Saturday, October 4, 2008

Uncertainty and Spending

This week the U.S. Commerce Dept. reported a 4.8% drop in durable goods orders, the worst since September 2001. There is an interesting paragraph in an article I found from Professor J. Bradford DeLong of the University of California at Berkeley. I suggest reading it and asking yourself if you see any parallels with where we could be heading in the near future:

"The stock market crash of 1929 greatly added to economic uncertainty: no one at the time knew what its consequences were going to be. The natural thing to do when something that you do not understand has happened is to pause and wait until the situation becomes clearer. Thus firms cut back their own plans for further purchase of producer durable goods. Consumers cut back purchases of consumer durables. The increase in uncertainty caused by the stock market crash amplified the magnitude of the initial recession."

Just something to think about.

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