It is human nature to assume that what happened yesterday will happen again today. The Sun rose yesterday, my spouse loved me yesterday, I had a job yesterday. Economists have made a living and science out of the belief that what happened yesterday, can be an indication of what will happen today and tomorrow. Statistical analysis is based on the concept. Trends tend til they don't.
If a car company sells exactly 100 cars every month for 10 years, statistics will tell you (as will human nature) that it will continue to see 100 cars a month into the future. Well trained and experienced economic analysts will delve deeper into the numbers and might tell you that the company can only produce 100 cars a month and that the demand for the vehicles is greater than 100 a month, suggesting a long and profitable (assuming it has been and is now) future. But if the demand ends? What part of the analysis takes that into consideration and gives everyone an idea of the real future? What if demand falls below 100 cars a month?
I read a story on California's budget woes. In it, it said that the shortfall was getting bigger because state revenues had come in significantly worse than expected. Expected, how?
AIG needed $20 billion, then $40 billion, then $85 billion and after $150 billion still might not survive. Why?
Lehman Brothers was liquid on Tuesday, bankrupt 6 days later. Why?
GM had enough money til mid 2009, now it needs money by the end of this month. Why?
These are all examples of following trend lines that fail. Many stock investors - chart types - closely watch a stock and how it behaves around trend lines. Many will note the change in a trend line, but then look for another trend line to follow. Are ALL analysts this blind? No. But most are, and they are in corporations and government (and of course teaching all the new economist in universities).
"Woe is me". Eeyore has a character flaw. Whatever can go wrong, will go wrong. Positive news just doesn't phase him much. Every event is a point on the downward trend. Those supporting the bailout of the automakers have the same character flaw. If GM declares bankruptcy, the end of the United States economy will occur. It doesn't matter that thousands of companies declared bankruptcy and SURVIVED for another day, week or decade. The trend line is down all the way to the bottom.
In all these cases, it should be noted that the trend lines changed because of events outside the analysis that established the trend lines. The Sun didn't come out. But, in many cases, looking back, we can see the break and if we are really careful, we can see why.
I believe the auto industry fall started the day car loans got extended to 30 years. Huh? You wonder what I am thinking. There are no 30 year car loans. Sure there are. When someone refinanced their home and used those extra funds to buy a car, cash, they were actually taking a 30 year loan out on the car. Everyone understands that most cars are not worth the loan the day they drive off the lot. That if they have a four or five year loan, that they will spend most of it, underwater. We accept that. But we also accept that at some point, the vehicle will be paid off and we can get a little for it. But a 30 year loan? Cars (generally) don't last 20 years, let alone 30 and therefore it will never be worth more than is owed. But, people don't see it that way. The actuality is buried in the mortgage. Others will, and have, loudly, that the legacy costs of all those retirees is what is killing GM, but it wasn't a problem when GM was profitable.
But, the issue is not the bailout or GM. It is the mindset that believes what happened yesterday will happen today - and they have the empirical evidence to prove it. Unfortunately for all concerned, reality can and often is different.
I also read today about how the decline of the US will give other countries the opportunity to take our place. China being a big candidate, but also countries with a lot of cash/funds to lend (read oil producers). I take issue with that point of view, not because I am partisan (I love my country) but because trends do not make reality. China pretends (sometimes better, sometimes worse) to be a capitalistic economy. It is not. It's ability to respond to events is limited. Oil producers will have considerably less funds if the world economy continues to fail (and they do not have a diverse economy to replace oil revenues).
I don't believe that the US can remain the source of reserve currency forever - that trend line is just like all the others - but regardless of what event occurs to change it, there has to be another currency available to take it's place - and right now, I can't see one that doesn't have the same, or worse problems than the dollar.
Where will our economy be in a year? The trend lines suggest like The War to End All Wars becoming WW1, the Great Depression will soon be known as the First Great Depression. It is possible because trends are trends, til they are not. What event or events could occur that will change the trend lines? I have two problems: I have a degree in Economics; I will only live 80 or so years. My experience and lifetime are both limited and I have no special insight into the future.
I can make some assumptions - you know, follow the trend lines - the economy is going to get a lot worse before it gets better. And better does not mean like it was before. The automakers, especially GM will never be the same. Could our financial system collapse (duh...already has) into oblivion, no, but what it will look like in the future?
Next time you hear ANYONE predict the future, make sure you know what trend lines they are using.
People have been talking to us and predicting our business (consumer bankruptcy) will be booming. It is not - growing, yes, but booming? Nope. First, people are just walking away. Second, they are hoping that Obama really WILL pay their mortgages.
You can be sure of one thing Obama said: change will happen. That is a trend line that has been unbroken from the beginning.