Weapons of Economic Warefare III

Consumer confidence is one of the better predictors of economic performance over the short run. Consumer confidence is essentially the expectations held by consumers about the future. It is also one of the more difficult things to predict and control. There a few ways in which consumer confidence might be manipulated into a weapon of economic warfare. When consumer confidence falls, consumer spending typically falls as well. A dramatic fall in consumer confidence, and thus consumer spending, can cause a recession or even a depression. A great deal of modern economic policy is centred on limiting the impact of a such a drop in consumer confidence. The most common and direct approach is to increase government expenditures to offset the impact. By decreasing consumer confidence an unfriendly power may be able cause a recession in a target country. During a recession the prices of real assets tend to fall making the acquisition of fundamental resources and assets less costly for the attacking power.

Consumers’ expectations of the future are the true target here. Economics has a less than ideal understanding of how expectations are formed, but there are a few simple ideas that might be exploited to this end. Continued bad news, or uncertainty is one way in which consumers expectations of the future may be manipulated. News stories covering closing of factories and failing businesses would be one method of decreasing consumer confidence. Proximity and accessibility are two keys in an individual’s assessment of risk. Proximity basically means did it happen to someone close to you or like you. If news stories or other methods of relating the unfortunate events relating to an “every man” are circulated, this will likely have a strong negative impact on consumer confidence. Accessibility refers to how easily an event like the one being assessed can be called to mind. Recently experienced events tend to receive higher assessed likelihoods than events further in the past. Thus increasing the frequency of these stories would increase the perceived likelihood of such an event. The result would again be a loss of consumer confidence.

There is another, more devious method of attacking consumer confidence. Very little shakes a person like disappointment. Thus, consumer confidence could be attacked not by trying to convince the populace of a country the future is going to be bleak, but by convincing them things were going to go phenomenally well.. By creating unrealistic expectations you set the populace up for a disappointment. The reaction to this disappointment would be a substantial contraction in consumer confidence and spending resulting in the desired economic hardship. The advantage of this approach is that people are more likely to believe what they want to hear, and good news is what most people want to hear.

Punch line: Beware of good news. It may not be what you think it is. J