Tuesday, February 4, 2014

Normalcy Bias

I hate to sound like a constant doom-monger, but I'm sure that from time to time, that's exactly how I sound to many people.  From my perspective, I'm simply being realistic about things.

There's something called the Normalcy Bias which I see everywhere I look.  Wikipedia explains what this is very succinctly as follows:
"The normalcy bias, or normality bias, refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations. The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It also results in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation."

Just thinking back to yesterday's post about more high end stores opening up in Toronto to cater to the top 20% whilst ignoring the purchasing power of the lower 80%, I can see this bias where the city planners are concerned.  They must be thinking that since nobody in Toronto has ever seen a problem where the elite are the only people being catered to in the downtown core, this must be a very good thing for all because just look at all the money!

I'm no economist, but I know a huge mistake when I see one.  When there's no department stores that cater to 80% of the population, you have to wonder if they're trying to turn the entire downtown core into Yorkville.  Just imagine it; an entire city core clogged up with poodles and posers. 

The problem is caused at the moment by debt.  There's just too much of it that the economy is trying to win over what expendable income there is by going cheap or expensive.  Cheap means the wages are low too, which drives more debt.  Expensive means you're limiting your market to the top 20% of the country's wage earners.

So why is debt such a problem?

Debt pulls more demand from the future. Unless you forgive debts or pay them off, they will strangle the economy.  Someone, somewhere, has to take the hit.  Eventually all that debt leads to negative growth some time in the future.  

Bondholders get whacked 

- or -
Debtors get whacked

- or -
A combination thereof happens.

When Bondholders get whacked, look for pension funds and states to go broke.
When Debtors get whacked, look for asset liquidations.

If you understand that, then it's not much of a mental leap to understand what's happening around us.  It's a disaster just waiting to happen.

If you understand Normalcy Bias, too, then it's not much of a mental leap to understand what's happening around us where the media and ministers are concerned.  It's just another disaster just waiting to happen.

You have to question though, what they're doing to prepare against this gumming up of the retail sector?  The way the current economy is designed means that much more will happen than just a bunch of shops going under. 

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