2016: The Year Wishful Thinking Fails

February 16, 2016

If we collectively choose wishful thinking, catastrophic consequences are guaranteed.

Wishful thinking has been an integral driver of the "recovery" 2009-2015: asset bubbles aren't bubbles, central bank policies are brilliantly successful, unemployment has dropped to levels of full employment, and so on.

The problems with wishful thinking that I describe in my book A Radically Beneficial World are becoming more apparent by the day:

1. Elite/Technocrat self-confirmation: Those in the top technocrat/financial layer of the economy look at their own success and think since the status quo is working great for me and my peers, it's working for everyone.

2. This wishful thinking reinforces the positive bias of status quo institutions run by the technocrat caste and state apparatchiks: the mainstream financial media, government agencies, etc.

3. Wishful thinking appears less risky that gambling on new ideas that might not pay off; wishful thinking is thus viewed by those benefiting from the status quo as the safe bet.

4. When we face difficult problems, wishful thinking is counter-productive because it doesn’t generate solutions. Wishful thinking satisfies our preference for low-risk comfort, but it doesn’t solve problems.

If you’re running a real enterprise, i.e. one that will bankrupt you if you fail to solve problems, wishful thinking is catastrophic. There are few guarantees in life, but wishful thinking guarantees failure.

Consider a short list of conventional economic/financial beliefs that are shot through with wishful thinking:

-- China will manage to slowly depreciate its currency without upsetting the apple carts of global growth and capital flows (never mind that China's leadership has no history of managing such a transition.)

-- Unemployment in the U.S. is less than 5%, a rate that signals full employment and a robust, durable job market (never mind the number of full-time jobs that can support a household remains anemic.)

-- Global stock markets will work off the few spots of overvaluation and soon return to across-the-board expansion.

-- Stagnating revenues and profits are a temporary spot of bother that will vanish once consumers reap the benefits of lower energy prices.

-- If global growth tanks, central banks will rescue the global economy with negative interest rates that punish savers so severely households and enterprises will spend every dime of cash they have.

-- This surge of spending will grow borrowing, revenues, profits, etc. and best of all, fire up inflation--the ultimate goal of Keynesian economists (and don't forget "we're all keynesians now".)

-- The race to devalue currencies to boost exports, i.e. the race to the bottom, is an excellent, surefire strategy for reinvigorating global growth (never mind everyone can't devalue their currency at the same time.)

The world faces a simple choice: do we continue to depend on wishful thinking, or do we actually start trying to solve problems? It's one or the other; there are no half-measure solutions. As Yoda might say, "either do or do not--there is no try."

If we collectively choose wishful thinking, catastrophic consequences are guaranteed.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.