CONTRIBUTED BY DOUG CARDELL Ph.d. | The Oracle of Oracle
What’s in store for 2024? Before I share what my models indicate, I’ll explain what many economists and virtually none of the media will tell you. ALL MODELS ARE WRONG. That may sound extreme, but it’s easy to see it’s true. A model is a simplification of reality. It is simplified because most realities are too complicated to understand fully. A doll is a model of a person. It’s fine for many purposes, but understanding how the human body functions is not one of them. Too often, people overextend a model’s reach. They open the doll, look inside, and conclude that people are full of cotton. People think a perfect model will lead to perfect results. However, a “perfect” model is no longer a model but an unsimplified copy.
Some models attempt to model chaotic systems, like the weather. You’ve probably heard of the butterfly effect. It describes the possibility that a butterfly flapping its wings in Brazil could precipitate a tornado in Texas. Dr. Lorenz, its discoverer, concluded that no model could ever make useful day-to-day weather forecasts beyond a couple of weeks. This uncertainty is because chaotic systems have vast numbers of independent entities affected by local variables, and tiny changes in even one can have an outsized effect. In the case of the weather, these are air molecules. In the economy, the autonomous entities are producers and consumers.
You might be the butterfly. If you buy an additional gallon of milk next month, that may be the purchase that triggers an increase in the grocer’s next order from their supplier. But since your purchase was an extra gallon you don’t usually buy, it might result in a supply excess at your grocers next month, which could trigger a smaller reorder, resulting in scarcity the following month. The oscillations often increase in magnitude with each repetition and can eventually cause severe distortions in the supply chain, such as toilet paper during COVID-19. Now, neither you nor the butterfly can do this alone, but in either case, you or the butterfly could be the last straw, the final push that tips the system. So, could your buying a gallon of milk in Catalina precipitate a recession in Poland? Yes, that’s the nature of chaos.
Two other factors create economic turmoil: asset bubbles, like the 2007 housing bubble, and rare events, like the recent pandemic. A large part of my doctoral dissertation was a proof that chaos, asset bubbles, and black swans prevented the Federal Reserve from predicting variations in Consumer Price Expenditures within a useful margin of any more than 43% of the time and would never be able to improve reliably.
Given those cautions, we can consider the results indicated by my models. They indicate that there is a 9% chance of a black swan upsetting the apple cart and a 19% chance of an asset bubble causing severe economic distortion. The probability of a ‘soft landing’ with no recession is 32%, and a recession’s likelihood is 40%. Of these projections, 59% of the seriously adverse outcomes are attributable to government policy. Depending upon the nature of whatever black swan may appear, the government’s role in creating the crisis is undetermined. Another pandemic might not be the result of government action. Still, a large-scale need for military deployment might be the result of the administration’s foreign policy, while the currently ineffective border policies may result in a substantial terrorist attack.
These projections assume that only one force can drive the economy in 2024, but more than one could combine. The best-case outcome, a soft landing without asset bubbles or black swans, does not get the administration off the hook. The unprecedented reckless borrowing in the past two years caused inflation, and the high-interest rates used to contain mean it may be years before the economy returns to some semblance of normal. Soft landing or recession, we will pay for this folly for years.