Best of the Week
Most Popular
1.UK Housing Market Affordability, House Prices Momentum and Trend Forecast - Nadeem_Walayat
2.Gold and Silver Sector Big Green Light and Low Risk Entry Setup... - Clive_Maund
3.UK Regional House Prices, Cheapest and Most Expensive Property Markets - Nadeem_Walayat
4.US Dollar, CRB, Oil, Gas, Copper and Gold - The Chartology of Deflation - Rambus_Chartology
5.Silver Price, COT, US Dollar Updates and More - Dan_Norcini
6.Will Gold Price Drop Below $1000 Soon? - Brad_Gudgeon
7.UK Regional House Prices Analysis - Video - Nadeem_Walayat
8.Crude Oil Swinging For The Fences - A 20 to 1 Option Play - Bob_Kirtley
9.Fed’s Tarullo: U.S. Interest Rates Liftoff Should Wait for Signs of Inflation - Bloomberg
10.UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - Nadeem_Walayat
Last 5 days
Bank Regulations Continue To Hinder The U.S. Economic Recovery - 1st Dec 15
Thanksgiving Amid the Terror Threats - 1st Dec 15
Collapsing Global Economic Trade - 1st Dec 15
Gold Demand in China Heading For Record and Reserves - 1st Dec 15
Stock Market Mixed Expectations Ahead Of December, New Economic Data Releases - 30th Nov 15
The First Prophet - The Day God First Spoke to Man - Video - 30th Nov 15
America's Rendezvous With Destiny - The Fourth Turning - 30th Nov 15
Stock Market Consolidation Week - 29th Nov 15
A Black Friday for Gold Prices - 29th Nov 15
Politicians Driving The World Towards War - Fourth Turning - 29th Nov 15
Stock Market Down Monday, Gold Price Bottoming? - 29th Nov 15
Turkey Downs Russian Jet to Draw NATO and US Deeper into Syrian Quagmire - 28th Nov 15
Stock Market Quiet Week as Primary 5 Continues - 28th Nov 15
Black Friday, Weekend for Europe's Migrants - 28th Nov 15
HUI and Gold - Who's Leading Whom? - 28th Nov 15
Gold And Silver - No Ending Action, But End May Be Near - 28th Nov 15
Social and Cultural Distress Dividing The Nation - Fourth Turning - 28th Nov 15
Sheffield Houses Prices 2015, Best Estate Agents As Rated by Buyers and Sellers - 28th Nov 15
Stock Market Top Valuations, at a Critical Juncture - 27th Nov 15
The Top Shopping Opportunity on Black Friday - 27th Nov 15
Economics Is About Scarcity, Property, and Relationships - 27th Nov 15
UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - 27th Nov 15
Vauxhall Zafira B Fire Danger Recall - What to Do Video - 26th Nov 15
Triggers In US Dollar Collapse - 26th Nov 15
Apple Stock is a 10-Year Short - Bear Market Environment - 26th Nov 15
U.S. Federal Reserve Rate Hike - 26th Nov 15
George Osborne's War on Buy to Let Sector Trending Towards Doomsday - 26th Nov 15
Will Turkey Drag NATO into War With Russia in Syria? - 25th Nov 15
George Osborne’s Autumn Statement and Spending Review Full Text - 25th Nov 15
Will Fresh QE From ECB Boost Gold? - 25th Nov 15
Sheffield, Yorkshire and Humberside House Prices Forecast 2016-2018 - 25th Nov 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Reasons to Get Excited About Japanese Stocks

Generating Economic Optimism, Put On a Happy Face?

Economics / US Economy Sep 27, 2010 - 11:23 AM GMT

By: Douglas_French


Best Financial Markets Analysis ArticleSince two years of zero interest rates, $800 billion in fiscal stimulus, and the bailout of any business remotely viewed as systemically important haven't resuscitated the dead economy, now the tonic suggested is optimism. American business owners and consumers need to quit getting their daubers down and keep the sunny side up.

George Mason professor of economics Tyler Cowen believes concern over the collective mood is not just for psychologists anymore. Optimism and pessimism are "very relevant to the difficulties that policy makers face: a deficit of optimism has much to do with why the United States economy remains stalled today," writes Professor Cowen in the New York Times.

