Positive Thinking and Economic Recovery

It's time for the good times
Forget about the bad times
--Madonna

Many pundits have proposed that what we need to break out of this economic funk is optimism. If more people would just view our situation favorably, then we would get the economic activity necessary to lift things.

A positive view is certainly a good thing. But optimism must go hand-in-hand with capability. An athlete who 'thinks positive' but does not develop winning habits and skills is unlikely to succeed.

Durable economic growth comes from improved productivity. Improved productivity comes from investment. Investment comes from capital formation. Capital formation comes from savings. Savings comes from putting aside a portion of income rather than consuming it.

We suffer from a death of savings. In fact, we are consuming more than our current incomes permit (read: we are borrowing resources from others to increase our standard of living today). Because our consumption exceeds income, then we have no savings in the aggregate at the country level.

Isolated pockets of real savings that do exist (mostly in the hands of wealthy individuals) are being forcefully sought by others to accomodate current standard of living in the face of declining capacity to borrow.

Thus, instead of capital formation, our current situation is one of capital consumption. Capital consumption is a death knell to economic recovery. Durable recovery is unlikely until debt is paid down and savings are increased.

No amount of 'positive thinking' will change that economic reality.