I just bought a new PC. Actually, it was an old PC - a refurbished Dell laptop. I spent $400 on a beat up brick, instead of, say, $1,900 on something shiny and new for a few reasons. One is that I'm a terrible maximizer and am still trying to decide which shiny and new machine I should get. Another is that I actually need two machines - one shiny and new, but also a stopgap machine for one of my team while her Lenovo goes back for repair. And the Dell is a perfect stopgap machine. But most important of all is this:
That reason is telling; I think, anyway. As I explained to my team in Verilab's Austin office yesterday, January 2009 feels much the same as January 2008, or January 2007. If anything, January 2009 actually feels better than those past years. Of course fortunes can change fast for a small firm, but that has nothing to do with 2009. Being a small company means you're always at risk from the big wave, let alone the perfect storm. And so if I keep my eyes purely on the data that immediately affects me, I cannot yet see a problem worse than the problem of being a small, international firm working in high tech.
So, why did I allow "The Economic Crisis" to affect my buying behaviour? The world of PC sales is $1,500 shorter than it would have been had I, You-Are-Already-Dead-Kelly, had the balls to buy a new machine. Why did I chicken out? Well the reason is, I'm scared not because I have anything yet to be scared about, but because you're scared. I'm reacting not to a softening sales pipeline, or to all my consultants being emptied from their clients, or to a sudden ban on the use of SystemVerilog for chip verification. I'm reacting primarily to the fear shown by others. You, and your fear, is the problem. Of course, you in turn are scared primarily because your friend is scared. And your friend's scared because his cousin in Austin was laid off because his Austin employer was scared because his next door neighbour, Tommy Kelly, was scared. Repeat until sick.
Now I'm not denying that there are real economic problems. As Kipling never said:
Are losing theirs ... you may have misjudged the situation"
So bad stuff is definitely out there. Toxic assets are, well, toxic. Companies large and small are in danger, jobs are being lost, and home loans foreclosed. Aaaah!
But is it reasonable to believe that I am not alone in reacting not to actual observable problems but merely to other people reacting to something? Is it reasonable to believe that a large part - maybe the largest part - of the current problem is not "real"? Let's do some math(s). There are, what, 300 million people in the US? Let's say 200 million of them are sufficiently afraid of their neighbour's fear that they are not buying as much stuff as they otherwise would. Let's say I'm an average non-spender. So, some are not buying a Starbucks for $4.00, while others are not buying a new Hummer for $60,000. Just for argument's sake, assume the average non-spend is $1,500. Two hundred million Americans each didn't spend $1,500 dollars they otherwise would have.
That means $300 billion dollars of non-spend. For no reason. $300 billion dollars of trade that would have happened, didn't happen, because of fear triggered by someone else's fear.
Suppose we decided to actually advance in the face of fire. Instead of battening down the hatches we each decided to buy something that we we knew we were putting off only because of the fear. What would happen to the economy?
I'll leave you with the best video I've yet seen explaining the crisis, and particularly this aspect of "market sentiment".
Meantime, I'm off to buy a shiny new PC!
Most economists would agree that the best measure of the health of an economy is growth. Yet growth cannot go on forever if it means consuming ever more of a finite world.
Couldn't we devise an economic system that embraces markets, competition, and free trade, but which doesn't depend on the growth of material consumption?
@Brad,
Thanks for the comment. But couldn't a consumption-limited environment suffer from the same problem? My point -- that sometimes the fears we have that stop us consuming (or investing) are both unfounded, and infectious -- isn't applicable only to unbridled capitalism (whatever that is). In a consumption-limited environment, wouldn't it still be possible, as in the video, for someone to cry, "My god, something awful's going to happen!!"? After all, a herd of elephants could still stampede at a single mouse.
I'd agree that fear that can be infectious, unfounded, paralyzing/stampeding, and difficult to resist. And sometimes that's exactly why it's a useful instinct sending a signal that you need to prepare yourself for trouble.
For example, if the stampede is starting, you'd better get ready to run, or you're going to get trampled. Just look at a chart of the DJIA for the last 6 months.
Great Post - if only the so-called experts in finance and government would recognize this - and oh, let's not forget the media who are having a field day fanning the flames. When everything is going good and the world is at peace, the media has nothing to talk about leading to less viewers.
Spending away in Silicon Valley ...
@Brad,
It's true that even an irrational stampede is a stampede. As you say in your 0-1-2 post, the 100th person in trend doesn't add much more momentum. The corollary is, subtracting one person from a panic doesn't stop the panic. Also, there's a bit of a Prisoner's Dilemma going on. If the panic was genuinely to subside, the selfish actor could still hold onto their money, relying on everyone else's spending to free up the economy.
But in the days of the internet, strange, viral things can happen with crowds. The slashdot effect is an example. Maybe that could take place with spending. If everyone who read this decided both to make their fear-less purchase and to convince three or four other people to do the same, the effect could grow large very quickly. I'm not pinning my hopes on that though.
But I am still going to buy that PC! :-)
@Bindesh,
The media do indeed seem to be a key part of the cycle. Only this morning, CNNMoney have this: http://money.cnn.com/2009/02/02/markets/stockswatch/index.htm. The headling is "Stocks Set To Falter". So not only are we hearing of gloomy near past events, we're also getting predictions of gloomy impending events. If that's not a self-fulfilling prophecy, I don't know what is.
just needs more articles like this ( http://www.forbes.com/2009/02/02/monetary-policy-recovery-opinions-columnists_0203_wesbury_stein.html?feed=rss_popstories )that say we've pretty much turned the corner and things are getting better.