Past And Future

Why is economic growth so hard to predict?

When you look at an economics textbook, it looks so clear: supply and demand each have their functions, and the two lines meet somewhere on a price/quantity graph. Economists call this the equilibrium condition. It’s like physics–an object at rest tends to remain at rest, right?

Only it doesn’t. Prices and quantities are always changing, and nothing seems to be at rest. In classical physics, cause and effect are clear: you have a past, a present, and a future that proceeds in one direction. But in economics, you’re modeling decisions made by thinking producers and consumers. Their expectation about the future can combine with their memories of the past to create a different set of behaviors in the present. The past, present, and future don’t run in a straight line–it’s more like a set of interlocking rings and feedback loops

For example, expectations of higher interest rates today are leading many to lock in mortgage refinancing rates. Thus, while refinancing is significantly less financially attractive than it was three months ago, many banks are seeing their refi activity hold up. That can’t continue.

Finance and economics are complicated because people act on their best judgment. When all those expectations line up in one direction, watch out: something’s gonna change.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-08-20T10:21:55+00:00 August 20th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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