The best column I've read today
If economic logic were clear-cut, governments wouldn’t have to justify what they do on the basis of market confidence. It would be evident which policies work and which do not, and pursuing the “right” policies would be the surest way to restore confidence. The pursuit of market confidence would be superfluous.
So, if market confidence has a meaning, it must be something that is not pinned down simply by economic fundamentals. But what is it? [...]
Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it.
Today, they worry about spineless governments unable to take the tough actions needed to deal with the crisis. Perhaps tomorrow they will lose sleep over the mass demonstrations and social conflicts that tough economic policies have spawned.
Few can predict which way market sentiment will move, least of all market participants themselves. Even with hindsight, it is sometimes not clear why markets go one way and not the other. Similar policies will produce different market reactions depending on the prevailing story, or fad of the moment. That is why steering the economy by the dictates of market confidence is a fool’s errand.
I'd just note, as Paul Krugman does, that in the United States, we're not steering the economy by the dictates of the market. We're steering the economy by the dictates of what some people think the market might want at some point in the future. Listening to the market is one thing. Trying to predict its future demands is another.
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