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
Expectations – and changes in expectations – can contribute to real economic outcomes. Take, for instance, inflation. If most people expect prices to rise by, say, 8%, they’ll push (through collective bargaining etc) for wage rises of 8%. Especially in countries with large, powerful unions, they may well get the 8% (it’s only fair: if prices rise by 8%, etc). Of course, companies will seek to offset this increase in cost, and increase the price of their product by 8%. Now if enough companies do this, that means prices overall *will* rise by about 8%… exactly as expected.
Of course there’s quite a bit more to it then that (and different mechanisms at play), but inflation expectations are important enough to central banks that many of them take very careful measure of them, and also try very hard to ‘anchor’ inflation expectations. That’s one of the reasons why many central banks have adopted inflation *targets.*
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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