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Wednesday, September 9, 2009

It Ain't Over Until It Is Over

Yogi Berra could have been talking about the U.S. economy today. The happy talk clowns in Washington are saying it's over, it's over, etc. etc.

What they don't mention is that there are currently 5 million mortgages in the U. S. that are 60 days, or more, late in payments. In addition, there are an unknown number of Option Arms (see earlier post for explanation) due to be reset. That is a huge time bomb just waiting to go off in our faces, and you should be very, very careful in your spending plans.

And that leads us to a brand new concept in economics which I chose to call the Happy Talk Paradox. If you have read our book, The Great Recession Conspiracy, you are familiar with the well known economic conundrum, the Savings Paradox. The Savings Paradox says that what is good for individuals is bad for the entire economy, e.g., if individuals save instead of spending the economy cannot grow.

You would also know that the Business Cycle is driven by psychology, not finance, and that a Contraction (recession) ends when everyone starts believing everything is going to get better. Therefore, it is good government policy to encourage the idea that everything is getting better, e.g., Happy Talk. However, individuals should be very, very careful about abandoning caution and saving until the next expansion really is underway.

Hence, the Happy Talk Paradox. The best government policy for the entire economy is to encourage optimism, but the best government policy for individuals is to encourage pessimism.
So the Happy Talk Paradox, and you have just witnessed the creation of economic theory.

What is truly interesting today is that Alan Greenspan admitted in an interview on the BBC that the Business Cycle is driven by psychology (see The Great Recession Conspiracy), but then he utterly failed to understand what that means. So sad.

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