What The Hell Is... An Economist? (Vol. 5)
This will go well...
Editor's Note: I’m out west. No autographs, please.
Dear Fellow Traveler:
I have a friend who always writes out elaborate directions to places, but somehow always gets himself lost.
It’s not shocking that he’s an economist.
I studied economics at four schools, which has given me insight into its limitations, particularly at the macroeconomic levels of government and large financial institutions.
My conclusion is this…
An institutional economist is a highly credentialed professional who uses sophisticated mathematical models to explain why everything they predicted last year didn't happen, while confidently predicting what will happen next year…
Think of them as meteorologists…
But we have worse track records and better suits.
The Art of Being Consistently Wrong
Economics is the only profession where you can be spectacularly wrong about everything and still get invited back to explain why you were right all along.
Let's review their greatest hits:
2021: Jerome Powell, Janet Yellen, and virtually every Fed economist said that "Inflation is transitory." Inflation hit 9.1%, the highest in 40 years.
2022: Most economists on Wall Street predicted a soft landing. Then we got the fastest rate hiking cycle since the 1980s and regional bank failures.
2020: The Congressional Budget Office said that the economy will take years to recover from COVID-19. The economy snapped back in months, then overheated so badly that we got the inflation they said was impossible.
2008: Ben Bernanke said in 2005 that housing prices don’t decline on a national level (largely because of their experimental inflation targeting.) Three years later, housing crashed 30% and nearly took down the global financial system.
2007: Bernanke said that subprime was contained… $29 trillion in global bailouts later, they’re still working on that containment.
This isn't cherry-picking.
This is the entire orchard.
The Scientific Method (Sort Of)
Economics calls itself the "dismal science."
But that’s unfair to both science and dismal things.
Real science follows this method…
Make hypothesis
Test hypothesis
Hypothesis fails
Revise the hypothesis.
Economics does this…
Make hypothesis
Hypothesis fails
Explain why failure proves the hypothesis was correct
Make the same hypothesis again with more confidence.
What makes it dismal?
The problem isn't that economists are stupid.
Many are brilliant.
The problem is they're trying to predict human behavior using equations that assume humans are rational calculators. Behavior is the key thing…
Have you met humans?
They buy lottery tickets and expensive coffee while complaining that they can't afford rent.
They'll buy organic everything because "health is priceless," then stress-eat $40 worth of gas station snacks because their portfolio dropped 2%.
They'll spend 20 minutes comparing prices on a $5 item online, then impulse-buy a $500 gadget because it was "30% off."
They budget meticulously for groceries, then blow the savings on DoorDash because cooking felt "too hard" that Tuesday.
That’s what economists are really up against…
The Forecasting Industry
I’ve done some analysis on Statista and IBISWorld data.
So, I’d guess that economic forecasting is a $200 billion global industry built on predicting the future using past data.
This is like trying to drive by looking only in the rearview mirror…
But at least the PowerPoint presentations look great....
The Federal Reserve employs hundreds of PhD economists.
Their track record?
They've accurately predicted 2 of the last 47 recessions.
Meanwhile, the Treasury Secretary regularly appears on television to explain why their predictions were wrong, but their new predictions are definitely right this time.
Why We Keep Listening
If economists are so consistently wrong, why do we keep asking their opinions?
Because human beings crave authority.
They want someone in authority to tell them what's coming next.
This is why every financial presentation you have ever seen starts with a slide with the person’s biography. It's about establishing authority and reputation, not about sharing their hobbies and making them seem like just another person.
Uncertainty is terrifying…
Bad predictions are better than no predictions.
Plus, economists speak with mathematical certainty about uncertain things.
They don't say "maybe." They say "models indicate" and "data suggests" while showing charts with decimal precision about events that haven't happened yet.
It's fortune telling with regression analysis.
The media loves economists because they provide content.
Politicians love economists because they provide cover.
Markets love economists because they provide volatility.
And economists love themselves… because they spent decades in school…
The Institutional Protection Racket
Being wrong doesn't hurt economists' careers.
It helps them.
When Paul Krugman predicted the internet would have no more economic impact than the fax machine, he didn't get fired. He had a Nobel Prize and continued to write for the New York Times.
When Larry Summers dismissed concerns about derivatives exposure to the global markets, he didn't disappear. He became the President of Harvard.
When Christina Romer predicted unemployment wouldn't exceed 8% with the stimulus (it hit 10%), she didn't lose credibility. She got more TV appearances.
Economic institutions protect economists from consequences.
Universities tenure them.
Think tanks fund them.
Media outlets quote them.
Janet Yellen has been wrong about significant things for 30 years.
She works at PIMCO now.
It's the ultimate job security…
Being wrong proves you're thinking deeply about complex problems.
The Uncomfortable Truth
Economics isn't really about predicting the future.
It's about explaining the present in ways that sound smart and make people feel better about not understanding what's happening.
When central bankers make policy based on economic models that assume people behave rationally. Since they’re wrong, we get asset bubbles.
When politicians craft spending plans based on multiplier effects that don't exist, we get debt crises.
The real problem isn't that economists are wrong.
It's that they're wrong with authority, and we keep listening.
Want to understand the economy?
Watch what people do, not what economists say they should do.
Want to know when there’s a financial crisis or liquidity event on the horizon?
Don’t use models.
Use equations… like the one I have that’s gotten out ahead of every crash since Covid.
As I explain in this article, I use three equations to determine which way the markets are heading… one for liquidity, one for momentum, and one for insider buying.
The results speak for themselves. Funny enough… I learned all of this AFTER finishing my three degrees in economics and finance.
Meanwhile, the next time an economist gives you directions, bring a compass.
And a grocery receipt.
Stay Positive,
Garrett Baldwin