I’ve been reading lots of analysis of where the economy is going, and one word that keeps popping up is the word “shadow”. Shadows are things that don’t show up in the official statistics, but might be big factors to what happens next. Shadow inventories that might suddenly come on the market could turn a shortage into a glut. Missing workers that are no longer looking for jobs, might reappear. Assets that are worth less than their book value will have to be recognized if they have to be sold or marked to market. Uninsured deposits that might flee the banks can cause bank runs.
Forecasting
We’ve had the highest inflation since the 1970’s. It’s come down some, but what happens next? The conventional wisdom is that inflation is on its way down and that we’ll have a soft landing, the fed will pivot soon and start cutting interest rates, inflation will drop back to 2%, and the economy will rally from here,
I’ve been thinking a lot about what’s going to happen to the economy so I can prepare for it. The idea that it’s possible to see at least broadly what might happen is alluring. Generally, the economy behaves the way it has in the past, and it’s safe to assume that whatever has worked well in the past will continue to work well. But there are periods of time that are paradigm shifts where all the old rules go out the window, like the oil crisis of the 1970’s and the Great Depression of the 1930’s. It feels like we are now in one of those paradigm shifts.