While I was growing up with my grandfather (who was quite a management whiz) in India, he explained the concept of inflation when I was quite young. He told me that people were going out and buying necessities and then storing them to protect against rising prices. India was going through very high inflation in those days. He went on to explain that what these people didn’t realize was that it was exactly that thinking and behavior that would lead to higher prices. A self-fulfilling prophecy! The science of economics has long conceded this point to the behavioral economists. How people think about the economy and their economic future actually has an impact on their economic future.
For a fascinating discussion on this, you should read this transcript from NPR here. Two very authoritative prognosticators, David Wessel of The Wall Street Journal and Zanny Minton Beddoes of The Economist, have much to say when they read the tea leaves. Granted that their focus is on the US economy. As you will note, the health of the US economy is very elastic to the global economy, at least in the short term. Some things to note are:
- Steady decline in unemployment
- European meltdown averted – for now
- Manufacturing showing signs of life
- Interest rates make government borrowing very cheap
- Mortgage rates are nudging the housing recovery along
- The so called “asset bust” related to real estate is almost over
- Stock Markets – need I say anything about this?
- Actual growth in the number of jobs
They both sound notes of caution that it’s not quite time to start celebrating, but that the light at the end of the tunnel is not a mirage.
- Europe has only managed to defer the crisis for now. That does buy the global economy and the U.S. economy some extra time to recover without that Damocles’ sword hanging over our head.
- Gas prices are always volatile and very elastic to world events and speculation. They are already showing their volatility.
- The political situation still does not look like it will lead to actual governance in the near future. The impact of that was clearly felt during the debt ceiling discussions in Washington last year, including the credit downgrade.
But then the discussion turns to what they call the “intangibles,” which is all about how people feel about the economy. They agree that how people feel about the economy actually drives their economic decisions. When people feel good about the economy, they generate far more economic activity (spending, investing, borrowing etc. etc.). They all agree that the intangibles are finally turning positive. People are starting to feel better about the economy and their economic future. David Wessel summed it up best when he said, “Larry Summers, the former Treasury Secretary, once said that you know a period of crisis is over when the surprises are consistently on the up side. And we’ve been through a period where for so long, the surprises have been negative. The fact that they’re positive now does kind of breed a self-fulfilling cycle of confidence that could be very important.”
My advice – pour yourself your favorite libation, and start feeling good about the economy. It’s the least you can do to help the global economy? N’est ce pas?