Social Mood Shapes Aggregate Opinion Regardless of Data
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.
Figure 1
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 Elliottt Wave Theorist may visit www.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.