Bob Dieli responds re deflationary recessions

- by Bob Dieli

A brief note by New Deal democrat: Last week I wrote about how, in my opinion, deflationary recessions are different. In so going I highlighted the model of Bob Dieli. I said it appeared not to catch the length or depth of the 1929-32 contraction, or the 1938 recession. Because our current economic climate also has deflationary elements, I believed that his model might very well miss the next recession also. Dieli tried to post a comment in response, but it apparently got spit out in the site's spam filter. It's only fair to let him defend his model, so below is his response in full.
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First off – nice research on this post!  I read it with great interest.    Your efforts will now allow me to answer a question that is often asked by some of my subscribers: “How would the model have done in the Great Depression?”

Just as an aside, I want everyone to know that this is not a magic formula.  As you can see from the videos in Jeff’s post, there is context on each occasion.  I try to add value each month by providing this context.  It is an early warning for a cycle turning point (nine months – I think you had a typo with nine weeks) but it is not a strength signal and we should all be vigilant.  

If I were asked the best accomplishment of the model, it would be the successful forecast of every peak and trough since 1969.  The same four variables – no changes – and always a nine-month horizon. The results are often startling for my clients, but my additional indicators are also important.  

In the interest of scholarly discourse, let us take a deeper look at the 1937 recession, which you conclude would have been missed by the model.  I am not comfortable with your conclusion for two reasons.  

First, we did not have a Federal Reserve with the same powers and mission as we do now, e.g. (the Fed Funds rate).

  Second, the ’37 recession was in part caused by policy actions taken by the Treasury and the Federal Reserve to sterilize gold inflows, some of which were induced by a “flight-to-quality” syndrome similar to the one we have now, but then due to rising war fears and the need to ship gold to a safer place.  The monetary shock to a weak economy played a key role. Further discussion can be found here:  http://www.voxeu.org/article/what-caused-recession-1937-38-new-lesson-today-s-policymakers  

Because of this, I am much more confident about the future predictive powers of the model.  While I only take it as a starting point (and I hope that Jeff will elaborate on this as he has promised to do) it has proven to be an excellent foundation.  Each month I consider additional information, as do all of us trying to analyze business cycle conditions.  We are all acutely aware of the impact of structural changes.  Even a model that has worked for decades might have some erosion in its power.  

I am flattered that you would devote as much time as you did to something based on my work.  Everyone benefits with a discussions like this.