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How an Excel error caused the decade of austerity
Sorry guys, got my formulas mixed up - you lost your job? Oops lol…
Tim Vollans
November 08, 2023 • Estimated Reading Time: 7 minutes
Jeff Bezos says this is top drawer financial knowledge
Jeff also says you can’t believe everything you read on the internet
💡 The Lightbulb
How an Excel error caused the decade of austerity
Sorry guys, got my formulas mixed up - you lost your job? Oops lol…
Was reminded of this amazing story yesterday.
ICYMI, there was this like, big financial crisis back in 2008. Rarely gets mentioned now…
The world was ending.
Widespread panic set in…
Rates plunged, nobody trusted the financial value of anything…
People believed the craziest things. Some professionals even believed that QE would cause inflation. Ha!
Those same people wrote an open letter to the Federal Reserve telling Fed Chief Bernanke and the gang to reconsider.
We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued.
The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
Right & wrong. QE didn’t cause inflation in goods & services. Asset prices were a whole different matter.
Anyway, the group also made another (better) point that’s often missed:
We subscribe to your statement in the Washington Post on November 4 that "the Federal Reserve cannot solve all the economy's problems on its own."
In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
See, one of the reasons the Fed and other central banks did this insanity is because governments were so scared to spend in the aftermath of the GFC.
There was no ‘fiscal impulse’.
Debt was ‘too high’, and they were told that piling on more debt wouldn’t help the economy grow. You can’t spend your way out of a recession.
So governments implemented austerity programs to bring debt back ‘under control’.
PLOT TWIST
Governments got it wrong.
Shocker.
It wasn’t all their fault. They simply listened to the wrong people.
January 2010: Professor Carmen Reinhart and the former chief economist of the International Monetary Fund, Ken Rogoff, are presenting a research paper called Growth in a Time of Debt.
At a time of economic crisis, their finding resonates - economic growth slows dramatically when the size of a country's debt rises above 90% of Gross Domestic Product, the overall size of the economy.
Word about this paper spread. Policymakers wanted to know more.
Imagine listening to the former Chief Economist of the IMF and thinking he knows what he’s on about. Bonkers!
Surely you can trust the experts? 😲
This paper was referenced by countless policymakers to justify the need for austerity. Until a few years later, when a Harvard student called Thomas Herndon tried to replicate the results and…
…. spotted a basic error in the spreadsheet. The Harvard professors had accidentally only included 15 of the 20 countries under analysis in their key calculation (of average GDP growth in countries with high public debt).
Australia, Austria, Belgium, Canada and Denmark were missing.
Even worse, the rest of the paper turned out to be a complete clusterf**k.
Some countries were missing entirely. Data was weighted incorrectly. One outlier year was given the same weight as two decades of high debt with robust growth. And so on.
The eventual conclusion, after all the kinks had been ironed out?
High debt is correlated with somewhat lower growth, but the relationship is much gentler and there are lots of exceptions to the rule.
Booooring! You can bet policymakers wouldn’t have paid it ANY attention if that had been the original conclusion.
And that’s how a decade of austerity was caused by a simple spreadsheet error.
🧠The Big Brain
The Immortal 60/40 Portfolio
The 60 / 40 Portfolio allocation is a weird finance obsession.
There’s nothing special about it.
Just literally put your savings in 60% stocks, 40% bonds.
Over time you should get some returns without destroying your portfolio.
It’s not optimal or even designed to outperform. In fact, the 60 / 40 portfolio is the beigest shade of beige there is. Mid curve, boring, bland. Did I mention beige?
Except when it doesn’t work as intended, then it’s all anyone can talk about
HA! Didn’t work. 60/40 dead now. Will never work again! and so on…
As usual, a debate that misses the point spectacularly!
So, what is that point…. Why does 60/40 dominate the discourse when there are more pressing conversations?
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âš¡ The Spark
Biden & Xi, sitting in a tree
The long-awaited Biden Xi meeting looks imminent.
Might even be as soon as next week…
We talked about China’s charm offensive a few weeks back with the premium guys.
The US is final boss level. China wants to mend ties where possible, and create regulatory clarity to attract foreign investment.
But everyone’s kinda had enough of them. Well, the EU & US have.
Especially their cheap vehicles.
The EU has already announced a review into China’s anti-competitive subsidies (should conclude by 2050 on usual schedule).
And now…
And they want measures to stop the Mexico workaround. Chinese companies can simply export to Mexico, then re-export the vehicles into the US to get around the existing tariffs.
Messaging: A Biden-Xi meeting is a big event, but nothing will be resolved in a day. All that matters for now is the messaging. Conciliatory? Or conflictive?
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