Struggling against pessimism:
The obvious ineptness in governments throughout the Western world was immensely frustrating and made it difficult to avoid pessimism during the second half of the 1970s. I expressed this pessimism in a political analysis written in 1976. It was my worst political forecasting error. By 1980, this pessimism had deepened, and in 1983, contributed to my worst, and only bad, economic forecasting error during the two decade period of active economic forecasting that had begun in 1966.
The Miami Review:
(12/13/78, p. 2)
"Pardon me while I take a bow!
"This year, 1978, marks the completion of a dozen years during which I have been providing an accurate alternative for those who want reliable economic forecasts but who know that the economic forecasts publicized by the popular media, the forecasts of 'authoritative' government and academic economists, are so distorted by ideology and political pressures as to be wholly unreliable.
"Government and most academic economists have been establishing an amazing record of almost complete incompetence during the last dozen years.
"They have missed one vital economic turning point after another, and have an amazing 100 per cent record for grossly and continuously underestimating both the severity of inflation and the seriousness of the recessions that quickly follow the government's periodic efforts to control inflation. Initial government forecasts for 1979 indicate that we can expect no change in this record of incompetence.
. . .
"As I predicted, the dollar continued to decline; the price of gold hit a new record, the government responded by selling substantial amounts of gold and taking a few of the other stabilizing measures still within its diminishing capabilities; both inflation and interest rates rose to double digit levels before the end of the year, more than a full percentage point higher than predicted by the least inaccurate 'turkeys'; and, the stock market's trading range was relatively narrow, with equity values continuing to lose ground to inflation.
. . .
"It is not the recession [in 1979] that is in doubt, the recession is a certainty. It is the severity and duration of the decline, and the degree to which inflation will be slowed down, that become uncertain because of doubts about government policy responses to the developing recession." (BOOO)
Pride goeth before the fall.
With the 1980 - 1982 depression, all the economic twists and turns predicted in my book, "Dollar Devaluation," back in 1967, would come to pass exactly as I had predicted. See "Lets Look at the Record I," Futurecasting_record_1. The certainty that the downturn was imminent was thus a proud moment for me.
It is obviously better to be six months too early than to be six months too late when predicting serious economic downturns. However, this was still my first real economic forecasting error. In the event, the Fed, now under the incompetent G. William Miller, couldn't stand the heat. It once again accelerated the growth of the money supply until the final quarter of 1979, and left the election year, 1980, and the two years thereafter, with even deeper problems and a real depression.
(1/15/79, p. 19)
"Showing all the strength and resolve of a wet noodle, the Carter Administration has been pushed into the anti-inflation fight. (The wet noodle would crumble yet once again, and it would be one of the factors that cost him his reelection.)
. . .
"History is once again proving that inflation is a deteriorative disease, that can't be 'lived' with.
. . .
"If there is any progress made against inflation in 1979, it will occur because of the recession, and will be hindered, not helped, by wage and price controls.
. . .
"It can confidently be predicted that there will be a recession in 1979. It will begin in either the second or third quarter, depending on whether the Administration jumps or has to be pushed into its austerity program." (BOOO)
"The stock market's basic trend will be down at least through the first half of the year. The Dow Jones industrial average will easily break 700 and will probably go below 650. Helping to drive it down will be interest rate increases that will continue until there is a discernible slowdown in economic activity.
"Unemployment will easily exceed 7 per cent before September; it will reach 8 per cent early in 1980 unless steps are taken to reflate the economy.
"The price of gold will move erratically, jumping upwards in response to periodic financial and diplomatic crises, but otherwise facing constant downward pressure from increased interest rates and the economic slowdown. If the recession is allowed to develop for a few months, dramatic improvements in the nation's international trade and payments accounts should occur boosting the value of the dollar and causing a broad retreat in the price of gold." (BOOO)
These predictions, although six months too early, were really good calls. Not even I could believe that the Carter administration would be so stupid as to put off the recession until it became inevitable in 1980 - a presidential election year.
(6/29/79, p. 3)
"The Fed undoubtedly wants to prevent the onslaught of the recession of 1979. However, my bet remains, as it has been all year, that the Fed will ultimately be helpless to prevent it.
"The dollar can't be supported without a significant reduction of the nation's balance of payments deficit, which in turn requires a significant reduction in energy usage, which in turn requires a significant reduction in overall economic demand, which in turn requires an austere stance by the Fed and a substantial recession.
"The international money markets are about to impose discipline and responsibility on G. William Miller and the other reluctant warriors of the Federal Reserve Board.
"We will have a recession whether they like it or not."
True, but it came a few months later than I thought.
(10/19/79, p. 3)
"Abandoning its efforts to control short-term interest rates and giving up its battle to slowly achieve a 'soft landing' from inflation, [the Fed] is now acting directly to restrict the growth rates for credit and the money supply.
. . .
"A recession that develops faster, dives deeper, causes more financial failures, and proves more difficult to pull out of than anything currently predicted by government or the vast majority of private forecasters now seems assured." (BINGO TO THE MAX!)
Who will provide the leadership?
Looking in vain for the modest amount of political leadership needed to prevent even worse economic dislocation, in 1980 I began to write some forecasts based on "worst case" scenarios. I visualized the possibility of a whole decade of inflationary depression. While the decade didn't turn out to be as bad as these worst case possibilities, I was not that far off in my forecasts. Indeed, it began with the worst depression since the 1930s, and inflation, interest rates, and unemployment persisted throughout the 1980s at levels that would have seemed intolerable just ten years earlier.
It took a while for Paul Volcker to show that Carter had made a brilliant appointment. It took a few months for Ronald Reagan to demonstrate that he was man enough to stand the heat of the 1980 - 1982 depression while Volcker did his job and began to undo some of the damage caused by the previous two decades of Keynesian economic policies.
This period of pessimism had its roots in 1976, when I looked around for effective leadership, but there was none to be found anywhere in the democratic world.
