Economics: Is saying that there will be an economic downturn/recovery a self-fulfilling prophecy?

Yes, with caveats.

You should always be wary about why someone is saying something in the markets. Ask yourself… "What's their book? What do they have to gain or lose by promoting their viewpoint?"

Plenty of the people that show up on TV to talk about the markets are compensated somehow for their analysis.

However, there are plenty of fundamental factors that shape how markets perform that jaw-boning can't change. Random events can also alter what happens. What people think or feel couldn't stop Deep Horizon from exploding in mid-2010. But the direction the markets moved afterwards was lead by how traders reacted to that new information.

Ask a financial journalist about the effects of their articles on asset prices. Even bloggers can move markets. 50 Cent can take to television and Twitter to boost the price of a penny stock. A new Wall Street Journal article or Financial Times blog post can bump or dump a stock.

The larger and more complicated the system, the less of an effect that just one person or organization can have on the price, unless they also control a substantial position.

When we're talking about something as broad as fostering an economic downturn or recovery, it's more complicated than that. Ben Bernanke can perhaps encourage the market to go long stocks and bonds through his rhetoric and by buoying certain assets – ask James Altucher if he thinks the PPT buys S&P futures – but he will have a lot of trouble encouraging those companies to hire new employees, because all he can do is buy and sell securities.

If some random dude talks about "green shoots," it's pretty useless. But when Bernanke talks about "green shoots" and then uses his magical money machine to put $600 billion behind his phrase, it moves markets in a big way.

When Nouriel Roubini says something about the markets, it may not be a big deal… but if his clients listen to him, who do control a lot of money, it will matter.

2 Replies to “Economics: Is saying that there will be an economic downturn/recovery a self-fulfilling prophecy?”

  1. No.

    Macroecomics is not the stock market. Social proof is not material proof.

    The current recession is about more than a shock to a corrupt system.

    It is about a structural shift the likes of which we haven't seen since the industrial revolution started. The subprime crisis was merely the event that triggered the shift.

    We are moving from non-zero sum growth economics (ultimately fueled by non-renewable resources) to zero-sum plateau economics (ultimately fueled by renewable and sustainable patterns of consumption).

    The industrial revolution marked an upward gearshift from the zero-sum era of mercantilism to the non-zero sum era of steam and beyond.

    Welcome to the downshift. A 200-year long S curve is finally plateauing.

    Tighten your seat belts. This is going to be far more unpleasant than the green (in more ways than one) champions of "sustainability" think.

    There will be blood.

  2. Possibly.  Bob Lucas of the U of Chicago did a lot of research into this.  But, if the facts on the ground don't prove the thesis, people ignore it.

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