Will Our Own Expectations Kill Us?

I just finished taking a CNN on line survey. Once I entered my response the results to date were listed. The outcome scared the hell out of me. The question was: “Are you confident world leaders can solve the financial crisis?” The result was that 70% of the respondents said no.

Normally, survey results do not have any effect upon me, especially ones that merely ask for opinions. Then why does this particular result scare me? The reason has to do with the effect people’s expectations have upon their economic behavior. Generally, people will either buy or save depending upon their expectations of their future economic health. If they believe the economy is slowing, they will cut their spending. If they believe the economy is healthy, they will continue to spend or even increase their spending. The current financial crisis has led to decreased expectations for the economy. This has led to a concurrent decrease in consumers’ economic activity. Consumers are the engine that drives the American, and subsequently the world, economy. This is where the survey result comes in.

The survey indicates that American consumers believe that world leaders will not be able to solve the financial crisis. Therefore, they believe that the economy will continue to decline. As a result, consumer spending will either stay low or decline. Either way this spells trouble for the economic future. A continued shrinkage in consumer confidence can turn what already looks like a severe recession into another great depression.

This weekend’s G-7 meeting must come out with solid plans that people believe will stop the financial decline. If this happens we can expect that people will begin to change their behavior. However, if the plans are tentative indecisive political obfuscations we can expect to see an economic disaster in our future. The Hoovervilles of our parents and grand-parents will become the Bushbergs of the 21st century.