|This essay by Wayne Gorman originally appeared in
The Elliott Wave Theorist in May 2005
One way to identify the effects of inflation and deflation is to observe significant changes in the money supply and in producer and consumer prices. One would think that as such measures rise, experts would be concerned about increasing inflation, and as those measures fall, they might begin to fear deflation. Is that what actually happens?
The Socionomic Perspective
Socionomics postulates that social mood determines the character of social actions and events. Changes in mood induce changes in attitudes towards all kinds of things. As social mood becomes increasingly positive, people become more optimistic, happy and confident, and they are less likely to be fearful. As social mood becomes increasingly negative, people are more pessimistic, depressed and angry, and they are more prone to becoming fearful. Such fears and lack thereof may or may not have a rational basis. Socionomics suggests that irrespective of hard evidence such as price data, positive social mood trends will result in less fear of inflation and deflation, while negative social mood trends will lead to greater fear of inflation and deflation.
The chart below answers the question of whether experts’ aggregate fears derive from the data or from social mood. The top graph shows the rate of change of the Consumer Price Index (CPI), which shows actual pressures from inflation and deflation. Posted on that chart are summaries of net fear and complacency expressed by experts as reported in newspapers and magazines (see Appendix). The Dow Jones Industrial Average (DJIA), shown in the bottom graph, functions as social mood meter. Major lows indicate periods of intense fear, and major highs indicate periods of high confidence. Observe that fears wax and wane not with the data on inflation and deflation but with the social mood meter, the stock market.
Ironically, experts’ opinions about the prospects for inflation and deflation are often contrary to CPI data. For example, from early 1999 to first quarter 2000, the rate of change in consumer prices rose dramatically, reaching its highest level since 1997, yet people’s fear of inflation was subdued, most likely reflecting the good feelings associated with the positive social mood trend, as evidenced by the rising stock market of those years. In the first three quarters of 2001, the rate of change in prices fell precipitously, yet news sources reported great consternation over inflation. This fear corresponds to a declining social mood trend throughout the same time period, but the focus of that fear was misplaced. In the fourth quarter of 2001, the rate of change in consumer prices fell to its lowest level of the entire period. One would expect that experts would then fear deflation, but the stock market rallied that quarter, so, on balance, experts were complacent, reflecting the more positive social mood. As the stock market fell again from March 2002 to March 2003, experts expressed great deflation fears, yet the rate of change in consumer prices rose the entire time. From February to December 2003, the rate of change for consumer prices fell to its second-lowest level of the period, and the rate of change in M3 (not shown) was in negative territory for the only time during this entire eight-year period.Yet experts no longer feared deflation. The reason appears to be that social mood, as represented by the stock market, was rising rapidly throughout that time. Thereafter, as stocks continued to rise, experts remained equally complacent despite a soaring rate of change for the CPI. Going into March 2005, with the stock market holding at a high level, economists and government officials have remained complacent, expressing no fears of either inflation or deflation.
The foregoing analysis suggests that social mood trends, as opposed to hard evidence, i.e., data on prices, regulate people’s perception of the potential stability or instability of monetary trends. We further observe that the referent —i.e., inflation or deflation—about which fear is expressed is often irrespective of the monetary facts.
Social mood trends result from forces that are endogenous to the process of collective mental interaction. These forces are not rational but impulsive and result from herding behavior that is motivated by the emotional parts of the brain. This dynamic leads to changes in attitudes towards investments, fashion, entertainment, cultural symbols, the stock market and even ideas such as the potential for inflation and deflation.
Socionomics represents a new paradigm for the social sciences, serving as a useful alternative lens for observing and predicting social moods and behavior. Further, socionomists are aware of these social forces, so we are better equipped to expect deflation or inflation based on facts, not emotions. Socionomists try hard to maintain a gulf between emotions and data, fears and facts. Can we trust the experts’ opinions in the future? Only if they are socionomists.
Note: There are no statistics on inflation and deflation fears, so we had to turn to the media to find representative expressions of experts’ opinions. The quotations we found are representative of experts’ opinions for each period. To see all the quotations, subscribers to The Elliott Wave Theorist may visitwww.elliottwave.com/wave/fears. We lack the resources to do a massive statistical study, but we would welcome the effort by anyone who is interested.
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Most economists, historians and sociologists
presume that events determine society’s mood. But socionomics hypothesizes
the opposite: that social mood regulates the character of social events. The
events of history—such as investment booms and busts, political events,
macroeconomic trends and even peace and war—are the products of a naturally
occurring pattern of social-mood fluctuation. Such events, therefore, are not
randomly distributed, as is commonly believed, but are in fact probabilistically
predictable. Socionomics also posits that the stock market is the best available
meter of a society’s aggregate mood, that news is irrelevant to social
mood, and that financial and economic decision-making are fundamentally different
in that financial decisions are motivated by the herding impulse while economic
choices are guided by supply and demand. For more information about socionomic
theory, see (1) the text, The
Wave Principle of Human Social Behavior © 1999, by Robert Prechter;
(2) the introductory documentary History's
Hidden Engine; (3) the video Toward
a New Science of Social Prediction, Prechter’s 2004 speech before
the London School of Economics in which he presents evidence to support his
socionomic hypothesis; and (4) the Socionomics Institute’s website, www.socionomics.net.
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