Sunday, August 7, 2011

Fear and the Perception of the Diving Economy

This is a recording made back on 4th March 1933, of Franklin Delano Roosevelt's (FDR, the USA's longest serving and arguably best president) first Inaugural Address as President of the United States. As a bit of a backdrop this speech was made during the Great Depression, when unemployment was around the 20% mark, and in the middle of a "bank panic" (sort of like the current GFC). The reference to the often quoted "the only thing we have to fear is fear itself" was specifically in respect of this bank panic. (As an aside, if you have some spare time read the entire Address made. Can you picture any current day leader making a similar speech? How times change.)

And so we come to the present day, where we the only thing we have to fear is fear itself.

Now, I know that hyperbole is apparently what make papers sell, but haven't they all gone just a bit over the top in recent days. Let's take a look at some of the stories in our papers over the last couple of days. First The Age:

This Time It's Serious
Share Market Set For A "Wild Ride"
Europe's Leaders Escalate Crisis Talks as Panic Threatens

And now the Murdoch press - The Australian:
Another Brick In Wall Of Worry
Reserve Slashes Growth Forecast

And our local tabloid - The Herald Sun (home of The Bolt):
$40 Billion Wiped From Aussi Superannaution Funds
Brace Yourself For Chaos. Welcome To Official Crisis 2.0
and with a headline to insult those impacted by the February 2009 bushfires
Black Friday: How Does It Affect You?

I wont even start with the ABC with it's wall to wall doomsday coverage.

Now I am not saying that the media should ignore the economic events. There are news stories hear and they should be reported. My beef is in the manner in which they are reported. What you currently have is an upside down cynical version of The Lion King's Circle of Life:

The fear being reported will lead to uncertainty being felt by the average investor (and even those that should know better). They will try to sell their investments in a soft market, leading to lower prices. This will then be reported on resulting in increase uncertainly and fear and thus the circle is complete.

Not all in the media are intent on feeding this fear frenzy. Take for example this article by Fairfax economics editor Ross Gittins - Are We Talking Ourselves Into A Recession?. Whilst I don't necessarily agree with his deflection of media failings, I think this paragraph, in the middle of the article, is a nice summary:

So if the underlying reality of the economy is enviably good, why are we so dissatisfied and anxious? Why are we so ready to think the worst about the prospects in America and Europe and to conclude - contrary to all the evidence - that tough times for them spell tough times for us? Well, not because the media are revelling in the bad news and forgetting to mention the good. They always do that. It's just that, when we're in an optimistic frame of mind we ignore the gloom mongering, whereas when we're in a pessimistic mood we lap it up.
Annabel Crabb, from the ABC, does have a point when she identifies how our federal political landscape is helping to feed this level of fear that we have in Confidently Going Where No Confidence Has Gone Before. In particular, about Tony Abbott:
 On the other side of politics, we have a chap undertaking a horror-theatre tour of the nation, donning garish costumes to frighten householders back into their homes. “Coal is doomed! Steel is doomed! People who make those little widgets that help shower doors roll properly are doomed! DOOMED, I tell you! You there! You with the sandwich! Enjoy that sandwich! Because sandwiches are DOOMED!”
And don't get me started on the lunacy that is politics in the USA. For any local readers of my blog, if you are wanting to get a handle of the US political situation, but in a slightly humurous way, you could do worse than watch The Daily Show with Jon Stewart and The Colbert Report (with 2 silent Ts). As an aside, Australia desperately needs a similar program, with the demise of The Chaser only John Clarke and Bryan Dawe provide any form of satirical observation of our politicians on television (I miss the days of The Gillies Report and Back Berner).

Sorry, back to the topic at hand. So we are currently in a position where the perception of poor political leadership, by both sides, coupled with actual poor leadership being shown overseas (both in the USA and in Europe) has lead to a reduction in spending, combined with an increase in saving.

The problem of drawing back on spending is that there are a lot of businesses out there that rely on you to spend, spend spend. Whether it's the manufacturer, importer or retailer of that thing you used to spend money on, or the operator of that entertainment venue, food place, holiday destination you're now not going to. And they are now feeling the pinch.

So, they start shedding staff. They delay payments to their suppliers. Or they close their doors.

This is how a recession starts. All this because you believe what you read in the newspapers and hear on the radio and television and are too afraid to spend your money.

We do not have the financial issues that other countries are facing at the moment. Not even close to it. But we may get that way if you listen to the doomsday merchants out there, both in the media and in politics.

The answer is simple. Ignore the media and the opposition and go out and spend. Your economy will thank you for it.

What are you afraid of?

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