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Analysis: A divergence of sentiment and reality?

Analysis: A divergence of sentiment and reality?
On Wednesday October 19, 2011, 6:36 am EDT
By Michael Dolan

LONDON (Reuters) – If there’s nothing to fear but fear itself, as President Franklin Roosevelt contended during the Great Depression, then the world economy in 2011 has reached an interesting juncture between sentiment and reality.

The grim facts of the now four-year-old credit crisis and western economic funk are undeniable, even if still some distance from the ravages of the 1930s.

And there are some who argue the unhappy confluence of crippling household and government debt, policy exhaustion, aging populations and resource scarcity spells a long depression-like period of near-zero Western economic growth ahead.

But there is also a danger that all the negativity itself will push the global economy over the edge.

As Klaus Kleinfeld, CEO of the largest U.S. aluminum producer Alcoa Inc, said last week: “It almost looks like the world is worrying itself into another recession.”

The stability of the modern interlinked world economy, with its rapid transmission of information and shocks globally, has never been more dependent on confidence — confidence in the smooth functioning of markets, the predictability of government policy and future employment.

Any lack of visibility can have profound self-fulfilling consequences and fear of the future, justified or otherwise, can create a downward spiral all of its own.

If you are lucky to keep your job, anxiety about unemployment itself can delay household purchases or loans. Corporate angst about ebbing demand, government contracts, taxation changes or trade restrictions can similarly halt assembly lines, stall job creation or stymie new investment.

This is basically the dark side of what British economist John Maynard Keynes described in 1936 as the economy’s “animal spirits” — or “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

The same human emotions trigger often irrational retrenchment and hunkering down when confidence about the future is doused by a cacophony of disaster warnings.

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