Economists use a metric that says something about our expectations for the future development of the economy: real interest rates. Leaving aside all other factors, interest rates indicate how fast we expect the economy to grow.

A pessimist will use extremely low or even negative interest rates: growth is expected to be low and there is no prospect of it improving further down the line.
The same thing applies to optimists, but in reverse: the higher the growth expectations, the higher long-term interest rates will be. Borrowing money for capital expenditure is relatively expensive, but because everything is going to get even better, we are going for it.

Have we perhaps been a little too optimistic about pessimistic prospects?

This sort of optimism drives our animal spirits: it makes people undertake activities that will make the economy's flywheel spin again. Given the current low interest rate level, it costs relatively little to be optimistic. According to this line of thought optimism is, moreover, a self-fulfilling prophecy. If we think that we can do it, the chances of success are greater. In the words mistakenly attributed to Pippi Longstocking: "I have never tried that before, so I think I should definitely be able to do that."

And before you know it people are quoting the philosopher Karl Popper, arguing that it is our moral duty to be optimistic. If necessary, we should just wear blinkers. But this too, is a misquote. What Popper said was that we are all responsible for what the future holds in store, that we must not assume that the worst will happen but fight for a better world and that that is where our duty lies.

And that is the subtle difference. Blind optimism actually causes a lot of problems. Optimists see no reason why they should worry about the future, so why maintain buffers or safety margins? You could therefore argue that pessimism is ‘healthier’ than optimism. It ensures that people take precautions. We have seen this throughout human history. Excessive optimism is usually punished: it is better to mistake a stick for a snake than the other way around.

Capital market rates have very recently started to move up. So it looks as if the number of optimists is growing. In Western countries vaccination programs are gaining traction and in US the budget policy is giving markets a huge boost. But this positivity is in fact a cause for concern. Worldwide, we have taken out a huge mortgage on our future, assuming that interest rates will remain low. But now that interest rates do finally appear to be on the rise, this optimism is coming back to bite us and concerns about the affordability of the debt mountain immediately emerge. Have we perhaps been a little too optimistic about pessimistic prospects? It is time for a little more realism.

This is a translation of Hans Stegeman's column in Het Financieel Dagblad, published March 2nd, 2021.

Read Hans' previous column 'Central bankers: heroes or villains?'