The world’s fundamental economic problem today is a staggering loss of business confidence. Commercial banks, investment banks, and hedge funds all owe their ongoing trouble to its decline, which in turn is jeopardizing the plans of companies and entrepreneurs to launch enterprises and make investments, and of households to consume.
Our “animal spirits,” to borrow a phrase made famous by John Maynard Keynes, are weakening. George Akerlof and I have just written a book by the same name, but by the time Animal Spirits appears later this winter, the world economy may be even worse than it is now.
Nations everywhere are starting to implement aggressive stimulus and bailout packages. Yet the economic outlook still looks grim. The IMF’s latest forecast predicts that the world’s advanced economies will contract 0.3 percent in next year — the first such shrinkage since the end of World War II.
Part of the difficulty of contending with a crisis of confidence is that it is hard to quantify confidence in the first place. The Conference Board Consumer Confidence Index in the US, begun in 1967, fell last month to its lowest value ever. The latest Nielsen Global Consumer Confidence Index, which covers 52 countries, fell to 84, from 137 when it was launched in 2005.
But these surveys, which tabulate quick answers to simple questions, do not tell us how deeply held these opinions are, how new circumstances might change confidence, or what people will really do when they make important decisions in coming months or years.
This decline in confidence is fundamentally related to the chaos in the financial markets that started last year and accelerated this September. The specter of collapsing financial institutions around the world, and desperate government bailouts to try to save them, has created a general sense of alarm.
Then there is the effect of memory on today’s animal spirits. People know enough about the Great Depression to understand that there are parallels with today. Many know that interest rates on three-month US Treasury bills became slightly negative in September — for the first time since 1941.
People are also aware that the stock market has not been this volatile since the Great Depression (with the single exception of October 1987). Beyond that, national leaders are defending extraordinary bailout measures by not-so-veiled comparisons to the Great Depression.
Animal spirits are not always shattered by extraordinary economic events. But then, not all economic convulsions are alike. For example, the Oct. 19, 1987, stock market crash was the biggest one-day drop ever. The Standard & Poor’s Composite fell by 20.5 percent, the FTSE 100 by 12.2 percent and the Nikkei 225 by 14.9 percent the next day.
The crisis spread around the world, but there was no recession. Instead, world stock markets recovered, creating a colossal bubble that peaked 13 years later, in 2000.
In a survey that I conducted immediately after the 1987 crash, I found that the biggest concern expressed by individual and institutional investors in the US was essentially that the stock market had been overpriced. After the crash corrected that problem, many people apparently did not feel there was much more to worry about. The only parallel to the Great Depression was the stock market drop itself.
Moreover, many financial experts blamed the 1987 crash on a kind of programmed trading called “portfolio insurance,” which most thought would stop.
But recent events do not carry such a rosy interpretation. The stunning magnitude of recent declines cannot be dismissed as a one-day anomaly caused by a technical trading glitch.
The week of Oct. 3 to Oct. 10 was the worst stock market week in the US since the Great Depression, while Japan’s stock market performed worse than it did in the worst week of the Asian financial crisis ten years ago.
Similarly, Mexico’s stock market performed about as badly as it did during the worst week of the Mexican financial crisis in 1995, and Argentina’s stock market roughly matched the worst weekly drop during the country’s financial crisis of 1997 to 2002. Extraordinary stock market volatility, both up and down, has continued since.
The current stimulus and bailout plans were hatched in reaction to that dreadful week. The G7 countries announced a coordinated plan to fix the world economy on Oct. 10, and that weekend the G20 countries endorsed the plan.
But stock markets were barely higher in early this month. In China and India, they were lower.
The erosion of animal spirits feeds on itself. Immense market volatility serves only to reinforce people’s sense that something is really wrong. A volatility feedback loop begins: the more volatility, the more people feel they must pay attention to the market, and hence the more erratic their trades.
Perhaps the saving grace in this situation is that animal spirits can and sometimes do change direction. Confidence is a psychological phenomenon, and can make seemingly capricious jumps up as well as down.
The most promising prospect for a return of business confidence now would be some kind of public inspiration. In the US, president-elect Barack Obama seems to have the charisma to create this, and his status as the first minority president marks a major historical transition that might have great positive psychological impact in the US and around the world.
Whatever the near future holds the multitude of plans now being discussed to deal with this global crisis need to be judged with attention to the elusive and inexplicable effects they might have on confidence. The “animal spirits” that Keynes identified generations ago remain with us today.
Robert Shiller is professor of economics at Yale University and chief economist at MacroMarkets LLC.
COPYRIGHT: PROJECT SYNDICATE
A failure by the Chinese Communist Party (CCP) to respond to Israel’s brilliant 12-day (June 12-23) bombing and special operations war against Iran, topped by US President Donald Trump’s ordering the June 21 bombing of Iranian deep underground nuclear weapons fuel processing sites, has been noted by some as demonstrating a profound lack of resolve, even “impotence,” by China. However, this would be a dangerous underestimation of CCP ambitions and its broader and more profound military response to the Trump Administration — a challenge that includes an acceleration of its strategies to assist nuclear proxy states, and developing a wide array
Twenty-four Chinese Nationalist Party (KMT) lawmakers are facing recall votes on Saturday, prompting nearly all KMT officials and lawmakers to rally their supporters over the past weekend, urging them to vote “no” in a bid to retain their seats and preserve the KMT’s majority in the Legislative Yuan. The Democratic Progressive Party (DPP), which had largely kept its distance from the civic recall campaigns, earlier this month instructed its officials and staff to support the recall groups in a final push to protect the nation. The justification for the recalls has increasingly been framed as a “resistance” movement against China and
Jaw Shaw-kong (趙少康), former chairman of Broadcasting Corp of China and leader of the “blue fighters,” recently announced that he had canned his trip to east Africa, and he would stay in Taiwan for the recall vote on Saturday. He added that he hoped “his friends in the blue camp would follow his lead.” His statement is quite interesting for a few reasons. Jaw had been criticized following media reports that he would be traveling in east Africa during the recall vote. While he decided to stay in Taiwan after drawing a lot of flak, his hesitation says it all: If
Saturday is the day of the first batch of recall votes primarily targeting lawmakers of the Chinese Nationalist Party (KMT). The scale of the recall drive far outstrips the expectations from when the idea was mooted in January by Democratic Progressive Party (DPP) caucus whip Ker Chien-ming (柯建銘). The mass recall effort is reminiscent of the Sunflower movement protests against the then-KMT government’s non-transparent attempts to push through a controversial cross-strait service trade agreement in 2014. That movement, initiated by students, civic groups and non-governmental organizations, included student-led protesters occupying the main legislative chamber for three weeks. The two movements are linked