Belmont Club

Let me tell your fortune

The Federal Open Market Committee met in the last days of December, 2008 in Washington to take assess where the US economy was going. The short take was that it was headed down.

The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter. … Economic activity in most advanced foreign economies contracted in the third quarter, driven by sharp declines in investment and by significant negative contributions of net exports, as the global recession took hold more strongly.

The question was, for how long? The FOMC staff forecast that things maybe things would pick up by 2010. “In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010.” But that recovery was predicated on the success of government stimulus and many of the conference participants rightly concluded that projections based on assumptions of success were by no means certain.

All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. …

Meeting participants generally agreed that the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern. Indeed, the severe ongoing financial market strains, the large reductions in household wealth, and the global nature of the economic slowdown were seen by some participants as suggesting the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome.

In short, it sounds like everyone is hoping for the best but no one really knows what’s going to happen in the next five years. Over the really long term, rising population growth and technological advancement probably guarantee a return to economic growth. But we live in the short term; and what will happen over the next half decade is probably going to be determined by contingent events like which way fuel prices trend, whether the world’s economies can clean up their act and finally, the avoidance of catastrophic political events. In other words, to the question, ‘what will tomorrow bring?’ the answer is ‘it depends’.

My own personal feeling is that outcomes will be driven by culture, technology and luck. Politicians may think they are ‘in control’, but maybe the best they can aim for, like the doctors of the pre-scientific age is simply to do no harm. But by definition, politicians have oversized egos. They’ll ‘help’ us, whether it does any good or not. Or at least, they’ll help themselves.