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Note: I have no education in economics but economics is beginning to trump all other concerns primarily due to a lack of trust in financial markets, so I am trying to pay attention.  Since one use of social media is to engender trust, can social media play a role in mitigating the damage from the current deflationary cycle we are in?

PS I am certain the educated economic people will tear me apart on my simplifications/misunderstandings of economic theory…but here goes..

Some background from Wikipedia:

Joeseph Schumpeter was “an economist and tried instead to integrate sociological understanding into his economic theories.”  He has some interesting predictions which seem to be playing out in the current news.

Creative Destruction:

“In Capitalism, Socialism and Democracy, the Austrian economist Joseph Schumpeter popularized and used the term  to describe the process of transformation that accompanies radical innovation.[2]  “

“In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.”

Sounds familiar? Social media as disruptive/transformative? Linux vs. microsoft?  It seems there are 2 social media issues which intersect with the economy.

1. Social media as a both a social and technology innovation which has the potential for significant creative destruction. (I will deal with the creative destruction power of social media in another post because I already have a headache thinking about economics and social media at the same time.)

2. Social media as a tool which is able to spread sphere’s of trust faster and wider than they could normally be spread.

But how about this on the trust issue.. According to Schumpeter as interpreted by Roger Arnold, former radio talk show host and macro economist, the reason a recession becomes a depression is due to irrational decisions which start to occur when leaders frantically try to find a quick fix to stop the downward trend.  They listen to the economic models which promise the faster fix rather than the ones which have most predictive.  They also tend to turn inward as they make the decisions.

The depth and length of the deflationary cycle will be determined by whether cooler heads prevail and on rebuilding confidence of INFLUENCERS in markets, NOT the confidence of markets. (Social media axiom:  people trust people not organizations. Therefore markets cannot trust. People in markets trust and are trusted.  Also financial markets are notorious for being led by their influencers, so an influencer map is incredibly important.)

So the real risk we run, is that irrational decisions further corrode trust among financial influencers with the administration.  That leaders will loose the market’s confidence even further by thinking they will pander to constituencies with a quick fix and ignore the concerns of the financial influencers who are expected to come back to the market.  The fact is the rescue will be slow and will need the help of those same finance guys who got us into the mess in the first place. People don’t like that but there it is.

So how do we prevent further loss in confidence?  We need to address economic issues which matter to financial influencers and convert them to evangelists for the administration’s economic policies.  Yes, talk with the a…holes who got us here in the first place.   Also we need to make sure Treas/Fed have a broad economic theory outlook rather than a narrow set of Friedman economic assumptions taken as fact even though they don’t seem to be good predictors any longer.

Is this happening now? It seems the opposite is the case.  There seems to be a trust gap between Fed/Treasury and market leaders right now.   Neither trusting the other to act to work towards a mutually beneficial outcome.

If  ever we needed collaboration where all parties are trusted to act to achieve the best outcome and make sure diverse opinions are heard, the time is NOW and the place is the financial  sector.