>> http://money.cnn.com/2004/12/07/news/economy/nobel_economy.reut/index.htm
>  
> That's the same blithering idiot who coauthored the paper "The 1929 Stock 
> Market: Irving Fisher Was Right."
>  
> Cf the thread "Fine work by our new Nobelist." 
> 


There was nothing idiotic about the paper. In fact if I recall the whole 
thread had SERIOUS misunderstandings about what undervalued meant. You 
asserted that the value and earnings estimates may be a little liberal 
after finally starting to understand something about what the paper was 
trying to do.

The estimates show stocks were undervalued. That means prices were under 
CURRENT EARNINGS PER A SHARE. This means something very clear. PEOPLE 
SAW THE RECESSION COMING AND REACTED. The argument supports rational 
expectations in that people are intelligent to see indicators and REACT 
to them. The stock market prices were dropping before the earnings 
information became known and the statistics were gathered to see a 
recession had occurred. There is nothing silly about saying a stock is 
undervalued at the onset of a recession. It only seems silly when you 
think undervalued means that stock prices MUST rise soon. Undervalued 
does not say that. Undervalued says that people EXPECT earnings to be 
LESS in the FUTURE than they are NOW. That means in 1929 investors 
CORRECTLY PREDICTED THE COMING RECESSION.

Now to the argument about deficits. There are only two reasons a 
macroeconomist would tell you to be concerned. First, Inflation. Not a 
problem right now because of slow demand growth during and after the 
last recession. Still not a problem later on because the Fed can 
counteract the inflationary effects. Second, because the Fed can 
counteract the effects and the rise in interest rates on T-bills due to 
offering bonds to cover up the deficits, deficits could crowd out 
investment. The second argument is hard to test and to my knowledge 
there are few if any good empirical test of the argument. So many 
economist would tell you DEFICITS DO NOT MATTER. Presscott is not the 
only person with this view.