kitchen table math, the sequel: 5 years on

Monday, December 30, 2013

5 years on


I looked at my calendar today (for once)* and discovered I had entered a link to a 2009 Greg Mankiw post challenging Paul Krugman to a bet:
Wanna bet some of that Nobel money? (If that link doesn't work, try this one.)

Paul Krugman suggests that my skepticism about the administration's growth forecast over the next few years is somehow "evil." Well, Paul, if you are so confident in this forecast, would you like to place a wager on it and take advantage of my wickedness?

Team Obama says that real GDP in 2013 will be 15.6 percent above real GDP in 2008. (That number comes from compounding their predicted growth rates for these five years.) So, Paul, are you willing to wager that the economy will meet or exceed this benchmark? I am not much of a gambler, but that is a bet I would be happy to take the other side of (even as I hope to lose, for the sake of the economy). [March 4, 2009]
Apparently I was so struck by this challenge that I pasted the Mankiw post into my calendar on a date five years hence…..and today's the day.

From FRED Graphs:

Real GDP 7/1/2008: 14895.1
Real GDP 7/1/2013: 15839.3
Percent change: 6.3%

Not 15.6%.

If I had never had to teach my son math, I don't think I would have reached the point where I can fact-check the predictions of Nobel-prizewinning economists.

My now half-decade long preoccupation with macro also led me to tell Ed to get rid of ALL of the bonds in our Vanguard 401k last spring, just weeks before the Fed's taper talk crashed the bond market. Weeks.

Of course, we'd be better off today if I'd figured out the problem with bonds a few years earlier, but, on the other hand, if I hadn't taught my son math, & hadn't developed an obsession with macro, I wouldn't  have figured it out at all. So: silver lining.

At a family birthday celebration yesterday (my father-in-law's 94th!) Ed and his brothers chewed over the stocks-&-bonds issue for a while. The youngest brother has all of his and his wife's retirement savings invested in bonds. 100%.  Ed, a person with heretofore zero interest in the Federal Reserve who has spent the past five years being harangued on the subject, gave a fluent explanation of why nobody should have 100% of anything in bonds (short version: Don't bet against the Fed), at which point the middle brother said there was a middle position: the youngest brother should have some of his retirement savings in stocks.

Ed objected to the middle position, too, and on the same grounds: don't bet against the Fed. The Federal Reserve is the decider.

I learned that from Algebra 1.

S&P 500 Stock Price Index
1/1/2013 - 1462.42
1/27/2013 - 1841.4
Percent change: 25.9%

Ed, by the way, has developed an interest in the Fed and in monetary policy and monetary effects in general -- to the point that he has read Barry Eichengreen's book on the gold standard (a gift from me Christmas 2012) and was recently asked to expand a section on the Great Depression and the gold standard in a book review of a new history of Europe.

*I say for once because, this week alone, I managed to miss a) a scheduled phone call with Katie Beals and b) my friends F & J's Christmas party by not checking my calendar.


SteveH said...

In some ways this is NOT off-topic. It has to do with the quality and level of public information and debate. Too many make assumptions (personal or otherwise) that greatly affect the analysis. As in education, I've seen some really bad assumptions and analyses from people who are supposed to be leaders in their field.

My advice to my son is to get a job with a good 401K plan and company match. Fund it to the max from day one. Put all of the money into a S&P 500 index fund. Forget about it. When the Fed evens out the market, stocks benefit much more than bonds.

SteveH said...

I've also seen some really bad analyses of Roth versus regular IRAs. The level of publically available analysis can be extraordinarily bad. Some compare putting the same amount into both a regular IRA and a Roth IRA. They ignore tax rates of when you put in the money versus when you take it out.