johnphart.com

We tend to fear what we do not know. This seems to be a basic human trait. The less we know, the more we are inclined to fear. Hope, the opposite of fear, usually comes from wrapping ourselves in what we know. And what we know the best comes from our past experiences.

As we think of the past, the things that we remember the most are the good times. Few like to dwell on bad times. We thus reinforce our positive memories by visiting them more often. We like to open them up, polish them carefully, and place them back on the mantle of our minds. The bad memories we try to ignore. They subsequently grow fuzzy and moldy from neglect, even though they may have more to teach us. 

When we think of the future, which being unknown would normally tilt our meter towards fear, the needle can be swayed into the hope category by pretending to know what will happen. In other words, by making hopeful predictions.

Such philosophy is often employed in economics, in politics, in religion and in life. In this post I will focus on economics since I want to be brief.

Companies make money by generating hope. They do this by reminding investors of past good times and predicting growth ahead. If a company says, “times are very tough, our prospects are bad and we may not be in business next year,” very few will invest, however truthful the statement. There is simply little perceived gain in it. If a company says instead, “We have been through some tough times, but we have come through tough times before. Going forward things will improve and we will grow.” Now investors have something to believe in. Something to hope for. Even if the company has absolutely no clue what will happen, predicting positive results is the only way to generate investment.

In this manner the prediction itself can become self-fulfilling. By generating enough hope through positive predictions, enough resources are allocated to make it happen.

The down side is that overly positive forecasts can also fill us with false expectations that we assume are more certain than they in truth are. We can be set up for greater losses by filling our minds with fabricated or over-predicted gains. Just look back at the past year.

So is it better to have the half-empty or half-full view of our current economy? Do we hope or fear the future? Optimism is gradually returning, but the risks remain high. You can hear every kind of prediction imaginable. When predicting the economy, investors must place their bets based on what they know, or at least, what they hope for.

How many of you reading this blog want a new car? I have to admit that I want one. The car that I desire is completely impractical, non-environmental, and a nostalgic throw-back to good times. Yet it seems as if it was designed and engineered just for me. And even though I really want this car, I will not buy it. I just can’t. What if I can’t get a loan from the bank? What if I loose my job? What if…?

Many of you actually have purchased a brand new car in recent months. I have noticed a few more shiny new models driving around town recently.

You may not realize it, but those of you who have purchased a new car recently are in fact a key indication of whether or not we will see economic recovery soon. Many financial experts have started looking at new car sales as a marker of consumer confidence.

If you think about this, it makes perfect sense. A car is a consumer purchase. Those who imagine a new car as an investment are thinking very long-term, about thirty or forty years out. Even then, a long shot. In reality, a car is something we buy and use up. And for most of us a new car is the largest consumer purchase that we make.

This is why tracking new car sales is one of the major gauges of how consumers feel. A year ago there were about 16 million of us that could not resist the urge for a shiny new model. This year that number has dropped to 9 million. Seven million people like me start feeling a little nervous and talk themselves out of buying a new car, and suddenly major carmakers go bankrupt and require government bailout. In a consumer driven economy, consumers “feelings” are very important.

Luckily, most of us really want to feel good. We want to be happy, even if we have to pretend. Our minds are not engineered to remember pain very well. The further into the past pain gets, the more blurry and less scary it is. Soon, its ability to incapacitate our decisions looses its hold and we move on.

This is why recession cannot last forever. Already the fear of economic depression is receding. Indicators show our confidence is improving. Eventually we will stop being scared and go after the things that make us happy.

And for millions of Americans, happiness comes in the form of a leather appointed interior, GPS navigation, MP3 player, and alloy rims. Who knows, maybe I will get my dream car after all. I am sure that 400 horses are bound to improve my economic outlook.