(3/19/76, p. 1)
"Where are the political leaders who can guide the United States and the other nations of the Western world through their current difficulties? What has happened to the vaunted ability of the Western democracies to generate the leadership needed to guide them through periods of crisis? Why are all the Western democracies afflicted with such bland and ineffectual leadership at the same time?
. . .
"With government activist theories discredited, with no proof that a 'soft landing' can be provided once inflation takes hold, and with electorates still insisting that candidates at least provide them with hope that inflation's problems can be dealt with without undue hardship or massive cuts in government services, the only candidates whose chances remain viable are those who are fools, demagogues and/or cynics. The Western democracies are unlikely to obtain effective leadership from such men." (BOOO TO THE MAX!)
A political call rather than an economic forecast, this was nevertheless one of my worst predictions.
It is an unforgivable error to lose faith in democratic electorates. During this time of troubles, neither the idiot left nor the idiot right could make any real headway. It may take awhile, but electorates do eventually get it right. Just when things looked darkest, in the 1980s, the Western democracies enjoyed the strongest, most effective leadership since WW II, and their electorates surprised all the pundits, including me, by insisting on strong cold war leadership and supporting the harshly austere policies needed to provide economic stability and, ultimately, regain financial strength.
(1/15/80, p. 7)
"1980 initiates a period of indefinite duration, during which the United States government will experience repeated frustrations and failures. The nation will visibly decline economically, militarily and politically." (BOOO)
We would indeed suffer much, but Volcker, Reagan, and then Greenspan would rebuild stability and strength.
"The recession and the deregulation of energy prices, if they are allowed to develop, will solve the nation's energy and international payments problems. (BINGO)
"1980 will see unemployment rates rising above 8 percent, the failure of Chrysler and several other major economic entities, a renewal of New York City's budgetary troubles, and a renewed surge in the price of gold that will occur shortly after the initiation of Federal Reserve Board efforts to restimulate the economy. (BINGO)
"Indeed, every crisis will see such flights of capital into gold. The economy will stagger and the stock market will continue to lose ground to inflation. (BINGO)
"This scenario will repeat itself continuously throughout the next decade, until the public is convinced that government is the problem, not the answer, and sends a hoard of new political leaders to Washington intent on demobilizing the federal bureaucracy."
In the 1980 election, the public showed that it would not take the entire decade for it to be convinced of the need for political change.
(4/1/80, p. 3)
"Ultimately, of course, all levels of government will be forced to make the massive expenditure cuts that they now reject. All other remedies are doomed to quick failure. Even the tax reduction program favored by many Republicans probably will fail if unaccompanied by massive budgetary cuts." (BINGO)
(5/7/80, p. 24)
"The recession is already developing with a rapidity that most government and private economists find surprising, as they scurry to alter downwards their previous projections.
"The recession will all-too-soon create the kind of political heat the Carter administration is unlikely to be able to endure during this election year.
"Thus, the political question is whether and when the Carter Administration will once again surrender to inflation.
. . .
"It is likely to be only a matter of a few months - perhaps even just weeks - before Carter starts to put pressure on the Fed to accelerate the printing presses." (BINGO)
(5/21/80, p. 3)
"The Federal Reserve Board has been left by the Democratic Congress and the Carter administration to struggle alone against the inflation and recession caused primarily by their irresponsible policies.
"The Fed is now trying to limit the extent of the current recession by pushing interest rates down as fast as it dares.
"However, the adverse response of international currency markets has been practically instantaneous. A policy of benign neglect towards the dollar is probably not feasible."
(7/29/80, pp 25 and 27)
"There will be no recovery! Not in 1980, not in 1981 or thereafter! There will be no substantial recovery as long as the burdens of government continue to grow." (BINGO)
Again confounding the consensus forecast, the recovery did not begin until 1983, when reduced inflation, monetary stability, some modest tax relief, deregulation, privatization, and other policies friendly to commerce finally permitted a slow, hesitant economic recovery.
"Government efforts to slow the recession have had some effect, but have been met with instantaneous negative responses from the currency and gold markets. The Federal Reserve Board has lost the ability to support the prices of the government's bonds.
"The rapid decline of short term interest rates has undermined the rally in the more important long-term bond market, and government borrowing to finance its growing deficits is now clearly squeezing out private borrowing.
. . .
"There will be pauses in the decline. . . . Given the volatility of the situation, the recent rapid decline in interest rates probably will produce such a pause prior to the election. However, such pauses will be bought dearly in terms of losses for the nation's financial reserves and its dollar, losses that will quickly force renewed retreats. Such pauses will serve to keep unemployment rates from rising too fast; it will be the overall decline in living standards that will be the most accurate measure of the severity of the decline." (BINGO)
(From my carbon dated 8/27/80)
"Once again, the vast majority of economic forecasters are demonstrating how little they actually know about economics and the nation's economy. Recovery is predicted for 1981 or even for the end of 1980; recovery is forecast as being substantial or shallow; whatever the variation, almost all forecasters are predicting some kind of recovery.
"Unfortunately, they are all wrong. This shouldn't come as a surprise to anyone, since the vast majority of forecasters have been wrong so consistently these last 15 years. Recovery is not possible under current conditions.
. . .
"The fall of the dollar and the surge in monetary aggregates forced the Fed to once again restrain monetary growth. Thus, although still in the midst of recession, interest rates are rising. It is this rise in interest rates, a rise that is inevitable under current conditions, that makes recovery impossible." (BINGO)
(8/4/80, p. 3)
"The Federal Reserve Board's newest member, in one of his first speeches, candidly told a Denver audience that 'the ability to use monetary policy as a short-term counter cyclical tool is severely limited under present circumstances.'
"Monetary policy can no longer 'lean against the wind' to counteract recessionary tendencies, said Lyle Gramley, because any fresh impetus to inflation tends to worsen the long term trend of inflation.
. . .
"Fed Chairman Paul Volcker has also seen the light. He told the Senate Banking Committee on July 22 that it would no longer work to 'blow up employment' by increasing the money supply. He warned that any perception that the Fed is loosening the money strings 'could affect both expectations and behavior, most immediately in the financial and foreign exchange markets, but also among businessmen and consumers.'"
After 15 years, I was no longer alone. My short period of deep pessimism began to lift.
(8/6/80, p. 3)
"An enticing idea, the Republican tax cut! If we cut taxes, the economy will be stimulated and will generate enough income to make up for the tax revenues lost.
"Unfortunately, the nation's grave financial weakness will not permit even a semblance of success.
. . .
"If the tax cuts were directed entirely at the productive entities of the economy, they would reduce costs and have a favorable impact on the economy's competitive position in international markets.
"Unfortunately, the Republican tax cuts are as politically motivated as the Democrats' traditional deficit spending policies; the cuts will be spread across the economic spectrum, with a significant proportion being directed at putting more money directly into consumer pockets in the hope of thereby buying consumer votes.
"Of course, the Republicans do promise to restrain the growth of government spending, something which President Ford, the last Republican president, actually tried, with some success, to do. This would be no mean accomplishment and would substantially improve the nation's economic outlook.
. . .
"The Republicans would like to substitute a 'tax cut-tax cut, elect and elect' formula for the 'spend-spend, elect and elect' formula used so successfully by the Democrats.
"The nation, however, can no long afford either form of demagoguery The solution to our problems remains impossible without massive cuts in government spending."
(10/17/80, p. 5)
"Most of the seemingly intractable problems of the day are creatures of inflation and will disappear with the disappearance of inflation. Unemployment, high interest rates, technological decline, military weakness, energy shortages and a wide variety of social problems are the inevitable result of runaway inflation, and only government can cause runaway inflation. (BINGO)
. . .
"This summer's pause in the downward course of the recession will be over by October or November and, even if all the statistics don't yet reflect it, the signs of renewed decline should be evident by Election Day." (BINGO)
(11/21/80, p. 5)
"Now that the election is over, it is time for the nation to pay for the monetary expansion of the election year.
"The pause in the recession was not, as President Carter claimed, the beginning of an economic renaissance. The pause was bought with a frantic surge of monetary expansion initiated by a Federal Reserve Board eager to assure incumbent politicians the best possible economic conditions during the election campaign, regardless of the ultimate consequences for the nation.
"The ultimate consequences will begin to arrive within the next few months, and will be severe.
"Indeed, the renewed recession will be extremely severe - far more severe than any establishment economist is now forecasting - and, if political burdens are not quickly lifted from the struggling economy, this recession has the potential to become severe enough for some to start using that dread word, 'depression.'" (BINGO TO THE MAX!)
By any standard other than that of the 1930s, the 1980 - 1982 decline was a "depression."
(12/5/80, p. 24)
"Information dribbling out of Reagan administration planning sessions doesn't bode well for the success of Reagan's economic policy.
"The plan being developed seems to include spending and hiring limitations, a redoubled effort to reduce fraud and waste, the avoidance of any new major non-military programs, and the cutting of a series of programs deemed expendable.
"This would be, to be sure, a major improvement over the current economic policies of the Carter administration and the Democratic Congress. Unfortunately, it appears to be based on overoptimistic assumptions, and if adopted will clearly prove to be too little, too late.
. . .
"Cuts of about $15 billion would be clearly ineffectual. Cuts of about $35 billion would undoubtedly be helpful, but probably would not succeed in turning the economy around. Cuts of about $60 billion are the minimum that could be expected to do the job. To be sure that the job gets done, the cuts should amount to considerably more than $60 billion." (BINGO)
Breaking the Momentum of Inflation (1981 - 1982)
The strength and resiliency of capitalism:
Pessimism was, of necessity, so prevalent in my economic forecasts, that I periodically ran columns outlining our many economic strengths and reminding readers of the great resiliency of capitalism. Even in 1980, when pessimism was deepest, I realized and wrote about how quickly and positively the economy would respond to any semblance of responsible economic policies.
(4/19/72, pp. 1 and 16)
"The productivity of our farms is one of the economic marvels of the world and will continue to provide a fundamental buttress for our standard of living even during the worst of financial and economic dislocations.
. . .
"The natural wealth within this country's boundaries, although far from sufficient for all our needs, remains vast as compared with that of most other nations and regions of this world.
"Our productive plant, although no longer the model of competitive efficiency it once was, remains impressive and retains a capacity for vast improvement that is certain to be tapped during the periods of financial and economic stringency that we will face during this decade.
"Our financial system, one of the key factors in the productivity of our private enterprise system, has been sorely abused and now constitutes the key weakness in our present situation. But it is also, inherently, the most resilient of the factors in our economic system. Its ability to survive, and revive, will again confound those ideologues who criticize our system and revel in its difficulties. (BINGO)
. . .
". . . [T]he good sense of the vast majority of our citizenry remains, and their willingness to rally behind their country in its moments of need provides, the ultimate reason for optimism in our future." (BINGO TO THE MAX!)
(8/30/73, pp. 1 and 3)
After repeating my observations from the previous year's article, I included several additional factors.
"The public is becoming increasingly skeptical of big spending by big government. Bond proposals are being voted down with encouraging regularity, and efforts to raise taxes are viewed as political dynamite. The incredible promises of the 'Great Society' have been discredited, and a sense of sobriety has, to some extent, returned to our cities and campuses.
"Most surprising of all, at least to this generally skeptical reporter, has been the restraint and sense of responsibility shown by the labor unions. . . . Unfortunately, it is unlikely that such restraint can be maintained if inflation continues at the present pace.
. . .
"[T]he right wing and left wing extremist movements have failed to make any discernible headway during this last year. The vast majority of our citizenry continue to live responsible, productive lives, and their willingness to rally on behalf of the country in its moments of need continues to provide the ultimate reason for optimism in our future." (BINGO)
(8/11/80, p. 3)
"The stock market lies like a coiled spring, pressed down by 15 years of deteriorating economic conditions.
"In real terms, the Dow Jones industrial average has lost approximately two thirds of its value since first crossing the 1,000 mark in the mid-1960s.
"Depressed to this great extent, the market ignores the current recession and any further bad news; it needs only a hint of good news to send it spurting upwards. Any indication the government might at long last adopt some practical economic policies would send it shooting upwards past 1,500, and any actual adoption of such policies would place it permanently in the 2,000 range.
. . .
"Aside from a few laudable efforts at deregulation, nothing has been done to get the government off the back of the economy. However, hope is increasing with indications of growing political support for restraints on government spending, reductions in business taxes, and strong measures to restrain inflation.
"The stock market, which generally tends towards optimism, stirs restlessly and surges upwards as the fruition of these positive tendencies becomes increasingly possible.
. . .
"Any indication that the 1980 election will bring relief from government spending, budgetary deficits, taxes, and regulation would uncoil the spring of optimism pressing upwards under the market, sending it on a surge of historic proportions. How high it would go, and how long it would stay up, would depend, of course, on whether the market's fond hopes find support from real measures." (BINGO TO THE MAX!)
Coming at the worst point of the inflationary crisis, amidst the deepest pessimism, with the Dow still struggling to get over 1000, this is one of my best calls.
(11/26/80, p. 7)
"The liberal economists are confidently asserting that nothing can be done to rapidly improve economic conditions, that economic problems such as inflation, unemployment and energy shortages are intractable and caused by factors largely outside government control.
"Of course, they are just as wrong now as they were in the 1960s when they asserted with equal confidence that government could manage the economy in accordance with their government activist concepts.
"It is government, not the economy, that is the problem. It is government activism that has destroyed the nation's economic health. The economy will respond dramatically to any government that simply gets off the economy's back.
. . .
"A capitalist economy is incredibly resilient. Any evidence of competent and responsible government could bring startling results. If government spending and taxes are substantially cut and the printing presses stopped, a great flood of capital could rush in to take advantage of the improved investment climate.
. . .
"What cannot be restored quickly is financial strength; it will take many years of responsible government to reestablish the nation's credit to the point where it can again withstand long periods of adversity."
Ridiculing the obvious weaknesses of the Reagan administration's economic policies has been intellectually fashionable since its inception. However, while I always agreed about the weaknesses, I instantly recognized that there was much that was right with Reaganomics.
Reaganomics was indisputably infinitely superior to the Keynesian economic policies that had preceded it. For the economic forecaster, evaluating chances for success under Reaganomics was infinitely more difficult than explaining the certainty of failure under Keynesian economic policies.
The question was whether Reagan, inhibited by a Democratic House of Representatives, would be able to make deep enough cuts in domestic spending and other economic burdens to make his policy work. Most of my economic columns were therefore evaluative and explanatory rather than predictive; I tried to limit definite forecasts to those moments when the scope of the economic policy became clear enough to evaluate their impact. I correctly concluded that the cuts were inadequate to avoid the worst depression since the 1930s and the subsequent vast increase in the national debt.
However, in 1983, I made the worst mistake of my 35 years of economic forecasting. I concluded that the inflationary implications of this failure would be far worse than they turned out to be.
The strongest feature of Reagan's economic policy had nothing to do with Reaganomics.
Reagan was willing to take the political heat while Paul Volcker did his job, putting the economy through the austerity wringer of the depression of 1980 - 1982. This broke the inflationary momentum and psychology. It laid the foundation for the subsequent effort to achieve a "soft landing." This "soft landing" effort dictated substandard economic performance for the next fifteen years, but was, amazingly, ultimately successful. Reaganomics indeed did pave the way to "Morning in America," but the dawn required an end to the Cold War, and took about a decade longer to arrive than the Reagan administration anticipated.
(1/8/81, p. 7)
"While 1980 once again proved the lack of understanding, and lack of competence, of most economists and financial forecasters, my 1980 forecasts have been trooping in like good little soldiers.
"During the preceding year, readers of my columns were forewarned of all of the following:
That the government's failure to permit a recession to develop in 1979 would result in uncontrollable economic conditions in 1980;
That the 1980 recession would be far harsher and far more intractable than indicated by the consensus forecast;
That the government's election year efforts to artificially prop up the economy would fail, achieving nothing more than a pause that would probably not last through the elections; and,
That all efforts to heal our economic wounds would fail unless accompanied by massive cuts in government spending.
"Readers of my columns were alerted to the surge in gold prices that had to accompany the Federal Reserve Board's pre-election efforts to artificially push down interest rates, Chrysler's renewed troubles, and the inevitability of a rash of public and private financial failures.
"Most important of all, my readers have for more than a year been repeatedly warned of the increasing volatility of economic events, something most other economic forecasters and columnists have yet to recognize.
. . .
"All things eventually come to an end, even inflations. Those who are in real estate, collectibles and other illiquid inflation hedges may find themselves still there long after inflation has turned to deflation." (BINGO)
(1/10/81, p. 3)
"The recession is once again well under way and the slowdown in the expansion of the money supply has now continued long enough to firmly establish several economic movements.
"Inflation, and thus, interest rates for both long and short term high grade instruments are heading down into single digit territory. Moreover, the slower the interest rate decline, the longer they take to get back into single digits, the deeper the descent will ultimately be.
"There is no longer any question that substantial progress will be made against inflation this year, progress that will surprise most economists and that will be undiminished by the deregulation of oil and gas.
. . .
"There will either be a quick renewal of the resort to monetary expansion to restimulate the economy, or there will be severe political losses for congressional conservatives in 1982 and a new surrender to inflation soon thereafter. (BINGO)
. . .
"This time, it is possible that the dollar will remain healthy and gold weak even as interest rates decline." (BINGO)
(1/27-29/81, p. 8EF)
"The new conservative government thus has the power to provide the nation with economic contraction or virulent inflation, or recovery and stable economic expansion; it all depends on how it gets out of the starting gate, on how deeply it cuts into the burdens government imposes on the economy."
(2/27/81, p. 5)
"The current program still looks like too little, too late, but it wouldn't take much more to change that evaluation.
"A dollar-for-dollar austerity program isn't needed. Even if the Administration program never cuts sums equal to current estimates of the budget's deficit, it can provide substantial financial relief for the economy. Anything close to a truly balanced budget will stimulate massive positive financial flows and economic developments that, along with the stimulation from the tax cuts, could put the program over the top. It would be a serious mistake to underestimate the natural resiliency of this nation's capitalist economy."
(3/25/81, p. 5)
"Almost every day brings news of cutbacks and slowdowns in current expenditures and credit allocation programs and of Senate progress with substantial cuts in the 1982 budget. This has to be an important force behind the recent stock market surge. These positive capital flows are already having a material impact on the economy, mitigating recessionary forces, assisting the Reagan program, and hinting at the tremendous resiliency of our capitalist economy."
(5/5/81, p. 6)
"It seems to me that, even with something in excess of $40 billion in cuts, the President still is at least $25 billion short of the cuts needed to give the economy a chance to recover. Actually, he still may be another $40 billion short. However, even without further cuts, I would not feel embarrassed if I turn out to be wrong on this point. The tremendous resiliency of capitalism has repeatedly confounded its critics and pleasantly surprised its supporters, and I would of course be overjoyed if that resiliency proved surprising to me, too."
After 1983, our capitalist economy began to surprise everybody!
(5/18/81, p. 6)
"With inflation tumbling well below 10 percent and basic interest rates again around 20 percent, the economy is staggering under interest rates that are heavily positive.
""A real time-cost of money of about 10 percent obviously creates a very unstable situation, especially for a national and world economy encumbered by heavy debt loads. The high proportion of short term debt makes the situation explosive.
"Even given the incompetent performance of most economists and economic commentators during the last two decades, one is still surprised at the number of them who take first quarter 1981 statistics at face value. They simplistically suggest or even conclude that the economy is expanding; some even use terms like 'healthy' or 'robust.'
"The figures are ambiguous only to those who refuse to examine them.
. . .
"The March decline in inflation rates wasn't just a fluke. Barring something like a war in the Middle East, the decline should be firmly established by the beginning of this summer, and slack economic conditions and a strong dollar should keep a lid on most other costs. With a good harvest, inflation could be trimmed to a rate below 7 percent before the summer is over. (BINGO)
"The recent increase in interest costs, coming despite weakening economic conditions and a decline in inflation rates, should prove to be the last straw for the economy in general and for some of its weaker elements in particular.
"The months of May and June should be a disaster for housing, construction, autos and the struggling savings and loans. Other weak spots should show up this summer.
"Absent news of further dramatic cuts in the federal budget, the stock market could also have its long expected tumble. (BINGO) However, it must be remembered that, even at present levels, the stock market is already very depressed. Despite runaway inflation, it languished at levels first reached 15 year ago. The Dow industrials are actually below 400 in terms of mid-1960s dollars."
(7/8/81, p. 6)
"Investors around the world have begun to bet on the American economy. Capital is flowing into the United States at prodigious rates and will accelerate further if further budget cuts are forthcoming. This flow will continue as long as the Fed's printing presses continue to decelerate.
"Commodity prices are plummeting as suppliers scramble to sell their wares for sound dollars; the energy crisis is dissolving on schedule.
. . .
"The purchases for the strategic reserve add billions to the federal deficit and act as a significant prop to oil prices.
"Gold is behaving exactly as I predicted, reflecting the continuing economic instability by surging with each crisis but remaining under persistent downward pressure as the Fed decelerates money growth.
"The shortcomings of the Reagan program leave the economy in a state of slow deterioration, but inflation has fallen well below 7 percent and will stay there if the Fed can keep the brakes on the printing presses. This is perhaps the most dramatic error of the year for the host of 'authoritative' forecasters, especially those liberal economists who had become prone to discourse in terms of supposedly intransigent 'underlying' rates of inflation.
"Interest rates were expected to decline; the slower the decline the further it would go. The initial decline at the beginning of the year was clearly too fast, something we paid for this spring. Now, a slow decline, with long term rates declining ahead of short term rates, looks much better.
. . .
"Unfortunately, without further substantial cuts in government spending, any sustainable decline in interest rates has to be too slow to avoid a slowly deepening recession." (BINGO)
(7/21-23/81, pp. 27 and 28)
"[If there are about $20 billion in additional cuts (which didn't occur)], I expect inflation rates to be well below 7 percent during the last half of the year with declines in commodity prices continuing and further declines in energy and gold prices. It is even possible that inflation could be reduced to practically nothing by the end of the year.
"The decline in oil prices will continue well into 1982, interrupted at least once, and not more than twice, by hefty cuts in Saudi Arabian production. When Saudi production dips below 7 million bpd, OPEC will have lost most of its ability to control oil prices. The decline in gold prices will continue, with interruptions during any crisis that may occur.
. . .
"A constant deceleration of the printing presses accompanied by further fiscal cuts should leave Reagan and the Fed strong enough by spring 1982 to provide flourishing economic conditions for the fall election."
Reagan couldn't get any more cuts.
(7/27/81, p. 5)
"The growing push for 'comparable worth' is typical of liberal crusades. It is highly attractive, poorly thought out, capable of doing immense damage before running its course, and doomed by its economic weaknesses to inevitable failure.
"It has all the weaknesses of any traditional price support program. It lacks objective standards for evaluating worth, and must inevitably come in conflict with market forces that will ultimately prove overwhelmingly powerful."
(8/21/81, p. 3)
"No sooner had the authorities started congratulating themselves on the brevity of the 1980 recession than it returned.
. . .
"It is painfully obvious that, without further substantial cuts in government expenditures, the economy must decline throughout the second half of the year.
. . .
