There's a lot of good money in bad news

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The Independent Online

The anxiety in America is providing lucrative opportunities for economists, analysts, hedge-fund managers and every other sort of spoon-bending, star-gazing rune-caster. There's a lot of money to be made from predicting downturns and advising clients - certainly far more than actually betting on the recession and shorting stocks yourself. The demand for People Who Know is all but insatiable - right or wrong, they answer a deep psychological need.

The anxiety in America is providing lucrative opportunities for economists, analysts, hedge-fund managers and every other sort of spoon-bending, star-gazing rune-caster. There's a lot of money to be made from predicting downturns and advising clients - certainly far more than actually betting on the recession and shorting stocks yourself. The demand for People Who Know is all but insatiable - right or wrong, they answer a deep psychological need.

And it's not only the experts - the politicians are also in the market, making capital out of their confident assertions. "The euro has already begun to strengthen against the dollar, and that will probably continue," said John Monks, the union leader, quite as if he knew what he was talking about.

The fact is, he doesn't know. The other fact is that nobody knows. And the last, most interesting fact is that nobody can know. Anyone who says they know is a salesman or a psycho.

There's a test here you can do yourself. Do you actually believe the euro will strengthen this year? If the answer is affirmative then surely you will mortgage your house and invest everything you own into buying euros on the margin, secure in the knowledge that you will be rich in 12 months time. Few of us - even currency specialists - believe anything with this degree of certainty, but very many think we do.

The Fed's Alan Greenspan admits his ignorance cheerfully, insofar as a central banker does anything cheerfully. While he is credited for America's prosperity, he declares that the reasons behind 10 years of growth, rising living standards, the productivity and employment boom are a mystery. Inexplicable. Unknowable. It isn't just modesty that he is expressing but a profound insight into the exhilaratingly unpredictable nature of the world.

William Sherdern's book The Fortune Sellers is a useful supporting text. Sherdern's proposition is that expert economists are as useful as celebrity astrologers in predicting economic events. The forecasts made by six big organisations during the volatile early 1970s were gloriously bad. Out of 48 predictions, 46 missed the turning points in the economy. The big three government agencies - including the Federal Reserve and the Congressional Budget Office - failed by 270 per cent to predict the severity of the 1980 recession, which turned out to be the worst since the Depression.

So he draws lessons from the fortune-selling industry: the naive forecast (which says that next year will be the same as this year) is a more reliable guide to the future than anything else. He says that economists' forecasting skill is on average about as good as coin-flipping. There are no economic forecasters who consistently lead the pack in forecasting accuracy. Increased sophistication, such as the use of computers, provides no improvement in forecasting accuracy. Consensus forecasts offer little improvement. There is no evidence that forecasting skill has improved over the last three decades.

Indeed, he says, when the IMF and the OECD claimed their forecasts were more accurate at the start of the 90s, they were correct. However, over the same period, the naive model had become even more accurate. "The notion that the economy has regular business cycles is a myth," Sherdern says. "Although the economy surely fluctuates between good times and bad, it does so irregularly." In the words of the forecaster and founder of Chase Economics, Michael Evans: "The problem with macroeconomic forecasting is that no one can do it."

This is an important subversion of our ruling class. For all the Prime Minister's talk of not returning to the boom and bust of Tory years, he hasn't the first reliable idea of what will happen to the economy this year.

And he can't have.

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