Remember the Uncertainty

I don’t think the US deserves a AAA rating on its debt anymore because I think its financial situation is far worse than the official forecasts suggest. I base this notion on the fact that forecasts ten years ago actually thought the debt would be lower today than it was then, when it ended up over three times larger.

Whoever was making those forecasts may have overestimated the growth of the economy, or underestimated the growth of government spending, or (from my bias) underestimated the negative effect of government growth on the private economy. Less abstractly, whoever was making those forecasts was probably not expecting 9/11 or two unfunded wars or a housing bubble and bust or a global financial crisis or even things like Hurricane Katrina or the BP oil spill. Unexpected things happened, and as a result we are sitting under a debt pile of $14.3 trillion instead of less than four.

At least now “they” expect the deficit to be higher ten years from now, but when “they” say $7-10 trillion higher I laugh at the underlying assumptions. We might not come anywhere near the expected growth of those forecasts, and that’s before any number of unexpected “black swan” events occur – and the rest of this decade will certainly have some. I believe the forecasts to be off by so many trillions that it’s irrelevant whether or not S&P made a $2 trillion math error in their downgrade – they’re all off by so much that doesn’t even matter.

And yet, I must remember that the uncertainty goes both ways. If we go back ten more years, we find that the early 90’s had some ominous warnings about the growing U.S. debt load, and there were estimates that by 2000 the debt would have doubled, when it actually ended the decade almost where it started thanks to some surpluses during the Clinton years that nobody saw coming.

I’m too young to remember any of those details, but I definitely remember the financial crashes of 2007-2009, when, among other things, the stock market lost half its value. Through the lens of my newfound economic knowledge and libertarian philosophies I saw this crash as the result of decades of horrible government intervention. I worked at the Apple Store at the time and sold my few shares of company stock because I didn’t know if the world would ever recover and I wanted to at least get back the amount I had invested instead of waiting to see if everything would drop by half again.

Of course, today Apple shares are pushing through all-time highs that are about five times the amount that I sold back in early 2009. The world economy doesn’t seem that much better, and certainly not more stable, than it was two years ago, but the crash did not continue. I was overly pessimistic, and I paid for that pessimism. (At least my naive doom-and-gloom investment strategies weren’t a total loss. The twenty or so ounces of silver that I slowly accumulated in that time period for $15-$20 an ounce are currently the best-performing thing I own.)

So just because I think the forecasters are overly optimistic, I don’t want to be overly pessimistic. The rest of this decade will have nasty surprises, but it could have nice ones too. Who knows what amazing things will be invented, what new things will be discovered, what unpredictable things will be done by any one of the seven billion people breathing on this planet?

Despite all the vast increases in knowledge in the last hundred years, we are living in a largely unpredictable world. Tyler Cowen points to a post by Brad DeLong admitting, “If You Had Told Me a Year Ago That on August 5, 2011 S&P Would Downgrade the U.S, and the 10-Yr Treasury Would Yield 2.5%… I would have laughed at you.” We think we understand trends and causes and effects in the economy but are still baffled on a regular basis when reality doesn’t match what we expected. History is full of experts who were too confident about the future, and it’s easy to forget that we are the “experts” that the bloggers of the future will mock for our own overconfidence and lack of knowledge.

I think the United States is not going to be a pretty place ten years from now, but there’s a tiny little skeptical, optimistic part of me that won’t be surprised if we’re somehow running trillion-dollar surpluses with very low unemployment. OK, I would still be surprised. But if the last ten years – nay, the last five years – is any indication, I’m not willing to put any money down on what the price of oil will look like in 2021, or the price of gold, or the level of the stock market, or the yields on Treasuries, or the deficit, or unemployment, or anything, really. I will expect things as best I can, and try to prepare for them accordingly, but I will always remember the uncertainty.