Making the most of fiscal uncertainty

Everywhere you look, there's uncertainty.

Uncertainty plays a key role in central bankers' policy deliberations. The Federal Reserve says there's "considerable uncertainty" about the strength of the recovery.

In the euro zone, "uncertainty remains high", European Central Bank President Jean-Claude Trichet said at a September 3 press conference. He went on to qualify the degree of high-ness, calling it "high", "very high" and "higher than usual" in the space of a half-hour. Trichet further categorised uncertainty as "ongoing" and "a major factor" in the outlook.

The uncertainty principle isn't confined to central banking. It has infected academia, too. "There's too much uncertainty out there," MIT labour economist Thomas Kochan told The New York Times, explaining his doubts about an imminent increase in job openings.

The ghost of uncertainty haunts financial markets. Analysts remind us all the time how much markets hate uncertainty. (They hate it a lot more when prices are falling. Rising prices don't breed uncertainty.)

Stock investors make decisions to buy and sell in the face of uncertainty over corporate earnings. Businessmen contend with chronic uncertainty over what and how much to produce. Consumers deal with uncertainty when they choose between an adjustable and 30-year, fixed-rate mortgage.

Outside the world of finance, uncertainty is rampant. Golfers, airline travellers and wedding planners are prisoners of weather uncertainty.

Funny how uncertainty seems to vanish when the haze lifts. When the sun is shining, the economy is ginning and the markets are rising, policy makers don't talk about uncertainty.

And that's the point. The future is always uncertain. It was uncertain when folks were piling into Asia's emerging markets in the mid-1990s. It was uncertain when they were buying internet and technology stocks in the late 1990s. And it was uncertain when they were flipping condos in 2005.

Uncertainty as a policy or planning variable is a lot more prevalent in bad times. Which leads me to believe uncertainty is a euphemism for something else: pessimism.

Storm clouds

When central bankers say the outlook is uncertain, they mean they see heavy storm clouds overhead.

If that isn't your style, try taking a leaf out of former Defence Secretary Donald Rumsfeld's book. Rumsfeld liked to differentiate among "known knowns" (things we know we know), "known unknowns" (things we know we don't know) and "unknown unknowns" (things we don't know we don't know). It's the third one that gets you every time, Rumsfeld said.

So, central bankers, emphasise garden variety uncertainty — certain uncertainty — if you must, but lay off uncertain uncertainty unless things get really bad.