Changing Views on Growth and Economic Recovery

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When we signed off last week, the Germans and the French were trying to hold Europe together. This morning, they are still trying.

“Don’t you live in Europe?” asked a friend at a party over the weekend.

“Yes…much of the time.”

“Well, maybe you can tell me what is going on with this European debt crisis?”

“I was hoping you would tell me.”

The closer you to get to Europe, the harder it is to see what is going on. In the trees of constitutional changes, pledges of solidarity, plans A-Z, official and unofficial announcements from more than a dozen different sovereign countries and half a dozen European agencies…it’s hard to see the forest of debt.

Debt levels need to come down. And falling debt levels mean a slumping economy. The rest is detail.

In America, stock market investors generally decided to ignore the debt problem last week. The unemployment rate went down, largely because people who couldn’t find jobs were taken off the list. Consumers still seemed ready to buy, as long as the price was right. And Congress does not seem serious about cutting spending…which gives people hope, either because they’re dim enough to think that Congress knows what it is doing or they’re bright enough to know it doesn’t. Either way, they’re sure the US government will spend, spend, spend…until it can’t spend any more.

People tend to view the future through the lens of the past. If you’re under 70, you have lived almost all your life in a world where economic growth was a fact of life. It slowed sometimes. It stopped from time to time. But it always came back. All you had to do was to stick with it. Whether you were an investor, a businessman, or a householder, you learned that as long as you could stay the course, you would probably come out okay. Your investments would go up. Your business would do better. And your standard of living would rise.

Naturally, you came to believe that that was the way things were s’posed to be. Economist David Rosenberg explains the US mindset with the following quote:

Because human psychology is slow to change, a broad economic move usually occurs in three stages. The first stage begins when some unexpected event shatters an overdone psychological environment. Yet, while some people respond immediately to this new lesson, most people, as they find it outside their past experience, do not believe it. They need more evidence — that is, a second stage. Typically, the majority become convinced during the second stage and therefore the psychological background changes. People begin to act differently, and their behavior soon affects the performance of the economy. (Dick Stoken, as quoted by Arthur Zeikel in On Thinking)

But Rosenberg agrees with us. Something big has happened. Something has changed. And it could change the way we think. Instead of believing that ‘recovery’ is right around the corner, we may begin to think it will never come.

Rosenberg says that major changes in our attitudes will come in 8 different areas:


1. Frugality on the part of the global consumer (living within our means; retirement with dignity)
2. Austerity on the part of sovereigns (spending cuts/tax reform)
3. Nationalism (an umbrella for protectionism and isolationism: mean reversion for globalization)
4. Political movement along the ideological and fiscal spectrum (from gridlock to change)
5. Geopolitical change (wars, elections and regime changes)
6. Changes in inflationary/deflationary expectations
7. Changes in growth expectations
8. Changes in asset allocation preference (fund-flows/de-risking)

He may be right. Markets make opinions.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning