Tuesday, November 1, 2011

Problems In Europe And Coginitive Illusion In Spain

This article points out that recent optimism about a solution in Europe stimulated the stock market but bond traders were less enthusiastic. It turns out that the bond traders knew more than the equity investors. The recent events in Greece were also unexpected and the stock market has turned sour.

The description of a report by Spain's central bank in this article is what really amazed me. The central bank blamed slower economic growth in Spain on austerity measures imposed on regional governments which were forced to reduce spending. It concluded, however, with little concern for logic, that growth would be better later in the year despite the austerity imposed on regional governments. Its hard to imagine a better example of cognitive illusion. Central banks are such firm believers in fiscal austerity that they continue to believe in its beneficial effects on the economy despite contrary evidence that they acknowledge.

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