Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14
Torture, Terror And Elite Schizophrenia In The UK - 16th Dec 14
Eurozone Conflict Will Bring a Major Stocks Buying Opportunity - 16th Dec 14
Viewing Russia From the Inside - 16th Dec 14
Gold and Silver Stocks Bottom - Are We There Yet? - 16th Dec 14
The Financial Industry Pigmen Win Again - 16th Dec 14
Crude Oil Price Epic Blowout - 16th Dec 14
Asian Stocks Markets: Sand In The Gears Of The Bull Market - 16th Dec 14
U.S. Dollar Trend Forecast 2015 - Video - 16th Dec 14
Silver Price Bottom? - 15th Dec 14
Gold Price Base Building Bullish Pattern - 15th Dec 14
Stock Market Probable Pop-n-Crash Today - 15th Dec 14
Stock Market Time for a Bounce - 15th Dec 14
Stock Market Euphoria: The Mother of All Ponzi Schemes - 15th Dec 14
Gold - The Weight of Time as Trend - 15th Dec 14
U.S. Dollar Collapse? USD Index Trend Forecast 2015 - 14th Dec 14
The Rushing Stocks Bear Market and How to Prepare - 14th Dec 14
Gold and Silver Dreaming of a White Christmas - 14th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

Generating Economic Optimism, Put On a Happy Face?

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

By: Douglas_French

Economics

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.


© 2005-2014 http://www.MarketOracle.co.uk - 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

Free Report - Financial Markets 2014