Nate Silver over at FiveThirtyEight has an interesting post today about the chances of a depression occurring.
He notes that over at Intrade markets, traders currently think there's a 40 percent chance of the U.S. facing a depression in 2009.
He compares this pessimism to the views of economists, who expect nothing more than a 1-2 percent decline in GDP at most, which would fall considerably short of meeting the criteria for a depression.
Silver speculates that there might be a "pessimism bubble" driving down expectations:
What the Intrade traders may be betting on, in other words, is other traders becoming more pessimistic at some point between now and close of the contact -- a "pessimism bubble", if you will.The economic news is going to get worse before it gets better, so if Silver's bubble theory were true, people like me are going to stay pessimistic for a while. It won't be until the economy starts to move forward again that we come around and realize that things weren't as bad as we expected.
But here's the real question. Is there a risk of a "pessimism bubble" in the real economy? And if so, are the real markets and the professional forecasters adequately accounting for it?
I hope he's right.
I think the reason the Intrade odds of a "depression" in 2009 are so high have to do with the definition of the contract:
ReplyDeleteFor expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. This is calculated by adding together the published (annualized) Real GDP figures (as detailed below).