"Glimmers of Hope" could help animal spirits

The President speaks of "glimmers of hope" and Larry Summers says the end of the "free fall" may be near. Not overly optimistic words, but anything will help what may be the most important issue, "animal spirits". Keynes refers to animal spirits as a "naive optimism" which when applied to entrepreneurs is "the thought of ultimate loss which overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death."

Many think of animal spirits in the context of optimism while other have sometimes thought of the animal spirits as irrational behavior. More recently, Robert Shiller has defined animal spirits in the context of "trust"

Keynes also argues that we know little about what will drive investments in the long-run. This is why there is a focus on animal spirits.

"If we speak frankly we have to admit that our basis for knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of patent medicine, an Atlantic liner, a building in the City of London amounts to very little and something nothing ...)"

Some of our decisions are not based on mathematical expectations. Hence, it is confidence that drives the decision to invest.

"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

"... human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist ... it is our innate urge to activity that makes the wheel go around ..."

It is not clear what exactly Keynes was talking about with animal spirits other than to say that confidence does matter and that an economy will grow if there is a increase in overall optimism or confidence. What has been lacking from government is an attempt to increase confidence and provide a certain environment for players to make decisions. The TARP programs and and the stress testing of banks has actually lead to more uncertainty through a changing views and adjustment of the rules of the game.

These words of encouragement from the Administration which may help sustain the equity rally that we have seen continue for the fifth week. We may need more to move the animal spirits out of cash.