Predictions Are Hard, Especially About the Future

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Tom Friedman is bullish on China “First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.”

Felix Salmon notes that this is a bad rule of thumb:

In fact, if you decided to short only countries whose foreign exchange reserves reached some large proportion of gross world product, you’d be batting 2 for 2 right now as you started shorting China. First you would have shorted the USA in the 1920s, and then you would have shorted Japan in the 1980s.

On the other hand, this seems to set up a converse wrong lesson “always short countries with massive foreign currency reserves.” As Ryan Avent notes, this mostly seems to be a coincidence. Both American policymakers in the 1930s and Japanese policymakers in the 1990s made serious avoidable errors.

For China, I think this just shows that nobody can forecast the future reliably. China’s had a great 20 years. In many ways, its outlook looks bright and you could easily imagine another great 20 years going forward. On the other hand, there are always bumps in the road. And for a country to prosper, policymakers need to navigate those bumps and not drive into ditches. Will China’s leaders continue to make deft decisions? Who knows? Certainly the existence of big reserves aren’t going to magically solve problems for them.