Posted: Wednesday, January 23, 2008 12:00 am
The daily stories all over the news about the economy are having the effect they describe. The more warnings about the economy there are, the slower the economy is likely to get.
The fundamental reason for this is that the economy operates not on fact but on opinion. There is no such thing as intrinsic value. Anything - a job, a house, a car, a bottle of pop - is worth only as much as somebody else is willing to pay for it. If that willingness sags, our whole economy begins to lose steam.
Some people are complaining that by reporting the news the media are causing a recession. Whether that assertion is true is another story. But if it's true, then the media necessarily also should get credit for causing the economy to expand before.
But regardless of what appears in the media as fact or opinion, people who have a big effect on the economy don't have to believe it. They could act as though they know better. Pension funds with huge holdings in the stock market might say: "Those media, they don't know what they're talking about when it comes to the economy or much of anything else. We'll just hold on to our 10 million shares of XYZ Corporation no matter what anybody says about their likely value."
If other big shareholders reacted the same way, the swings in the financial markets would be a lot less dramatic, and traders would have far less reason to panic.
While the economy is driven mainly by feelings, ranging from fear on the one hand to optimism on the other, those feelings obviously lead to tangible results. The value of your house is strictly a matter of opinion, but if you borrow money based on its value and obligate yourself to pay it off, the contract is a real thing. And if nobody is willing to buy it at the price you had in mind, you may have a real problem.
The main prerequisite for a successful economy is confidence that it can continue to work well. If confidence ebbs, events in the real world will follow in short order. Which is why ominous warnings about the future of the economy don't do anybody any good. (hh)