"President Reagan's recent legislative victories have significantly improved matters but are still too little, too late. Most of the benefits will not be felt until well into 1982. Even then, they will be offset to a large extent by increased defense spending, budgetary gimmickry and protectionism."
(9/18/81, p. 6)
"The Fed did, in fact, decide to increase slightly the rate of monetary expansion, a decision immediately sensed and reacted to by the financial markets. Long before public announcement of the shift, international money and precious metals markets reacted adversely, and interest rates responded by moving even higher.
"As I repeatedly have pointed out during these last 15 years, it is not money but purchasing power that is the essential ingredient in economic well-being, and inflation destroys purchasing power. Moreover, inflation has clearly reached the point where the more money we print or permit the financial system to generate, the less purchasing power we have."
(11/17-19/81, p. 18B)
"For the first time since the beginning of 1966, I am getting bullish on stocks as a vehicle suitable for conservative investment programs.
. . .
"There are real possibilities for a major rally in long term bonds, but this looks quite speculative to me; it depends on the success of Reaganomics and the determination of the Fed, both of which look increasingly unreliable each week. (BINGO)
"The stock market provides the most intriguing possibilities at present. The market is greatly depressed; it is under 300 on the Dow in terms of 1966 dollars.
. . .
"Even if Reaganomics fails, as it probably will, the market is still so depressed - and the current decline could carry it down considerably further - that it could still experience a significant rebound next year.
. . .
"Stock accumulation should begin early, since the rebound will probably begin as much as six months before government statistics reveal any business upturn. (BINGO) (The market bottomed in Aug., 1982, six months before the end of the depression.)
. . .
"The energy glut should be with us through the 1980s. This is bad news for multinational energy companies but good news for those companies hurt by the energy shortages of the 1970s. (BINGO)
. . .
"Recreational vehicles, travel, and tires are obvious industries to look at. New cars should start growing in size again, . . ."
In fact, the public turned to station wagons, vans, stretch cab pickup trucks and, eventually, sports utility vehicles.
"Should Reaganomics start to look like a winner, of course, throwing darts at the list of stocks should provide excellent investment choices." (BINGO)
(1/4/82, p. 7)
"Time was of the essence, and time ran out last summer, when Congressional opposition overwhelmed efforts to make further substantial cuts in the budget. The cuts that were made kept the recession mild at first, but massive deficits are now squeezing borrowers out of the credit markets, and the recession is now accelerating.
"Fed actions are running exactly as I predicted. Misreading their monetary aggregate statistics, and wary of the deepening recession, the Fed made strenuous efforts to expand monetary growth this fall. The result is that the monetary aggregates have begun exploding upward, causing capital to flee the long term bond markets, and ultimately even undermining the decline of short-term interest rates.
"This all has happened so fast that the pump priming effort hasn't even had a chance to stop the recession. The Fed will probably be forced to back off of its pump priming efforts for fear of a total loss of control such as it experienced in 1980. For government economic authorities, the nation's financial weakness means that the troublesome long run now arrives before the beneficial short run.
. . .
"This means that the economic decline will continue through the first quarter of 1982, reaching depths considerably beyond those generally forecast.
. . .
"[The recession] will leave the Fed with some control over the economy for the election period of 1982, but it will balloon the government's budget deficits." (BINGO)
(From my carbon dated 1/7/82, for the Miami Review Forecast Edition for January, 1982)
"[T]he safest bet for 1982 is that interest rates will decline through the spring. Unfortunately, government credit demands will prevent them from going down fast enough to permit economic recovery. The recession should cut the inflation rate to well below 6 percent by this spring, so that any basic interest rates still in double digit territory will remain harshly positive.
"The tax decreases should be helpful, but will be largely offset by increases in social security and state and local taxes. The first major cut in income taxes doesn't even take place until midyear.
. . .
"The pace of wage increases will decline sharply; there will be increasing numbers of actual reductions in benefit packages as the harsh realities of double digit unemployment undermines the strength of all but the most monopolistic unions.
. . .
"For the second half of 1982, we must watch the Fed. An election year effort to accelerate the printing presses, starting sometime this spring, would temporarily accelerate the interest rate decline and give a healthier tone to the economy this summer. . . . At any event, the effort will abort within a few months, leaving the nation's finances and economy laboring under severe financial constraints by year's end.
. . .
"[T]he stock market is now so depressed that any good news will propel prices to significantly higher levels. A program of accumulating stocks of financially strong companies serving markets that are not credit sensitive could pay rich dividends in the months ahead and throughout the first half of the 1980s. (MORE BINGO TO THE MAX!) The stock market averages should show considerable strength in the spring and summer of 1982."
The Dow indeed hit its cyclical low in March, but didn't show real strength until the fall.
(5/17/82, p. 6)
"The recession is forcing the rationalization of the economy. Not only are weak entities in individual industries being eliminated or reduced, but whole inefficient industries are suffering the same fate. This is freeing immense productive resources for use by the nation's stronger industries and will accelerate the rise of new and more vigorous industries to take the place of those that are dying. The freeing-up of resources is enabling the economy to undertake productive efforts that it couldn't undertake before.
. . .
"Economic change causes profound pain, but it is absolutely essential. We must build on strength, not waste our scarce resources sheltering weak industries.
. . .
"Thus, my investment advice remains the same as it has been for the last year. Equity investments should be directed towards those industries serving markets that aren't dependent on easy credit conditions, and towards those particular business entities whose balance sheets remain relatively unencumbered with debt."
(9/9/82, p. 6)
"Those who have been reading my columns should have no trouble whatsoever understanding the current rallies in the stock and bond markets, and why they can't last much beyond this November's elections, if that long.
"These rallies are nothing more than the result of the expected election year acceleration of the printing presses."
Correct for the bond market, but the stock market was already too depressed to go back down, even during the depths of the depression.
"As I predicted, the currency and precious metals markets are providing irrefutable evidence concerning the nature of this boomlet. If the current decline in interest rates was natural, there wouldn't be any major increase in precious metals or substantial decline in the dollar. Booming precious metals prices and a falling dollar are the unmistakable side effects of artificial stimulation, of accelerating rates of credit and monetary expansion.
. . .
"This is the time, short as it may be, to get your financial house in order for the renewed and worsening recession to come. Next spring might be a good time to look again for bargains in the bond markets, and next summer might be a good time to again begin positioning yourself for the next stock market rally."
The last half of 1982 was, in fact, the bottom of the 1980 - 1982 depression, and economic growth did take off in the spring and summer of 1983.
The "Soft Landing" Policy (1983 - 1984)
Getting it wrong:
If my theoretical understanding has holes in it, my forecasts will have errors. In this, I am no different than anyone else. That the forecasts of economists dependent on modern (Keynesian) economic theory were almost 100 percent in error during the 20 years between 1965 and 1985 speaks volumes.
I depend a lot on economic history, and I had never heard of a successful effort to arrange a "soft landing" from a substantial level of inflation. Yet, that is the policy that the Fed embarked upon in 1983, with amazing success.
It took me a while to appreciate the tremendous difference between monetary expansion that leads to abnormally low real interest rates or even negative real interest rates, and monetary expansion that is sufficiently limited so that real interest rates remain positive at levels significantly higher than normal.
Inevitably, there was a price to pay for this. Nominal and real interest rates stayed high and are still somewhat above normal to this day, and unemployment rates remained high until 1999. Until the end of the Cold War and the dissolution of the Evil Empire, the federal deficit grew massively, inflation remained at levels that would have been considered intolerable twenty years earlier, and economic growth was sluggish. In short, instead of the acute episodes of alternating recessions and inflationary surges that I expected, the economy suffered 15 years of chronic stagflation, but at levels considerably below and more manageable than those during the Carter administration.
While I fully appreciated that Reaganomics had changed much for the better, I, like everybody else, made the correct call on the failures of Reaganomics. But I was much too pessimistic about both inflation and economic performance, and thus made my second and worst economic forecasting error during this 20 year span of active economic forecasting.
(1/3/83, p. 5)
"When Paul Volcker declared that the war against inflation had been won, it was time to start worrying about inflation again." (BINGO)
This war dragged on for another 15 years.
"[Reaganomics] failed right in the beginning, in 1981, when the chief executive was unwilling, or unable, to slash federal spending far enough, fast enough to balance the budget and prevent the recession from reaching depression proportions.
"[Reaganomics] failed right in the beginning, in 1981, when it delayed the tax cuts until they were too late to avoid the worsening recession, and until increases in Social Security and other taxes, at all levels of government, nullified their impact.
. . .
"[Gold] will continue to surge upward so long as the Fed continues to accelerate the printing presses. If this artificial stimulation is continued for a few more months, we will see 20-percent prime interest again before the 1984 elections." (BOOO TO THE MAX!)
(1/24/83, p. 6 and 46)
"As I have repeatedly stressed these last 10 years, the Fed can't cure the nation's ills; these are caused by bloated budgets and deficits bestowed upon us by Congress, . . .
. . .
"Fed policy, however, will determine just what form the nation's economic misery will take at any given moment.
. . .
"It appears that the Fed once again has surrendered to inflation, and that it will maintain its new policy as long as it can, thus dictating an expansive economic climate through the first half of 1983. . . . [I]f it perseveres in this effort through this winter, the economic expansion of 1983 will surprise most forecasters, including those at the Fed. (BINGO)
"The surest bet, therefore, is that interest rates will be rising fairly sharply through most of 1983, and that the more the Fed tries to resist this rise, the higher they will go. While some minor rate reductions are still possible this winter, it is likely that we already have seen the top of the bond market rally." (BOOO)
Short term rates rose modestly, but the bond market was essentially flat during 1983.
"We also will pay a price in inflation rates for the Fed's current accommodative policy. Double digit inflation rates again could be the norm by year's end." (BOOO TO THE MAX!)
Too pessimistic about inflation; this drove my interest rate outlook, too.
"Until the upturn in interest rates begins, the stock market is likely to remain fairly buoyant. (BINGO)
. . .
"[A]lmost all surviving corporations have substantially increased efficiency and reduced their break-even points.
"Deregulation has provided substantial improvement in overall economic flexibility and efficiency, and savings rates have improved in response to tax law changes and reduced inflation rates.
"Even a modest economic upturn will improve profits substantially, the economic upturn should be substantially greater than expected during the first half of 1983, and several sectors of the economy that aren't credit sensitive could maintain real prosperity for an extended period of time. However, government spending, deficits and taxes continue to impose unsustainable and increasing burdens on the economy, and the broad bull market will be over by midyear at the latest." (BINGO)
The market surge lasted until August, and the decline began in October.
(6/14/83, p. 6)
"Only acceleration of the printing presses, as the Fed warily strives to monetize enough debt to keep interest rates from rising and to prevent world financial panic, is widely noted. However, this effort remains essentially a holding action; the Fed hasn't been so foolish as to push interest rates to negative figures or even to the lower positive numbers historically experienced. (BINGO)
. . .
"The surge in the nation's money supply is initiating a new round of accelerating inflation that will become apparent during the second half of 1983. Interest rates and other costs will begin rising rapidly, decreasing the general efficiency of the economy, undermining business profitability, deterring new investment, and reintroducing us to the concept of stagflation. This inflation will give OPEC a new lease on life." (BOOO)
Not completely wrong, but still too pessimistic about inflation.
(6/25/83, p. 37)
"While restraint this fall would provide the Fed with some control over events for the 1984 election campaign, the prospects for the Fed being able to present incumbent politicians with an apparently healthy economy at that time are starting to look very doubtful."
But Volcker would pull it off!
"[T]he financial world is strangely calm at present; strange, isn't it, how world crises seem so much more manageable and less threatening when the dollar is strong. Wars are raging or threatened all over the map without any observable disturbance to international finance or trade.
. . .
"Some corporations will realize substantial increases in profits and growth rates during 1983 and 1984, their paths made easier by the decline of those bearing heavy burdens of debt or burdened by other inefficient economic practices. In short, it will be a professional trader's market, and no place for amateurs.
"Real estate, especially in high growth areas like Florida, continues to look good through 1984. However, several basic factors will prevent real estate from performing as well nationwide as in the 1970s, and periodic shifts toward monetary restraint will prove devastating to those trapped in such illiquid investments in the 1980s as they were in the 1970s. (BINGO)
"Long term, the Fed can be expected to monetize enough debt, not only within the United States but worldwide, to prevent any full blown financial crises." (BINGO)
(From my carbon dated 12/29/83, for the January 1984 Forecast Edition)
"[T]he only sure bet for 1984, as it was for 1983, is that interest rates will be higher at the end of 1984 than they were at the beginning.
. . .
"The interest rate rise is unlikely to be uninterrupted. Sometime in the spring or summer of 1984, the Fed will probably feel obliged to strenuously resist upwards tendencies on interest rates." (BOOO)
The Fed - brilliantly - did just the opposite. It raised short term interest rates before mid year so that long term rates could come down, thus substantially changing the interest rate picture for the better for the last quarter of the year.
This was the third - and last - economic forecasting error of this 20 year period. It was just a missed "probability," but by this time I should have had more confidence in the skill of Paul Volcker.
(1/12/84, p. 3)
"For the last year, I've been writing that the only sure thing in economics during 1983 was that interest rates would rise. How far and how fast depended on a variety of political variables that weren't predictable, but up was the only way interest rates could go. Now, at the end of 1983, I have the dubious satisfaction of seeing that the continuing weaknesses in the nation's economic policies have indeed resulted in higher interest rates. However, I must admit that the increase, given the existing mix of political and economic policies, is less than I expected. An analysis of the reasons for this favorable outcome highlights many of the favorable economic factors, unique to relatively open-market, capitalist systems, which bode well for our future.
"The first and most important factor is one that I have stressed in several previous articles: the natural resiliency and flexibility of capitalism.
. . .
"The factor that is second in importance is the modest success of recent efforts to free the economy from the shackles of government regulation. Deregulation was initiated by the Democrats during the Carter Administration, a period otherwise notable for the total failure of government economic policy. It has been continued sufficiently during the Reagan Administration to reach significant proportions. Related to this factor was the recession, which forced massive needed corrections throughout the economy.
. . .
"High rates of bankruptcies and facilities closings, together with rapid population shifts and high rates of new business formations, indicate the extent of the profound economic changes currently taking place; the economy is struggling against still-substantial shackles to throw off old, outmoded, inflexible economic activities, and to free resources for the vast new opportunities provided by the accelerating technological revolution."
(1/16/84, p. 3)
"Also important in lending strength to the economy is the dramatic shift in government attitude, from the determined imposition of increasing burdens on the economy during the 1960s to the current modest efforts to facilitate commerce.
"Similarly, there has been recently some modest tax relief afforded productive entities.
. . .
"Another factor is the internationalization of our economy. The proportion of our gross national product attributable to international trade has tripled with the last two decades. This has provided the competition needed to pry open many of the monopolistic enclaves that industry, government, and labor had succeeded in establishing in our economy during the first three quarters of the 20th century.
. . .
"The much-maligned flood of imports has been a primary factor in restraining price inflation during 1983.
"Most of the danger of massive balance of payments deficits caused in major part by these imports is dissipated in the international money and precious metals markets. These markets, free of federal government restrictions for a decade now, assure needed financial flexibility and (thank goodness) provide substantial restraints on the ability of governments to 'manage' economic affairs for political purposes.
. . .
"Finally, confidence in the economy of the United States has become remarkably high under the Reagan Administration.
. . .
"Positive interest rates are primarily responsible for attracting [foreign] capital, but it is the level of confidence that currently exists in our economy that enables our interest rates to attract this needed capital without having to go so high as to abort the recovery." (BINGO)
Now, I'm getting it right about the importance of those above normal real interest rates.
(From my carbon dated 8/29/84)
"The recent narrowing of the spread between short term and long term rates is a positive indication that recent increases in short term rates will at least temporarily achieve the objective of a slower, more sustainable rate of economic growth.
"Although certain prominent 'supply siders' continue to belabor recent Fed moves, the reduction in long term interest rates indicates that these critics don't know what they are talking about, and that the Fed is doing about as well as can be done with an absolutely impossible situation. The reduction of long term interest rates is far more important for the health of the economy than is restraint of increases in short term interest rates, and the strength of the dollar engendered by high short term rates is absolutely essential to restrain price inflation."
(From my carbon dated 1/18/85)
"At the beginning of 1984, it was evident that the economic boom was proceeding at an explosive pace, dictating higher interest rates during the course of the year. . . . Last spring, the Fed made its move, shutting down the printing presses and allowing interest rates, for a few months, to rise to levels more consistent with present economic conditions.
"In yet another demonstration of the explosiveness of current economic conditions, the economic boom was brought almost to a dead halt within just a few months. In this way, the Fed restored its ability to push interest rates down again just before the election, and thus gratify its political masters. It proved that the surest way to reduce interest rates is to allow them to rise.
. . .
"These are thus difficult times for even the best economic forecasters. At present, forecasting requires that one first await some definitive Fed move, and then await further indications as to how far the Fed intends to push that move. Even then, any forecast can confidently extend no further than the moment of the next shift in Fed policy.
. . .
"We are probably already at the bottom of the current interest rate cycle. Exactly when, how sharply, and how far interest rates will rise are events completely within the Fed's discretionary powers, even though they are not totally within the control of the Fed. (Bonds fell in the first quarter but rallied in the second quarter.)
. . .
"Overall, because the Fed reined in the economy during the summer of 1984, it retains control over the short term course of events. 1985 will be a year of increasing domestic and international financial strain, but looks far better than I dared hope at this time last year."
Growth slowed, but the market rose modestly in 1985.
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