Model builders failed to understand the changes in relationships between wealth and spending, as well as in the way monetary policy affects economic activity, a result of deregulation and integration of financial markets in the 1980s. They also misread the implications of the resulting debt accumulation. When interest rates started to rise sharply in 1989, pressure on firms and households to cut back their debt commitments became intense. This, together with the resulting fall in asset prices, led to a process of debt deflation which both deepened and prolonged the recession. However there was initially very little quantitative evidence of the magnitude of these effects. Forecasters had to make an unusually important act of judgement, by modifying the model to take account of the new behaviour. Such a judgement requires a high degree of experienced intuition which was clearly inadequate to the challenge.
2. Inaccurate forecasting can lead to the most serious problems, from hunger to war. Errors in planning in those military sector contribute to the armaments race and divert the economic resources which could build better societies. The over-blown military budgets of the Pentagon and the Kremlin, of NATO and the Warsaw Pact, and those of some smaller, richer nations in South America, Africa and Asia, are based on inefficient financial planning and irrational expectations of the inevitability of conflict. The financial costs incurred from faulty forecasting, by the USA Pentagon alone, would be sufficient to run the programmes of an agency such as FAO into the 22nd century.
2. Hindsight is an exact science.