Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Pakistan Booming House Prices Housing Market Mania Kabza Mafia Warning! - 29th Aug 16
Post Yellen = Market Confusion - 28th Aug 16
Theresa May Instructs Police, NHS Gp's, Public Sector To Stop Racial Discrimination in Service Delivery - 28th Aug 16
Ignore Yellen and Buy the Dip in Precious Metals - 27th Aug 16
SPX Downtrend Should be Underway - 27th Aug 16
Unraveling the Secular Economic Stagnation Story - 27th Aug 16
The Precious Metals Sector and the Fed. . . - 27th Aug 16
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy - 3 Secret Charts

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.


© 2005-2016 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

Catching a Falling Financial Knife