ECONOMIC PREDICTIONS FOR THE NEW YEAR.

ECONOMIC PREDICTIONS FOR THE NEW YEAR. It’s always fun to read predictions at this time of year. Professor Summers’s article is especially interesting because it summarizes the predictions that are being made by financial markets: clear skies.

“At the same time, financial markets are pricing in an expectation of tranquillity as far as the eye can see. Stock prices in the U.S. are at all-time highs. The risk premiums that corporations or developing countries have to pay to borrow money are at or near historic lows. In addition, estimates of the volatility of the stock, bond and foreign exchange markets inferred from the prices of options are near record lows.”

The article can also be found here. The Financial Times site has good economics articles on a regular basis. Summers contrasts what the markets are saying with predictions by various commentators of big swings in markets. This is a different kind of prediction for a couple reasons. First, it is not Summers’s own prediction, but what the markets are saying. Also, Summers is concentrating not on any direction that a variable will go, but on the narrow range in which things are expected to move. Also note, as Summers points out, that rare events come as surprises. I’ll try to come back to these predictions at the end of next year and see what happened.