We Want Confidence: But In what?
Nick Rowe:
Worthwhile Canadian Initiative: Confidence: In what?: It's a very old argument, and there's some truth in it. Financial crises and recessions are caused by a loss of confidence. And policies that might normally help end the recession might actually make things worse, if they worsen confidence.
Confidence in what? The problem right now is that there is too much confidence: in money, and perhaps in government bonds too. And too little confidence in real investment, and perhaps in corporate bonds and shares too. Everybody wants to hold money, and government bonds. Nobody wants to spend money on real investment and on the corporate bonds and shares that finance real investment. If you accept that diagnosis, then you want policies that worsen confidence in money, and perhaps in government bonds too. And if you worsen confidence in money, so that people try to get rid of it, and spend it, that should increase confidence in real investment, because firms will be able to sell the extra goods produced by that investment.
