In a recent survey not a single major central bank could provide an example of an accurate “a priori” recession forecast. The silence from the Federal Reserve, European Central Bank, BOE, BOJ and the Bank of Canada is deafening.
Precious metals investors rely heavily on economic projections when deciding where to put their money. But there’s something fishy in the land of mainstream forecasting. The US economy is now in its seventh year of recovery; however, Fed officials project growth as far ahead as the eye can see.
The Fed isn’t alone. Despite the fact that the US economy contracts for two consecutive quarters every six or seven years and is on schedule to do so again soon, not a single major central bank is forecasting a US recession as its baseline scenario. Why is that?
A miserable forecasting record
The Fed’s lousy forecasting record is well known. The US central bank completely missed predicting the 2008–2009 financial crisis and ensuing recession. Worse, it has consistently issued over-optimistic projections since then. Less well known is the fact that the US central bank appears to have never accurately forecast a recession before the country was already in one.
Two weeks ago I surveyed five major central banks, and not a single one could provide an example of an accurate “a priori” recession forecast. The silence from the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Bank of Canada was deafening.
Signs of a slowdown abound
The lousy forecasting records of major banks is of particular concern these days because signs of imminent trouble are everywhere. According to the Bank for International Settlements global personal, business and government debt has risen by more than 40% since the 2008 recession. Central banks have been printing money at their fastest pace since the Weimar Republic. The S&P 500 index continues to flirt with record highs.
Trade barriers, which caused immense damage during the Great Depression, are popping up everywhere, a sign of worse things to come. These include “Buy America” and other similar policies, as well as investment and capital flow restrictions.
For example, the office of Jeff Sessions, a US senator, printed out a copy of the recently signed Trans Pacific Partnership Agreement. The 5,544-page document stood over two feet tall. The TPP is so filled with fine print that even its writers didn’t use the words “free trade” in its title. “Managed trade” (by bureaucrats) would be a better term.
Consulting a range of opinions
According to one of Canada’s top economists, who I spoke to at a recent symposium held by the Association of Quebec Economists, governments worry that if central banks issue a recession forecast, businesses and consumers will pare back their investing and purchasing; this alone could cause a recession even if one weren’t already on the way. Large financial institutions have similar worries. If they predict a recession, their borrowing business will drop.
There is a good argument to be made that the more independent the forecaster, the better they are able to “call a spade a spade.” For example, Glen Hodgson of the Conference Board of Canada (a mainstream organization, but one that is outside the financial sector) was one of the first economists to suggest that Alberta had entered its most recent recession.
In short, if precious metals investors are relying on central bank forecasts to guide their investment decisions, they may be in for a rude surprise. By the time the Fed “projects” the next recession, there is a good chance that the US economy will already be in one.