Thursday, May 26, 2011
The dilemma of too much information
Consumer spending is fueled by increased consumer sentiment. If consumers feel that the economy is healthy, they spend. On the other hand, if they feel that the economy is down, they save the little money they have. So, a brave speculator/central banker could make consumers spend more if they control information...or only reveal the positive side of the economy. This could increase productivity and boost the economy, all things being equal. However, if information is free flowing, consumer spending and hence productivity goes through a cycle of ups and downs (the health of an economy is often determined by money supply). But, in an economy where consumer spending is through credit, the vulnerability of consumers to spend beyond their means is high when information about the health of the economy is controlled. Hence the need for increased information flow. So, what is one to do? Control information and risk a catastrophic collapse of consumer spending in the long run or free up information and live through the cycle of painful recessions and occasional booms?