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
You wish every Taiwanese spoke English like I do. I was not born an anglophone, yet I am paid to write and speak in English. It is my working language and my primary idiom in private. I am more than bilingual: I think in English; it is my language now. Can you guess how many native English speakers I had as teachers in my entire life? Zero. I only lived in an English-speaking country, Australia, in my 30s, and it was because I was already fluent that I was able to live and pursue a career. English became my main language during adulthood
The international women’s soccer match between Taiwan and New Zealand at the Kaohsiung Nanzih Football Stadium, scheduled for Tuesday last week, was canceled at the last minute amid safety concerns over poor field conditions raised by the visiting team. The Football Ferns, as New Zealand’s women’s soccer team are known, had arrived in Taiwan one week earlier to prepare and soon raised their concerns. Efforts were made to improve the field, but the replacement patches of grass could not grow fast enough. The Football Ferns canceled the closed-door training match and then days later, the main event against Team Taiwan. The safety
There are moments in history when America has turned its back on its principles and withdrawn from past commitments in service of higher goals. For example, US-Soviet Cold War competition compelled America to make a range of deals with unsavory and undemocratic figures across Latin America and Africa in service of geostrategic aims. The United States overlooked mass atrocities against the Bengali population in modern-day Bangladesh in the early 1970s in service of its tilt toward Pakistan, a relationship the Nixon administration deemed critical to its larger aims in developing relations with China. Then, of course, America switched diplomatic recognition
The National Immigration Agency on Tuesday said it had notified some naturalized citizens from China that they still had to renounce their People’s Republic of China (PRC) citizenship. They must provide proof that they have canceled their household registration in China within three months of the receipt of the notice. If they do not, the agency said it would cancel their household registration in Taiwan. Chinese are required to give up their PRC citizenship and household registration to become Republic of China (ROC) nationals, Mainland Affairs Council Minister Chiu Chui-cheng (邱垂正) said. He was referring to Article 9-1 of the Act
RSS