Government Can't Manage Market Expectations

The markets’ jitters last week in the wake of Standard & Poor’s downgrading of US government debt from AAA to AA+ reinforced the degree to which shifts in expectations about future events as opposed to changes in real events now dominate the economy. In this new world, governments need to both recognize the futility of attempting to reign in expectations and stop creating mechanisms that cause changes in expectations to ripple damagingly through the real economy.