Thursday, November 10, 2011

Do your own forecasting: Dynamic chart to forecast the future of the PIIGS and U.S.!

Is the United States headed the way of the EU PIIGS, and just how critical and potentially damaging to the forecast equation are the economic assumptions you make?

The answer is extremely as we'll see in the following example!
  1. Click on blue-shaded Euro area and in the drop-down menu go to US,
  2. The map will now show the lines that represent US and Italy levels of government debt as a % of GDP along with the forecast lines of the same based on certain assumptions,
  3. Now click on the bar that says "Show User Forecast,"
  4. This will show the forecast assumptions of GDP growth, Budget balance, approximate 10-year bond yield and Inflation rate,
  5. Now manipulate the US numbers assuming only 1.6% GDP growth, a 3.7% interest rate and 2.0% inflation. The change in the forecast as shown in the map would be staggering,
  6. US debt as a % of GDP would be in the range of 140%!
  7. Change the Italy interest rate to the current level of 7%+ and the result is no less punishing.
  8. Do this for all of the other countries as well.
Economic assumptions do matter very much and the question is whether Washington's current assumptions for economic growth, inflation and cost of debt are anywhere near accurate!

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