Samstag, 11. März 2017

About Those Animal Spirits...

"A large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

John Maynard Keynes (General Theory of Employment)

When, during the post-2008 recovery, the expected recovery never really became a recovery, the star economist Paul Krugman, a biblical follower of Keynes, often proposed that some 'act of irresponsibility' was required, either by the Treasury or by the Fed, to set animal spirits in motion. One of his ideas was that the Treasury should 'mint that coin', the trillion USD coin, to circumvent the debt ceiling.

Since then, Krugman seems to have forgotten all about animal spirits. Instead, he described the improved job situation more or less as 'the outcome of weighted average of quantitative benefits multiplied by quantitative probabilities'. In Krugman's words: "The first few months of job numbers reflect the previous president's policies, not the new ."

If Krugman is right, then consumer confidence must also have a lagging impact, i. e. the confidence was built up by the previous President but it didn't show until the new President arrived. Be that as it may, according to Bloomberg, US consumer confidence is now at its highest level since 2001.

With so many positive news about the US economy, one forgets easily that it could have developed in the opposite direction, as Krugman predicted the day after the election:

But, fortunately, Krugman's then prediction did not (yet) prove correct. Perhaps it never will.

PS: Maybe the election of Donald Trump as President was the 'act of irresponsibility' which Krugman considered so necessary, except that he probably had a different act in mind.

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