History - We're Doomed Because We're Repeating It (Part II)
Saturday November 29, 2008
I must not be expressing myself as clearly as I would like to. I was trying to get three points across in History - We're Doomed Because We're Repeating It. Specifically:
- Perceptions can deviate from reality for periods of time.
- Herd behavior and emotional reactions can cause people to overestimate how good things are during good times (irrational exuberance) and overestimate how bad things are during bad times (irrational discouragement).
- Due to people changing their actions based on their perceptions (point 2), self-fulfilling prophecies can occur which cause the economy from getting out of whack (either too low or too high) with the fundamentals for periods of time (point 1).
Your references to Dow 36000 and the real estate bubble support the contention that fantasy NEVER lasts and in fact (my point 1), when it exists it indicates that disaster waits around the corner. Sayng the economy isn’t that bad when it obviously is in trouble to even the casual observer does not prevent it from being bad. It just means reality isn’t being faced. This is always a recipe for disaster.At any rate - I never said the situation was not bad right now. My claim is that it's not as the hysterical would have you believe, but that hysteria has really consequences. Justin Fox describes the effect of these sulf-fulfilling prophecies:
In case you haven’t noticed one program after another that has been iniciated by the Federal Reserve and the Treasury that was supposed to solve the credit crisis has failed - usually within weeks. And you claim that things may not be that bad with the economy? My feeling is the public isn’t buying this B*** S*** anymore (my point 2) and I suggest you stop shoveling it if you wish to maintain any credibility.
When one is not confident about the answers to such questions, the natural tendency is to hold off on making decisions, especially decisions that involve any kind of long-term commitment. When lots of people postpone decisions, economic activity slumps. Uncertainty is a cause of recessions. And there's so much uncertainty now that this recession could really be doozy.I couldn't have said it better myself.
Comments
Well I can certainly see your points, and I do have to agree with them, perception is everything. A similar example may be this, when you hear the retail industry wallowing about sales drops from previous years, does this mean that they didn’t earn a profit? It may not be equal to the same profit from the previous sales year, but profit is profit…count your blessings. So people may have not spent as much from last year, profit is profit. I myself for one, would like to hear these retail giants for once speak in terms of profits and not sales.
I am finishing a course in 19th century economic history-my first economic history class and only my second econ class ever-it’s all new to me. However, I have a special interest in a particular company, so I watched the stock over the past few months. Last month I bought 43 shares at $5.38 per share. My stock has gone up and down since I made the decision.But, I made $38 in one month so today, I invested another $50 at $6.24 a share. As a phd student,my finances are thin, but I believe now is the best time to invest because the markets down and my stock is a need item not a luxury item. It can only go up once the market stabilizes.
Everyone is talking about the recession but, I’m not worried. “This too shall pass” and when it does, my stock will be worth more than the $38 I made this month. I may be ignorant of economics but when the numbers speak growth, I can’t help but be confident, recession or no, the economy is going to shift again soon.
People need to get out of that welfare mentality inflicted upon us by the New Deal, the Great Society, and the false War on Poverty.