If a prediction of a recession causes the market to crash, can it be said that the prediction itself is part of the cause of the recession? Like a self-fulfilling prophecy?
In: Economics
The man who sold very good hot dogs
There was once a man who lived by the side of the road and sold hot dogs. He was hard of hearing so he had no radio – he had trouble with his eyes, so he read no newspapers and of course he didn’t look at television. But he sold very good hot dogs. He put up signs on the highway telling everyone how good they were, he stood on the side of the road and cried out to all that past ‘buy a hot dog, they are the best in town’.
And people bought his hot dogs and he increased his meat and bun orders. He bought a bigger stove to take care of all the extra business. He finally got his son to come and help him out with his business.
But then something happened, his son who had been well educated said . . . ‘ Father, haven’t you been listening to the radio or reading the newspapers or watching television? There’s a big recession happening right now. The current business situation is terrible in this country – we have problems with unemployment, high living costs, strikes, pollution, the influence of minorities and majorities, the rich, the poor, drugs, alcohol, capitalism and communism ‘.
Where upon his father thought, ‘ well my son’s been well educated, he reads the papers, listens to the radio and watches television, so he ought to know ‘.
So his father cut down on his meat and bun orders, took down all his advertising signs and no longer bothered to stand by the side of the road to promote and sell his hot dogs, . . . . and his hot dog sales fell almost overnight.
While it may be, you have to consider the possibility that recessions are cyclical and that the predictions are making a vague prediction about an event that’s not necessarily related to the evidence the prediction stems from.
As an analogy, if I say it will rain because I washed my car, then it rains within the next 2 weeks, most would agree that my prediction while accurate on some level was vague enough it merely predicted an already probable event simply by accident.
Recession expectations can be self-fulfilling via the [paradox of thrift](https://en.wikipedia.org/wiki/Paradox_of_thrift), but not in the way you have worded it. First, we need to define the basic concepts you mentioned:
A **recession** is when total national income, measured by GDP, along with other measures such as employment and retail sales, falls for several months across the country. Think of this as a real, sustained reduction in economic activity.
A **market crash** is a severe drop in the value of stocks and other financial assets. It can be driven by some short-term shock, including psychological factors, or it can be driven by new information and expectations about what’s going to happen to corporate profits–including due to falling expectations for economic growth.
**Predictions**–generally referred to as “expectations” by economists–might be those of 1) stock market traders and financial institutions, 2) the Federal Reserve (the central bank of the US), or 3) the average consumer.
How do these things fit together?
1. If these traders and financial institutions freak out and the market crashes, it is unlikely to cause a recession. Some of the worst recessions in the past have been caused by financial crises, but most financial crises do not cause recessions. The stock market crash at the end of the 90’s internet bubble is a very good example of this. Investors realized they’d overvalued a bunch of tech stocks, causing a massive sell-off. But most economic activity went along the way it was, since it didn’t directly affect them.
2. If the Federal Reserve thinks a recession is coming, they will cut interest rates further to prevent it. So Fed expectations of a recession are more likely to *stop* a recession than cause it.
3. If the average consumer anticipates a recession, *this is where things get dangerous.* When consumers expect hard times ahead, they cut back on spending and start saving for a rainy day. But, by doing that, they cause a reduction in overall spending (aggregate demand) and thus cause businesses to cut back on investment and employment, leading to a recession. This is the classic “paradox of thrift” scenario.
TLDR; Predictions of a recession might cause a recession, but not because of the market crash. The predictions might cause a recession by freaking the average person out and causing them to cut back on spending.
the rates are a result of other predictions, which is generally that everyone is always preparing for the next recession. Its generally good game theory to always be more prepared than your competitors, so when the recession hits, your Ford, and not GM. (poor example, as in this case, bankruptcy turned out to be a real boost to GM’s long term profits).
The central banks primary job is to try and temper the swings by inducing some incentive to make spenders (mostly corporations) not go too far into prepper status that they create the thing they are prepping for.
anyway, the yield curve is well down the road on the signal, as at this point, things have already progressed to the point that yields are flipped.
basically, there were things that previewed the yield curve, and the yield curve is just another event in a string of events before the cycle repeats. Of course, things could reverse too, history does not dictate the future, everything is true until it isnt.
Look up Bank Run/Panic. Banks are solvent until every depositor thinks they’re not and wants to pull their money.
You can also say that a prediction of a recession will cause less of a recession then it being left to its own devices.
Op that is what makes a crash happen. Prices aren’t determined by some ultra power. It’s determined by how we feel about something at the core of it and then the fundamentals of the asset. A lot of times the fundamentals of the asset will change before our feelings catch up to it and that is how you get bubbles and crashes.
People realize that they are holding onto a lot of assets that have no where to go but down then price will crash as everyone rushes to the door. Just because someone realizes before the panic doesn’t make it a self fulfilling prophecy imo. In terms of this current economy. There is something wrong with it. Low inflation despite low interests rates and low unemployment. The US dollar is rising ( horrible for other countries). Globally yields are inverted. Europe has negative yields in some countries. You have the trade war. Not to mention it’s been 11 years without a major recession or pull back and like the saying goes economies don’t die from old age. They do die from “random events” . These random events have a better and better chance of happening the longer it doesn’t happen. Some finance guys argue the longer you wait the worst the outcome from the events get. You don’t allow for the weak to die then they only grow bigger and they’ll affect more people as time goes on.
A prediction of a recession does not cause the market to crash.
Predictive data that often precedes future recessions, on the other hand, can.
The market is made out of grownups telling imaginary stories about money. As long as the stories say there is going to be more money, they make more money. But sometimes, the money itself is imaginary. That’s how a company like Uber can get millions of dollars but never turn a profit. Everyone likes the pretend story that it’s making money so they act like it’s true.
But eventually someone opens their wallet and finds out it’s full of imaginary money instead of real money. They don’t like what might happen if other people find out. So they try to find ways to convert that imaginary money back to real money. But every trade they make just leaves them with more imaginary money. Soon, everyone notices how flustered everyone else looks and the spell’s broken: nobody believes the story anymore.
So yes, in some ways calling out the signs of a recession cause the recession. It makes people nervously go over how much of their money is imaginary and, if they don’t like the ratio, they try to dupe other people into giving them real money for imaginary money. That just makes other people more likely to notice how much money is imaginary.
Grownups are smart. Especially grownups with a lot of money! That’s why they don’t starve in a recession. You should give them all of your money and trust them with it, so they might remember and help you when it happens.
No. Nobody cares about prognosticators. Follow the money. Credit markets are more sensitive than equity markets. BIG money (sovereign states and massive corporations) don’t hold cash, they put it in long or short term benchmark bonds – frequently, US Treasury bills (short term) and bonds (long term). When BIG money thinks that interest rates will be lower in ten years than in two years, the MONEY is planning on an economic slowdown.
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