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3 P’s

Prognostication, Proscription, and Prescription

There is a glut of experts running around telling us what the future holds for us, what not to do, and what to do. Unfortunately, they cannot know these things. The reason is that their models cannot possibly be calibrated to deal with the current circumstances. In other words, the current circumstances are sufficiently unusual that the experts are operating outside the range of data on which the parameters in their models have been estimated. Their prediction errors are huge. Beware.

A Specific Example

In the fall of 2008, the Fed essentially doubled the money supply. To understand the implications of something like that, there would have to be many similar events. I do not believe that there have been similar events. More specifically, there have be no similar events in the post-WWII era when data has been more or less reliable.