Gracchus (cryofan@mylinuxisp.com)
Date: Wed Aug 15 2001 - 05:06:20 MDT
On Wed, 15 Aug 2001 00:33:30 -0700, you wrote:
>Depressions caused by loss of economic confidence might be predictable.
>http://www.nature.com/nsu/010816/010816-12.html
>A new model of economic fluctuations suggests that a global recession is
>indeed imminent - probably worse than that of 1990-91 - and that forecasters
>should have spotted it a year ago1.
>
>Depressions in the US economy become a near-inevitability at least a year
>before they happen, says Elliott Middleton of Placemark Investments in Dallas,
>Texas. His model predicts, a year in advance, all five of the slumps between
>1969 and 1998, and generates no false alarms.
>
>With this track record, the model's forecast of a recession in the second half
>of 2001 seems worth taking very seriously. Last May, professional economists
>put the chance of such a slump at about one in three; now many businesses are
>bracing themselves for it. Middleton expects the coming recession to be less
>serious than those of the 1970s and 1980s.
>
>Slumps seem to be an inevitable aspect of any economy; the business cycle of
>boom and bust has become a standard part of economic lore. But these changes
>are not really cyclic at all. Although bad times inevitably follow good, there
>is no regularity to the rise and fall of the economy.
>
>This makes recessions embarrassingly hard for economists to predict. In the
>words of John Kay of the London Business School: "Economic forecasters all say
>more or less the same thing at the same time, but what they say is almost
>always wrong."
>
>Middleton believes that there is something of a self-fulfilling prophecy about
>recessions. Businesses and investors lose confidence in the buoyancy of the
>market; their timidity causes a slowing and eventually a turnaround of
>economic growth. The British economist John Maynard Keynes dubbed these
>subjective levels of market confidence 'animal spirits'.
>
>Nothing, it seems, deflates these spirits like unemployment. The moment the
>unemployment rate ceases to improve, confidence plummets and the economy heads
>for a turnaround, transforming a boom into a slump. Because unemployment
>levels cannot get better for ever, a boom, in effect, carries the seed of its
>own demise.
>
>Loss of confidence can be detected in the variations of an economic index
>before the slump itself takes hold, Middleton says. Crucially, he asserts,
>market agents are adaptive: they take their norms from recent events rather
>than from any absolute judgement about what is a good or bad unemployment
>rate.
>
>So Middleton's model derives confidence changes from adaptive changes in
>unemployment, and uses the resulting prediction to forecast slumps.
>
>For the post-war US economy, the model works well. But in other countries -
>where the memory of the 1930s' Great Depression is less haunting -
>unemployment might not be the main influence on confidence levels, Middleton
>cautions. This might explain why previous attempts at forecasting have met
>with varying success in different countries.
>
>Reference
>1. Middleton, E.'Animal spirits' and expectations in nonlinear US recession
>forecasting. Preprint, (August 2001).
Yeah, but how does he MEASURE his quantifications/variables, or what
are they based on? He's not really saying, I don't think. I
basically agree with him that finance is based on confidence. I wrote
a perl script a few months ago to try to measure/relate the stock
market to negative words in financial news stories. Then I graduated
and got a job and haven't had time to look at the long term effects...
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