So the Fed can huff and puff and make itself triple its precrash self, "But if it could just convince Americans that it was committed to monetary expansion and economic growth, it would help the economy pick up speed," according to the George Mason professor.

Cowen goes on to explain that while the Fed is spewing liquidity, people and businesses just aren't holding up their end of the stimulus bargain. The common folk out in the real world have increased their demand for liquidity. They are spitting in the face of Fed bureaucrats and college professors who can't figure out why folks aren't taking advantage of the cheap money, flipping their calendars back to the bubble years, and buying bigger homes, bigger cars, and bigger flat screens.

Brother Bernanke is preaching the way to economic salvation, Cowen claims, but the congregation is unsure of the Fed chair's conviction. Cowen writes, "If no one believes the Fed's commitment to price inflation, spending and employment will not go up. The plan will fail, and people will view their skepticism as vindicated."

The Fed needs to boldly go where no central bank has gone since John Law's Banque Royale, according to top economists. Once more with feeling, the Fed must promise "a credible commitment to a more expansionary monetary policy."

But Professor Cowen has this all backwards. The Fed created this mess by slashing interest rates after 9/11 and the bursting of the dot-com stock bubble. The money flowed into all types of real estate. That money and credit created not only redundant brick and mortar malinvestments, but more jobs were created to build the unneeded subdivisions, shopping centers, and office buildings.

Employment at city halls all over America ballooned to handle vital services like checking plans and issuing permits. Retailers staffed up to handle the hordes of shoppers who used their homes as ATM machines. Dare we say, most everyone was overoptimistic. Not because they took a pill or watched Dr. Phil, but because they were spending the cheap and easy credit they thought would never end.

Now the bubble has burst, and those at the Fed and in academia believe rock-bottom interest rates should make entrepreneurs and consumers optimistic again. After all, they plugged low rates into their formulas and it worked — on paper. But it doesn't. Because the crisis, the downturn, is the cleansing of the malinvestments brought on by the previous blast of monetary expansion.

"Why should hardheaded businessmen, schooled in trying to maximize their profits, suddenly fall victim to such psychological swings?" asks Murray Rothbard in Man, Economy, and State with Power and Market. "In fact, the crisis brings bankruptcies regardless of the emotional state of particular entrepreneurs."

Rothbard quotes V. Lewis Bassie, who wrote in "Recent Developments in Short-Term Forecasting," Studies in Income and Wealth:

The whole psychological theory of the business cycle appears to be hardly more than an inversion of the real causal sequence. Expectations more nearly derive from objective conditions than produce them. The businessman both expands and expects that his expansion will be profitable because the conditions he sees justifies the expansion…. It is not the wave of optimism that makes times good. Good times are almost bound to bring a wave of optimism with them. On the other hand, when the decline comes, it comes not because anyone loses confidence, but because the basic economic forces are changing.

So this whole "put on a happy face" theory is hokum. And at least one market analyst, Robert Prechter, believes that optimism still reigns, at least in the investment world. Investors aren't down in the dumps, Prechter writes in his latest The Elliott Wave Theorist report. Mutual funds are nearly 97 percent invested and investor sentiment indexes are high.

Prechter dissects an article from Bloomberg entitled "Atlanta Awash in Empty Offices Struggles to Recover From Building Binge," listing more than a dozen negative facts about that market referenced in the article. Yet the opinions the reporter found to quote in the article were positive, such as "Owners of troubled properties … said they remain optimistic," and "[A] senior vice president … said in an e-mail, 'Our outlook is positive'."

A new office tower on Peachtree Street may be 98 percent empty, distressed sales may be nearly half the market, and in-migration has fallen 82 percent in Atlanta, but those in the real-estate business are keeping their rose-colored glasses on. As are Warren Buffett and GE's Jeff Immelt, who claim things are getting better and there is no chance for a double-dip.

As long as the Fed keeps printing and academia keeps rolling out new theories, the cleansing of the multiple booms created by Fed interventions will continue for years. Those operating in the here and now of the real world have figured out that they should be deleveraging and saving. That may be interpreted by policy makers as doom and gloom, but it's just good sense.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

© 2010 Copyright Douglas French - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History