Making Money on Macro?

Twitter is great for leaning more about macroeconomics, believe it or not. I happened across this tweet just now:

I’d highly recommend following the link; you’ll find a detailed account of a bet two macroeconomists agreed two years ago about inflation given GDP growth.

What is there to learn there?

1) Macroeconomics is very hard! Andrew Lilico readily admits he doesn’t understand how quantitative easing (QE) has affected inflation, and admits he’s unsure about how the labour market is currently working. The thing about QE is that is was “unconventional monetary policy”, which meant it wasn’t normal, hence there isn’t lots of examples of it previously being used elsewhere to get some sense of how it might work (you can count the uses on one hand, pretty much: Japan, UK, US, now Eurozone). This is problematic for us as macroeconomists: how then can we hope to understand how policy will work? The answer is we try and develop our theoretical understanding of how the economy works; but this has risks too…

2) Forecasting is not economics! Forecasting is predicting the future, and the future need not be the same as the present – things change all the time that have dramatic impacts on how events will turn out. Portes suggests that only an oil shock would have led to him losing the bet, and in fact one did occur, but a negative shock – something essentially nobody expected. More dramatic examples of forecast failure would be those in and around natural (and unnatural) disasters: e.g. forecasting output in Japan for the year ahead, just before the earthquake and tsunami struck in 2013. We can understand the economy perfectly well, but if things change tomorrow, our forecast will be wrong. Forecasting is different from economics. If you’re interested in forecasting, do think about taking my third year course on forecasting! 🙂

3) Knowledge is money! If you do know the economy well, and study macroeconomics hard, there’s no reason why you can’t hope to make financial gains using that information. This need not be betting related, either; better knowledge about the economy can lead to better ideas about how to store your wealth, about what line of work to go into, about when (and where) to buy a house. Much of this is common sense of course, but there’s no doubt a bit of economic nous can help you augment that common sense. All the more reason to study economics :-)))