Wednesday, January 2, 2013

A Test of the Perfect Foresight Assumption

Economists typically assume that individuals and business have "perfect foresight."  What this means is that people "optimally" forecast the future based upon what they know now.  Of course, there are many random events that one cannot know now.  But, one thing everyone knows now is that the average US taxpayer is on the hook for nearly $ 60,000 in sovereign US debt.  That number will climb to over $ 100,000 by Obama's last year in office.

What this means is that the average American is under-water financially and the situation is rapidly getting much worse.  Under perfect foresight, Americans will perceive their weakened financial position brought on by the Obama excesses and will dramatically curtail their spending.  Businesses, likewise, will pull in their horns.  This is the prediction of "perfect foresight" economics, an assumption typically used in economic modeling.

The "crowding out" of investment spending by massive government deficits is the immediate reality that helps inform future forecasts.  There is only so much savings to go around.  The US saves very little.  The US imports its savings from other countries (that is the driving cause of the balance of payments problems).  Even these imported savings will not be enough to both : 1) fund the US national debt; and 2) provide investment funds for US economic growth.  The latter will be shortchanged.

The war on US financial institutions codified by the Dodd-Frank legislation prohibits US financial institutions from funding an economic recovery and the war on business led by an aggressive EPA and the new Obamacare regulations means that the economy is headed nowhere.

Obama seems to be winning his war against the US economy on every front.  Don't expect much from the US economy over the next four years.  If the national debt passes the $ 20 trillion mark by 2015, which it is on track to do, don't expect much after the next four years.

1 comment:

liberty&justice said...

The fed is monetizing (printing money) the debt at a record rate. 40% Of every federal dollar is borrowed or printed. The last time this policy was tried was in the late 60's and 70's when we had what Johnson called “guns and butter” Like the piped ream of having your cake and eating too. Let's hope we don't have the resulting runaway inflation of the Carter Administration (15% plus) and resulting killer interest rates (14% plus). But If we think this scenario is in our future what assets should a persons savings be invested in for protection? Commodities? Stocks? Gold? God help our leaders to come to their senses and get theses deficits under control. It amazes me that we repeat the mistakes of the past over and over again.