Why We Were So Wrong About 2005

Remember how 2005 was supposed to turn out?

At the turn of the year, a consensus of economists, prognosticators, market gurus and various experts without a portfolio -- I'm in one or the other of those categories, I think -- predicted that in 2005 the dollar would fall, long-term interest rates would rise, economic growth would slow and the bond market would tumble.

Halfway through 2005, how could we all have been so wrong?

I don't think the year's second half will redeem that record. To me, it now looks like what the consensus predicted for 2005 has been pushed into 2006, and maybe even the second half of 2006 at that.

Wrong, wrong, wrong and wrong, which is an extraordinary record if you remember how clear the long-term trends looked at the year's start.

The federal deficit was stuck at high levels and set to go higher, thanks to a future avalanche of costs that included fixing the alternative minimum tax, Social Security and private pension plans.

The trade deficit was at historic levels and creeping higher with no end in sight. Commodity costs were rising around the world, with soaring oil prices a key culprit, threatening to slow economic growth. The Federal Reserve was determined to raise short-term interest rates until they reached a neutral position at roughly 3.5%.

The Pesky Lag Problem

I still think the chickens -- big budget deficits, huge trade deficits and crushing consumer debt -- will come home to roost. The dollar will fall, interest rates will rise and the economy will stumble -- just later than everyone predicted. The predictions made at the beginning of 2005 were a victim of lag, one of the worst problems in economic forecasting.