unforeseen consequences

Animal Spirits

© Can Stock Photo / cynoclub

More than eighty years ago, economist and thinker John Maynard Keynes wrote that “most, probably, of our decisions to do something positive…can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction…”1

The term animal spirits dates back to the Middle Ages as a way to refer to the vagaries of human activity. Keynes used it to describe concepts such as consumer confidence and the willingness of businesses to invest capital.

In recessions, animal spirits are subdued; during economic expansions, they are said to be stirring. The idea of animal spirits helps explain the booms and busts of the markets and economy.

As contrarians, we seek to discern when the dominant trend has gone too far, either from excess optimism or an overabundance of pessimism. A simpler way to say this is that we seek to avoid stampedes. We believe these things run in cycles.

More recently, we found another use for the concept of animal spirits. History suggests that rising tariffs and trade barriers around the world are a detriment to economic growth and prosperity. These kinds of trade troubles could emerge from the current discourse among nations. And there are differences of opinion on the economic impact here in the U.S.

Some analysts have calculated that the actual amount of goods and services directly affected by proposed trade actions is some very tiny percentage of the overall economy. Their conclusion is that the potential for economic mischief from trade issues is small.

At the same time, business leaders are becoming concerned about the possibility of reduced export sales and lower incomes and sales in the U.S. due to these same trade issues2. These concerns could dampen the animal spirits. Facility expansions, hiring, orders for inventory or raw material…all these things could be affected.

If business activity declines, jobs and personal incomes will not be far behind. The economic impact would be negative. You see, the effect on animal spirits, a second-order effect of trade disputes, could have a much larger impact than the direct effects.

We do not change our principles or strategies based on headlines of the day. Of course, we are always looking for ways to improve our tactics. If you would like to talk about this or anything else, please email us or call.

Notes and references:
1John Maynard Keynes. The General Theory of Employment, Interest and Money, 1936.
2Business Roundtable, CEO Economic Outlook Survey Q2 2018. https://www.businessroundtable.org/resources/ceo-survey/2018-Q2


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.