Finance in the 21st Century
The Great Debt Scare
Robert J. Shiller
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NEW HAVEN – It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic.
We now have a daily index for the US, the Gallup Economic Confidence Index, so we can pinpoint changes in confidence over time. The Gallup Index dropped sharply between the first week of July and the first week of August – the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting on August 2. The story played out in the news media every day. August 2 came and went, with no default, but, three days later, a Friday, Standard & Poor’s lowered its rating on long-term US debt from AAA to AA+. The following Monday, the S&P 500 dropped almost 7%.
Apparently, the specter of government deadlock causing a humiliating default suddenly made the US resemble the European countries that really are teetering on the brink. Europe’s story became America’s story.
Changes in public confidence are built upon such narratives, because the human mind is very receptive to them, particularly human-interest stories. The story of a possible US default is resonant in precisely this way, implicating as it does America’s sense of pride, fragile world dominance, and political upheavals.
Indeed, this is arguably a more captivating story than was the most intense moment of the financial crisis, in 2008, when Lehman Brothers collapsed. The drop in the Gallup Economic Confidence Index was sharper in July 2011 than it was in 2008, although the index has not yet fallen to a lower level than it reached then.
Most confidence indices today are based on survey questions that ask respondents to assess the economy today or in the near future. George Gallup, the pioneer of survey methods and creator of the Gallup poll, created a confidence index in 1938, late in the Great Depression, when he asked Americans, “Do you think business will be better or worse six months from now?” He interpreted the answers as measuring “public optimism” and “the intangible mental attitude which is recognized as one vital element in the week-to-week fluctuations of business activity.”
But it hardly seems likely that big changes in people’s confidence (the kind of confidence that affects their willingness to spend or invest) are rooted in expectations over so short a time horizon.
When George Gallup wrote, almost nine years after the Great Depression began, a sense of ultimate futility – a belief that high unemployment would never end – was widespread. That sentiment probably held back consumption and investment far more than any opinions about changes in the next six months. After all, consumers’ willingness to spend depends on their general situation, not on whether business will be a little better in the short term. Likewise, businesses’ willingness to hire people and expand operations depends on their longer-term expectations.
The Consumer Sentiment Survey of Americans, created by George Katona at the University of Michigan in the early 1950’s, and known today as the Thomson-Reuters University of Michigan Surveys of Consumers, has included a remarkable question about the reasonably long-term future, five years hence, and asks about visceral fears concerning that period:
“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?”
That question is usually not singled out for attention, but it appears spot-on for what we really want to know: what deep anxieties and fears do people have that might inhibit their willingness to spend for a long time. The answers to that question might well help us forecast the future outlook much more accurately.
Those answers plunged into depression territory between July and August, and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s. It stood at 135, its highest-ever level, in 2000, at the very peak of the millennium stock market bubble. By May 2011, it had fallen to 88. By September, just four months later, it was down to 48.
This is a much bigger downswing than was recorded in the overall consumer-confidence indices. The decline occurred over the better part of a decade, as we began to see the end of debt-driven overexpansion, and accelerated with the latest debt crisis.
The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy, at the level of the average person, is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years.
That said, the economic outlook can never be fully analyzed with conventional statistical models, for it may hinge on something that such models do not include: our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story.
Robert Shiller, Professor of Economics at Yale University, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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gamesmith94134 07:10 02 Oct 11
gamesmith94134: Central banks to the rescue
Five central banks come to rescue and recapitalize the banks at the fall the Greek bonds and the PIIGS. To cover the 2.5 trillion dollars of debts with “then five-year credit default swap (CDS) spreads, which measure the cost of insuring against their defaulting on their debt, peaked at around two percentage points, now they have reached three. “ It is different because all currencies will be locked in as “buyers beware” and there is no deflated real estate, and it is only with 1-2% governmental bonds and 5-7% with corporate bonds.
IMF would estimate growth in US and EU at less than 2%, higher unemployment after the austerity program to the debtors’ nations and the creditors’ nations are paid. It is sure a trick of liquidity and not trap. Now, the liquidity traps goes to corporation and tourniquet to the hedge fund guy. Chapter Seven and Eleven are opened to public usage whether you are in banking or finance, if corporations can raise funds and commit themselves to cut employment, even though the market is saturated now or later of the coming years; we should have the data to prove it years ago in the quantitative easing.
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This is the days of the gladiators when the COs and bankers can champion after killing each others in the currencies warfare or trade markets, in lesser than five year, the Central bank would not raise the interest rate even inflation hits; so, all citizens will be threw themselves to the lions of the politicians or hedge fund managers to liquidate our assets or to beg for assistance or alms. Perhaps, by then, the central bankers can clapped their hands or washed theirs for their mission of rescue.
Seriously, Interest rate is not profit. It is the wedge that keeps the balance of the currencies and performance of its economies. The Fed cannot cut off the exits just to funnel all into the bonds and dead bolted the exchange rates to make consumption out of debts; because we all learned our lessons by now. Nonetheless, we are broke with no credits and unemployed; deflation beats inflation if we are smarter in cutting prices by lesser consumption. In short-term, lower consumption cut profit, how would corporations withstand unprofitable production or employment? Get real. Put the interest rate back to work to stop the currencies warfare, and let the public saves their money to a comfortable margin to spend; then the corporation can hire. It is not the other way around. If the sovereignty debts deserve compensation, it is the administrative act to tax, not to liquidate by monetary demands
Days of the gladiators--It is deleveraging.
May the Buddha bless you?
famulla 03:38 03 Oct 11
President Obama has taken a swipe at the entire field of Republican presidential candidates, saying they are guilty of "smallness" for failing to stand up for a gay U.S. service member who was booed by a few audience members at a GOP debate."We don't believe in the kind of smallness that says it's OK for a stage full of political leaders — one of whom could end up being the President of the United States — being silent when an American soldier is booed," Mr. Obama told a cheering crowd of gay and lesbian advocates Saturday night at the Human Rights Campaign's annual dinner in Washington. "We don't believe in standing silent when that happens. You want to be Commander-in-Chief? You can start by standing up for the men and women who wear the uniform of the United States, even when it's not politically convenient." It was Mr. Obama's first public comment on the incident, which occurred at a GOP debate in Orlando on Sept. 22. When a gay soldier serving in Iraq asked a question of the candidates via YouTube, a few audience members booed. The candidates did not say anything at the time; some of them said later they could not hear the audience reaction from the stage. The president argued that the failure of the GOP candidates to speak out about it since then is emblematic of the Republican Party's "smallness." "We don't believe in a small America," Mr. Obama said. "We believe in a big America — a tolerant America, a just America, an equal America — that values the service of every patriot. We believe in an America where we're all in it together, and we see the good in one another, and we live up to a creed that is as old as our founding: E pluribus unum. Out of many, one. And that includes everybody." The notion of a "big America" extends to the passage of his $447 billion jobs bill, the president said. "I don't believe — we don't believe — in a small America, where we let our roads crumble, we let our schools fall apart, where we stand by while teachers are laid off and science labs are shut down, and kids are dropping out," Mr. Obama said. "We believe in a big America, an America that invests in the future — that invests in schools and highways and research and technology — the things that have helped make our economy the envy of the world."
I thank you Firozali A.Mulla DBA
gamesmith94134 05:41 03 Oct 11
Gamesmith94134: The Fear Factor by Roger E. A. Farmer
I fully agree with bluebear that his views on the quantitative easing that is the cause of its volatile market; since the valuation is questionable based on how investors see of our economy. I apply my half empty and half full valuation that what balances what price and value is.
However, The fear factor may applies if some economists spoke like the flat earth society that give the delusion of the sun rises from the east and our earth is not rotating around the sun; and surprise everyone the sun is actually move according to the stationary earth. It is confusing just because it sounds so real that I see the sun comes up at the east.
Why there isn’t a real economist talk of my 30K custodian is worth more of two RMB110000 MBAs financial planners I can hired in Shanghai; and I must pay my custodian’s health care $6000 more just to keep him working in US? It is my Fear Factor in operating in United States.
Do all economists agree inflation is the only exit of the deficits? They should fear on the consumers of American have their way to fight inflation already; they just cut more on consumption; and the deflation cut to profit margin. There is no inflation if price inflated products are not consumed. What stimulus programs, they only add more deficits. This is deleveraging.
May the Buddha bless you?
sooku 05:58 12 Oct 11
A fascinating review of what drives large-scale economic decisions. Apart from sentiment, however, is the physical constraint of dwindling, negligible or negative assets. Of course the two are interrelated and interdependent - a condition known to engineers as feedback or coupling. Is there any tool in economics to analyze mutually coupled and dependent phenomena liks this? Or must we remain at the stage of "which came first, the chicken or the egg"?
bluebear 09:28 25 Sep 11
US sovereign debt scare has been blown out of proportion for both its present impacts and its future implications.
Academicians, most disappointingly the more influential ones, are not doing their social duty of guiding the public’s thinking to prevent perverse psychological reactions but have followed the GOP and the Dem to practice partisanship, a kind of paranoid-provoking one, to gain public attention.
The Gallup’s surveys suffered severe selection and political-fashion biases: Everyone asked wanted to sound knowledgeable to the current events.
The truths were that reactions of consumers as measured by their spending and of both the bond and the equity markets did not indicate that US pubic scare level was surged up by either this round of government debt ceiling increase or the wickedly-timed S&P downgrade. Consumer spending stays the course. Bonds went up (i.e. US government’s IOU papers became more valuable) on the day of S&P downgrade of their risk ratings! And that day S&P-stirred drop of stock markets was manipulated and, hence, was much recovered immediately the second day.
The US public needs to be told that for every debtor there is a creditor, and both the responsibility of paying as well as the benefit of receiving the debt payment passed on to our next generation. Only the burden to redistribute wealth is delayed. Because more are gainfully employed having the debts than not having them, the net assets passed on to next generation are greater with the debts. In addition, for the US, future inflation tax to monetize the debts if needed would be a progressive tax and hence will less likely incite civil unrests—this is not true for other nations having high net private citizens’ savings.
The downgrade of US by S&P and the stock markets’ selling bursts in premarkets and in the first minutes of markets opening should be investigated by SEC. SEC should at least confiscate gains in all S&P employees and their relatives’ accounts that held any index short or inverse ETF or ETN positions at the time of the downgrade. The timing of that downgrade, at the peak of a scary market following multiday bursts of bad data and with S&P officers working late into a Friday evening after the afterhours markets to bracket an entire weekend to build up fear all seemed intended to trigger a black Monday.
Current dip of consumer sentiment was reactions to negative data of little to no new private sector’s hiring, public sector’s layoff, and broad dropping in leading and coincident indicators, as well as to the structural problem of euro seigniorage’s controls and possible domino risks of banks’ asset impairments and future stability of the euro. Hard landing in China and then the unavoidable breakdown of the out-fashioned Communist party’s leadership also seemed foretold by copper prices.
Political brinkmanship in the US was scary and disappointed but was at near the bottom of the list of factors that caused the present dip of consumer confidence.