04
Jun
12

Back up a minute there, Sparky

Let’s head over to Felix Salmon’s place for a moment.

I want to preface this with a bold claim: Felix Salmon is one of the best American political analysts on the internet bar Intrade.  That said, I start to wonder when he veers off the well-trodden horse-race path towards other topics.  He didn’t do a great job with the KFC Double Down, for example. EDIT: I was thinking of Nate Silver, not Felix Salmon; I’m an idiot.  Now we get this comment on a recent piece of prognostication by Greg Ip:

In particular, I want to quibble with this bit:

Ip puts the chance of a Chinese hard landing at 20%; of the euro falling apart at 40%; and of the US fiscal cliff actually happening at 30%. Individually, each of these risks is bearable. But make the reasonable assumption that they’re independent variables, and it turns out that if you put them all together, the chances of none of them happening are just one in three.

(Emphasis added.)

That little clause in there is doing a lot of work.  It’s reasonable to assume that disastrous economic outcomes in three of the world’s major trading areas are independent?  That a collapse of the Euro would have no impact on the likelihood of a Chinese “hard landing”?  That neither one would affect, say, US tax revenue?

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3 Responses to “Back up a minute there, Sparky”


  1. 1 Alex J.
    June 5, 2012 at 07:58

    Could be some tallest pygmy action.

  2. 2 TMI
    June 5, 2012 at 16:11

    JOTTOMH–

    Europe has had downturns before that haven’t affected US GDP. Yes, it’s true that in a downturn, there are export effects. But if it shows up as growth that hasn’t occured…does the tree still fall?

    Then, think about the correlation between these differing outcomes; is the likelyhood of any single thing a certain negative, certain positive, or somewhere in between? How to estimate a coefficient of risk?

    What he doesn’t state, but is clearly important in the current situation, unlike previous ones, is our own nation’s exposure to underfunded fiscal policies. There are a couple of guys–like Modigliani–who I would need to re-read.

    .

    • June 5, 2012 at 20:22

      I’m less concerned about American exposure to a European downturn than I am the PRC’s. I suspect that if the sky ends up falling, it’ll be the Europocalypse kicking things off and giving the export economies of India and the PRC a kick in the teeth. Then India/PRC/etc. get all protectionist and say “Screw you guys, I’m going (points) home”, and the Treasury has unexpected trouble rolling over some of its bonds without raising interest rates (remember the Europocalypse; we won’t be able to just sell ’em all to Germany in this scenario like we did with mortgage-backed securities).

      It’s a pretty contrived scenario, but I think it shows some of the possible correlations between the three outcomes.


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