Forecasting toolkit challenged by "new abnormal" Was Standard & Poor's right to downgrade France and the European Financial Stability Facility, while leaving the UK untouched? We could argue the case. But what is beyond argument is that economic and financial circumstances are so extraordinary that experts everywhere will be making monumental misjudgments on crucial issues for the foreseeable future. Consider the eurozone banking crisis. Not so long ago Stephen Cecchetti and his economist colleagues at the Bank for International Settlements, an organisation that was magnificently prescient about the crisis, looked at 40 systemic banking crises since the early 1980s, covering 35 countries. They decided that current events were unique, that the crisis was less similar to all those in their database than the Japanese crisis of the 1990s was to the crisis in Ecuador in 1998, or the one in Bulgaria during the post-Soviet transition. Hence their conclusion that it was not possible to learn about the likely path of the current crisis by averaging outcomes across past crises. That seems intuitively right. No crisis in my lifetime has involved such a high degree of complex political interaction between states. As for the sovereign debt side of the crisis, each member of the eurozone can exercise a veto on the formal bail-out proposals. Finland's reluctance to increase its guarantees for bail-out funding is a timely reminder of that stubborn fact. Meanwhile, the structure of central banking has been transformed since 2007. The central banks" traditional function as lender of last resort to illiquid but solvent banks has been transformed into a wider role where solvency support is offered to systemically important institutions, including non-banks such as the insurer AIG. Even the European Central Bank, supposedly modelled on the ultraconservative Bundesbank, now provides liquidity and solvency support for sovereign debtors as well. Predicting the ECB's behaviour within this complex nexus under a new chairman, Mario Draghi, is quite a conundrum. Will he speak in German fiscalese to the world, while providing a backstop to Italy and Spain as he finds direct and indirect ways of mopping up their IOUs? Such a backdoor rescue is perfectly feasible. Willem Buiter of Citigroup has conservatively estimated that the net present value of future non-inflationary currency issuance by the ECB and the eurozone central banks could range from €2tn to multiples of that amount. Yet the internal and external politics - and maybe Mr Draghi also - are too subtle to permit a confident answer to the question. Now consider an important micro aspect of the unbalanced world economy in which we live. Index-linked gilts in the UK started the year showing negative yields, while conventional gilts uniformly yield less than current inflation. Over time markets have shown a consistent tendency to revert to the mean. Yet in the UK and in most markets where the central bank has retained control over monetary policy, government bonds have simply become more expensive regardless. The persistence of global imbalances underlines the danger of taking a contrarian stance. And there are indeed fund managers who expect a further valuation adjustment in index-linked, taking yields further into negative territory. Against that background, putting a present value on pension liabilities is a hellish business. The risk is that historically freakish circumstances will lead to the adoption of discount rates that needlessly inflate the liabilities, inflicting an excessive burden on sponsoring companies. The actuarial world is working furiously on its models in an attempt to provide sage advice. But in the end we will all be guessing. The one certainty is that if anyone recommends discount rates that turn out, with hindsight, to have been right, it will be largely accidental. Much the same could be said of all forecasting exercises in current circumstances. The story of the past 30 years has been of an unsustainable credit bubble and the accumulation of a mountain of private and public debt. Any extrapolation of that past is bound to be a nonsense. A repetition of this economic aberration is inconceivable in my lifetime. So the conventional forecasting toolkit is a complete waste of time for many purposes. In referring to the "new normal" and to a lower growth world than we have been used to, Bill Gross and his colleagues at the bond fund manager Pimco were definitely on to something. But I wonder whether they should not have called it the "new abnormal," a nightmarish condition where we are condemned time and again to be wrong. That said, there are still a handful of safe, low-risk forecasts, not the least of them being that the overhang of debt will never be paid in full. The only question is whether the default will be formal or via inflation.