Green shoots and differential calculus (Warning: more maths than horticulture involved)
Niranjan Rajadhyaksha -
Wednesday, May 13, 2009 8:48 PM
What exactly did Europe's top central banker mean when he said this?
"We are, as far as growth is concerned, around the inflection point in the cycle," European Central Bank president Jean Clause Trichet told journalists on Monday after a meeting of central bankers in Basel.
The world's top two financial newspapers have interpreted this as a sign of optimism. Here are their headlines:
Wall Street Journal: Global central bankers see turning point near
Financial Times: Downturn 'bottomed out' says ECB head.
Is that really so? No.
Inflection point is a concept in differential calculus. It is a point on a curve at which the curvature sign changes. Read the Wikipedia entry here.
Willem Buiter explains what Trichet could actually have meant.
"Unlike the gormless arts students, limp-minded lawyers and woolly social scientists that dominate British and American economic policy making, President Trichet actually knows and understands mathematics. An inflection point is not a turning point."
Read the entire post here, and do not miss the neat moving graph that he has borrowed from Wikipedia.
Buiter concludes: "President Trichet’s statement that the cycle is at an inflection point is therefore quite consistent with the IMF’s forecast that real economic activity in the Euro Area will continue to decline for this year and much of the next. Both Trichet and the IMF could of course be wrong, but it helps to be clear about what he actually said."