Facebook has just reminded me of what I was doing on this day a year ago – I was giving a presentation at a seminar in Copenhagen organized by Danske Bank for some of the bank’s professional clients, as you can see in the picture below.
A lot has changed in the world since then, and looking back, things felt a lot more worrying at that time than they do now, especially because we had just experienced some banking turmoil in the USA.
What were my forecasts from exactly a year ago?
What you can see in the background behind my arm are two scenarios for the development of the American money supply (M2) – a “hawkish” scenario and a “dovish” scenario.
In the hawkish scenario, I assumed that the American money supply would stop falling and remain flat for about a year, after which it would gradually begin to rise.
If you look at the actual development of M2 in the USA over the past year, we have almost precisely been in this hawkish scenario.
So, I dug out my presentation and looked at the next slide after the one with the money supply. It’s also shown below. It shows two scenarios for inflation development.
The yellow line was the dovish scenario for monetary policy. The orange one was the hawkish scenario (the one that has almost played out).
I’ve added how inflation has actually developed. It’s the green line. And bingo – it lies almost perfectly on top of the orange line.
What does that tell us? Firstly, that we have been able to use the development of the money supply to predict the development of inflation quite well, but also that the talk we’ve heard recently among certain economists about inflation not coming down as quickly as expected in the USA is somewhat exaggerated. It’s almost gone exactly as expected (in the euro area, it has actually gone somewhat faster).
What I personally got wrong over the past few years was therefore not my forecast for inflation (I hit that almost spot-on) or growth (I didn’t have a forecast for a US recession), but instead, I got the interest rates wrong. It hasn’t come down nearly as fast as I expected.
And that explains a lot of the interest rate developments – because how can you be wrong about the interest rate when you hit the nail on the head with inflation and growth? The answer is that the natural interest rate has risen. But more on that another day.
Happy Easter.
PS If you wish to book me for a lecture or presentation on inflation, growth, interest rates, etc., please have a look a my agent YouandX here – the website is in Danish but I can also be booked for international speaking engagements through YouandX.