Can Optimism Alone Spur Recovery?

Let us begin by stating that there is a certain degree of truth to the layman's assertion that psychology plays a significant role in periods of economic contraction. Clearly, when consumers notice the early signs of a recession, they assess the likely threat to their job, standard of living, premium movie package, wine tasting club, Junior's college fund, etc., and adjust spending according to the perceived threat level. This collective consumer retrenchment has the potential to create a negative feedback loop whereby decreased consumer spending begets a weaker economy begets bad news begets further cuts to household spending. The most logical conclusion that can be derived from this sort of logic then, is that a dose of Happyspeak and a dollop of optimism can cure all ills. While this logic may have been valid during the infantile recession that ended in 2003, the situation at hand today is beyond the scope of what Optimism Alone is capable of repairing.

At present time we are in the midst of a balance sheet recession, characterized by the fact that the Total Liabilities of the financial system far exceed the dollar value of Total Assets. The scary thing is, we have only seen phase 1 of this grand and inevitable deleveraging process that must be completed prior to any sustainable recovery. Various other categories and breeds of poorly underwritten debt, whose combined value dwarfs the issues in subprime residential real estate, are currently lurking in the shadows of the Banking Sector's balance sheet. As evidenced by today's bankruptcy filing by the Nation's second largest mall owner/operator, commercial real estate has joined the deleveraging party. Next, consider the impending credit card debt debacle: At the exact moment that household incomes are being decimated by job losses and pay cuts, credit card issuers are aggressively slashing credit limits and ramping up interest rates. To invoke a suddenly relevant comment made several months ago by an acquaintance of ours "Are these guys suicidal?"

The primary point we would like to make is that optimism, regardless of its source, can only provoke households to spend a few extra dollars. Optimism will not, in any way shape or form, hasten the inevitable deleveraging process, nor will it reduce the Totality of Pain that comes as a result of the process.

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