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Money Illusion And The Market
Economists have only begun to understand when money illusion affects market outcomes.
Yeah, right. We've been using money for over two thousand years and they haven't figured that out yet. Next we'll be told that the Fed targets an inflation rate of two percent not because of the illusionary benefits of inflation, but because the consumer thinks in terms of reduced fat milk, lol.
Money illusion in the guise of a confusion of nominal and real interest rates may be partly to blame.
Just partly? I'd argue mostly. Next they'll be telling us that a small change in real interest rates might get people to borrow an extra $5 trillion to buy homes. That's just crazy talk though. Pay no attention to the Fed man behind the smoke and mirrors!
Economists have remained sceptical...
I invite them to watch the video below. Perhaps that will help clear things up.
Experiments conducted by Ernst Fehr (University of Zurich) and Jean-Robert Tyran (University of Copenhagen) show that money illusion can have a profound impact on market prices.
Let's just hope Bernanke doesn't have too many tricks up his sleeve the next time he needs us to consume. The theory is that if we get too scared he'll force us to buy something. I suspect he'll be right. However, if he's not careful there could be a mad dash to stock up on canned goods and toilet paper. I'm just not sure that would help our economy much, lol.
Thursday: Q1 GDP, Unemployment Claims, Pending Home Sales
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[image: Mortgage Rates] Note: Mortgage rates are from MortgageNewsDaily.com
and are for top tier scenarios.
Thursday:
• At 8:30 AM ET, *Gross Domestic Prod...
1 hour ago
2 comments:
Crappy news article from superstitious econometricians.
Key sentence:
"To illustrate, compare a situation in which money wages increase 2.3% and prices increase 3.1% over one year with a situation in which money wages fall by 0.8% at constant prices."
Why should anyone care how much prices change *in one year*?
Time horizon is utterly subjective, and the authors have no legitimate reason to call this behavior irrational or the people laboring under an illusion.
Maybe I'm missing your point but I certainly care how much prices change in a year (relative to my income anyway).
I see the point of the article being that people may change their behavior based on the actual price of things and not the inflation adjusted price of things.
My example would be that if wages are going up 4% per year and the price of soup is going up 4% per year some people might be more willing to spend than if wages are dropping 2% per year and the price of soup is dropping 2% per year. There might be an element of fear in some people that would cause them to reduce purchases.
If there is any difference at all between the two behaviors in my example then it wouldn't be all that rational in my opinion, since in both cases you'd be able to buy exactly the same amount of soup each year (so why would some people possibly change their behavior?).
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