Sunday, February 15, 2009
Rational Expectations rears it's ugly head
A friend of mine, who is the founder of his own successful company, might be the canary in the coal mine. Although his business is doing well, he told me that he and his wife are changing their spending habits and saving more. They are worried about the economy and they are looking at the stimulus and expect that in the future their taxes are going up.
This is rational expectations at it's most basic. The Government spends more money to stimulate the economy. The consumer looks at the economic future, knows his taxes will be raised, and makes a rational decision to spend less. The drop in spending counteracts the government's increase in spending. The economy is not stimulated.
This scares me.
This is rational expectations at it's most basic. The Government spends more money to stimulate the economy. The consumer looks at the economic future, knows his taxes will be raised, and makes a rational decision to spend less. The drop in spending counteracts the government's increase in spending. The economy is not stimulated.
This scares me.
