Another Difficult Year Comes to a Close
The Queen asked economists some tough questions. Do we have the answers?
In 1992, Queen Elizabeth used the term “annus horribilis” during a speech on the occasion of the 40th anniversary of her accession. Thirty years later, I find myself thinking 2022 is “not a year on which I shall look back with undiluted pleasure.”
The passing of the British monarch in the midst of so many major events will be one of the great markers of this age, a departure from a more predictable time. Lack of predictability in fact bothered the Queen. On at least two occasions she ventured to ask why no one foresaw the 2008 Financial Crisis.
So how did economists explain to the British monarch why everyone was caught off guard? Here I quote a recent retelling of Queen Elizabeth’s 2008 visit to the London School of Economics, Queen Elizabeth, Economists, and the Financial Crisis by Oleg Komlik.
On November 4, 2008, Queen Elizabeth visited the London School of Economics for the opening of a new building. While there she was given an explanation on the origins and effects of the global financial crisis. At the end of briefing the Queen asked only one question: “Why did nobody notice it?” Professor of Economics Luis Garicano, director of research at the LSE Management Department, replied: “At every stage someone was relying on somebody else and everyone thought they were doing the right thing.” The Telegraph, 5 November and Daily Mail, 6 November, 2008.
During her visit to the Bank of England’s gold vault in December 2012, the Queen inquired whether the UK Financial Services Authority “did not have the teeth” to respond to the crisis. A senior economist Sujit Kapadia from the Bank’s financial services committee gave the Queen three explanations why the crisis happened. It was rare event which made it difficult to predict, he said. The second, as he phrased it: “people thought markets were efficient, people thought regulation wasn’t necessary. Because the economy was stable there was this growing complacency.” Thirdly, added Kapadia, “people didn’t realise just how interconnected the system had become.” BBC, 13 December, 2012
I doubt these answers satisfied her. In a world where the interconnections Kapadia described are pervasive and sometimes invisible, we all have to be humble in terms of forecasting. Economists are supposed to perform this function, but the reality is that economics is about data and data is about the past, not the future. Like weathermen, they use this information to create models, but even the bravest and the best meteorologists predict no more than ten days out, given the chaotic systems they are dealing with.
Beyond the laws of nature, economists are also dealing with human nature and the vagaries of geopolitics. Assumptions must be challenged. This is why I especially love to listen to contrarian views that spark out-of-the-box discussions, like our recent panel on Japan with John Greenwood and Richard Katz. Through our podcasts and newsletters, we strive to bring you iconoclastic thinking. For a complete list of our 2022 posts, please click here:
What I am watching:
Credit issues as a result of the strong dollar and higher interest rates.
Why some central banks are buying gold
The longer-term consequences of US sanctions on Russia-bifurcation of the financial system
When will China move commodities?
CBDC’s vs crypto
Tech vs government in both US and China.
If you would like to read an array of mostly consensus views on these topics, here is an excellent roundup of the major research houses’ 2023 forecasts, with links:
2023 EconVue Preview
Next month we will be hosting a webinar, likely on Friday the 13th with EconVue experts to offer views in their respective fields for 2023. Invitations to subscribers forthcoming.
For those of you who very kindly became EconVue subscribers in 2022, my deep appreciation. Your subscriptions are vital to maintaining our publications. I am also thankful for the unwavering efforts of our managing editor Ying Zhan (we began to work together almost 25 years ago) and Hale Report producer Sam Fu. Our small team does a lot!
We have several very exciting podcasts coming soon, including John Mauldin, Nouriel Roubini, and Daniel Yergin, dates TBA. To receive updates:
Thank you for allowing me to share my thoughts with you in the closing hours of 2022. Time to find that bottle of champagne!
With all best wishes to you, your colleagues and your families for a peaceful and prosperous 2023.