The IMF Knows Uncertainty!


An esteemed US Supreme Court Justice named Potter Stewart many decades ago considered the law and considered the constitutional protections of the First Amendment. Given a particular case before the bench, he wanted to ascertain where those protections may never end, and where they just might, say perhaps at the reaches of obscenity – at least as considered at the time.

Ruling, Justice Stewart noted that he couldn’t really exactly define obscenity or pornography, but the judge ably emended – saying that though he couldn’t rightly say where and what it is, he did know it when he sees it, thus reinforcing – for himself at least – the point.

During the past couple of years, the IMF has been tasking itself to answer an analogous question. The IMF has been considering uncertainty – something it believes it can see and, importantly, measure.

It noted so roughly a year ago in its March 2020 edition of the in-house publication Finance and Development, containing the article, “60 Years of Uncertainty – Our New Index Provides Novel Insights”. That index, designed to measure uncertainty, reflects a great deal of thinking and homework on the IMF’s part. They think they have indeed got it.

What the Fund’s research arm did, and continues to do, is “text mine” through all of the quarterly Economist Intelligence Unit country reports going all the way back to the 1950’s and up to the current date. The IMF analysts then tally the number of times the word “uncertainty” is mentioned in a specific country quarterly report, then normalize that total against the total word count for that report, to then arrive at an uncertainty measure from that country report for that given period.

Aiming to check their work, the IMF team looks at the ebb and flow of the text uncertainty measure against periods of instability/uncertainty that are evident in the historical record.

Not satisfied with just that, the IMF has fashioned a comprehensive “global” (their word) uncertainty measure which is in fact the GDP-weighted index averaged across the respective national index values drawn from a survey of 143 countries.

As the Fund continues to splice and parse its understanding of uncertainty, one observation it has already arrived at is the realization that “stronger trade and financial linkages lead to stronger uncertainty synchronization.” That would seem to make sense. The more linkages, the more there is to think about, the more uncertainty there can be.

So, what does the IMF say about these days, given Covid and all the sovereign improvising? Are conditions becoming more uncertain?

Apparently not, according to the IMF technocrats who measure such things. The compiled IMF GDP-weighted global uncertainty index reached a peak score of 55,684.71 as of first quarter of 2020 – which might be attributed to the perceived absence of methods and means to deal with the newly spreading pandemic, thus raising uncertainty all around. The same index, however, has retraced to a much lower level at 22,319.62 as of the fourth quarter in 2020.

Maybe we can draw solace from that. The moderating index path would seem to imply much less uncertainty, or possibly even greater confidence in how things are set to go, at least prospectively. There are vaccines now, people are breathing (literally) more easily. Ultimately, one can at least say that analysts and editors at the EIU are feeling hale, influencing their choice of diction, and perhaps the narratives they’re framing.

Should we be concerned with “uncertainty”? The short answer is yes. Uncertainty and risk aversion are kindred phenomena, or rather states of mind. Both retard action and engagement – to paraphrase and to wit: a faint heart neither wins a robust economy, nor recovering trade flows, nor buoyant job creation. More assured animal spirits are better.

The funny thing, though, is that one can also make the point reasonably that “uncertainty”, or rather its level as such, is a supremely “coincident” indicator. It is actually good to know the present magnitude of uncertainty – we’ll have a better idea right now whether investors, and planners, and doers are skittish or not. That can help inform our own actions. But knowing what uncertainty is now doesn’t tell us that much about what it might be in the future, even in the immediate future. Quick developments can recast sentiment, sometimes fundamentally – hard charging confidence can follow uncertainty, or the reverse.

Again, being aware of what the ambient uncertainty is can be helpful, but just as important, if not more so, is to have a steady and growing awareness of what the real and potential sources of uncertainty are. One might be better positioned – and ultimately solvent – for being sensitive to, say, Joe Biden’s own mental framework for parsing the economy, or the shifting alignments, if any, in the CCP Politburo, or whether there’s really that much support for pooling sovereignty in the EU. It’s always good to have things to bear in mind, when committing risk capital.


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