Can We Talk Ourselves Into a Recession?

Robert Shiller has a new book coming out next month called Narrative Economics: How Stories Go Viral and Drive Major Economic EventsShiller laid out the idea behind the book in a recent piece for the New York Times:

Forecasting such a shift is extremely difficult. But if we are to have a chance at success, it is critical to insert into the discussion another factor entirely: an examination of the popular narratives that may be infecting individual economic decision-making.

The probability that a recession will come soon — or be severe when it does — depends in part on the state of ever-changing popular narratives about the economy. These are stories that provide a framework for piecing together the seemingly random bits of information that one picks up from friends, the news or social media.

If enough people begin to act fearfully, their anxiety can become self-fulfilling, and a recession, sometimes a big one, may follow.

I agree with Shiller that narratives drive much of what goes on in the economy, especially at the extremes. And these stories can stay with us for long periods of time.

There was an entire generation of people scarred by the Great Depression which impacted how they thought about money, markets, and financial security. Others have been using the 1970s inflationary playbook ever since.

Jim Grant admitted as much this week in a profile at Institutional Investor:

Grant readily admits he got it wrong on inflation, even suggesting that his views may have been colored by getting his start in the 1970s decade of inflationary high interest rates. He launched Grant’s two years after rates hit their modern-day highs.

I’m sure many young people will spend the rest of their lives waiting for the next Great Recession of 2007-2009 to hit.

The entire system is built on faith and trust. Paper money is technically backed by the government’s ability to tax us but in many ways how we spend and move money around is based on trust in the financial system.

My only problem with the idea of using narratives to gauge the health of the economy is the world is awash in them. Here’s what I had to say about this on the podcast this week:

It’s harder than ever to track sentiment because we have a firehose of opinions coming at us on a regular basis through social media, 24-hour news networks, the financial media, blogs and the usual finance industry sales tactics.

How can we ever be sure what the prevailing narrative is when there are dozens of new ones being created each day?

Eventually the collective narrative is going to shift, consumers are going to retrench, businesses are going to cut back, and the economy is going to go into a recession. I’m just not sure anyone is going to be able to figure out when that narrative switch is going to flip in advance.

Everyone wants to find the signal within the noise these days but the noise has never been louder and the signal is getting harder to pinpoint.


Here are the remaining highlights from this week’s Animal Spirits:

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Further Reading:
Prosperity is a State of Mind

Now here’s what else I’ve been reading lately: