Fear is a powerful emotion which can have significant economic implications.
Often real fears are ignored in a wave of over-exuberance. Sometimes, if people had greater fear of getting into debt and falling asset prices e.t.c, the economy would be less prone to bubbles and the consequent mess. Perhaps fear isn’t the right word. – People just need greater awareness of the potential pitfalls of seemingly one way investment bets.
On the other hand, fear can create a powerful wave of pessimism and negativity which can prolong economic downturns and make it difficult to create an economic recovery.
For example, if people fear being made unemployed, they will be reluctant to spend even if interest rates are cut to 0.5%. This is one reason why interest rate cuts have not worked in creating an economic recovery.
Political Fears and Economic Fears
Political campaigning is often most successful when focusing on people’s fears. But, politicians may exaggerate certain fears and concentrate on the wrong problem.
For example, there are many problems currently facing the UK Economy.
One of these is the size of the budget deficit. Certainly a budget deficit of £200bn in one fiscal year is no insignificant problem. Yet, the depth of the recession is arguably even more serious.
A report by Fathom Consulting argues that the Conservatives plan to cut spending may cause serious problems for economic growth and push the economy back into recession. (link at Telegraph)
In other words, we need to be concerned about the problem of rising levels of government borrowing, but, we have to keep things in perspective and worry about the biggest problem first. It can be dangerous to fear one problem ignoring other issues.
Another example is the fear of inflation. When Quantitative easing was announced, some immediately feared future inflation. But, recent money supply figures suggest inflationary pressures are almost non-existent. In other words, it can be dangerous to fear the wrong thing (perhaps a lesson for the ECB)