A Time Of Money Illusion

Published Friday, November 24, 2023 at: 10:51 PM EST

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Money illusion, the tendency to view wealth and income in nominal terms, rather than their real value, is being cited to explain the disconnect between the strong growth in the economy and sentiment of consumers and investors. 

Money illusion partly explains why consumer sentiment is not far above an all-time low while the economy is actually strong. People tend to notice higher prices but gains in wages after inflation is recognized not so much. You know that you’re paying more for food and that filling a grocery bag before adjusting for inflation costs more nominally. The money illusion makes people overlook the real cost of groceries after-inflation and wage hikes. The money illusion makes people focus on higher nominal prices and not consider real prices. 

The University of Michigan’s index of consumer sentiment fell for the fourth consecutive month, to 4% in November from October, not much higher than its all-time low during the pandemic. But recent economic data are actually strong. How strong? 

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The growth rate right now is about 15% higher than the 1.8% expected by the Congressional agency in charge of researching the facts.

The real growth potential of the United State economy is 1.8% annually, according to the Congressional Budget Office. The potential growth of an economy is the sum of the rate of growth in its productivity and labor force. The non-partisan agency Congress empowers to monitor the federal budget says the U.S. has potential to grow 1.8% annually from 2023 to 2033.  

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But in the fourth quarter ending December 31, 2023 the growth rate is at least 2.1%, according to two separate algorithms written by the staff at the Federal Reserve Bank district branches in Atlanta and New York. That’s higher than the consensus forecast of economists of November 8 by Blue Chip Economic Forecasts.  

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Stocks rose prices rose for the fourth week in a row. The Standard & Poor’s 500 stock index closed Friday at 4559.34, up +0.06% from Wednesday, and + 1.00% higher than a week ago. The index is up +103.78% from the March 23, 2020 bear market low and only -4.95% off its January 3, 2022, all-time high.


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