How can we break the negative feedback cycle?

Warren Buffett calls it the negative feedback cycle. I call it the death spiral.

“Yeah, we … we have a negative feedback cycle going on now,” Buffett told Tom Brokaw recently on Dateline NBC. “ We have fear which leads to people not wanting to spend. And … and not wanting to make investments. And then that leads to more fear. And … we're in a negative feedback cycle. We were in a positive feedback cycle three or four years ago, when everybody lent you more and more on a house that kept going up, and you could keep spending money you didn't have and so on. We'll break out of it. But … it takes time …”

But the only thing dropping faster than home prices are the number of home sales. When people aren't selling homes, appliance dealers aren't selling, furniture dealers aren’t selling. And none of those people are buying cars. And in turn they aren’t buying advertising in their friendly local newspaper.

But it is all in the mind.

Rather like the classic tulip mania that swept Holland in the 16th century.

Tulips were introduced from Turkey and quickly the new flower became wildly popular. Bulbs were escalating in value by as much as 20 times in a month. People poured their life savings into investing in tulip bulbs. Then the bubble burst and investors were wiped out.

There was no intrinsic value. It was all in the mind.

Sort of like Phil Gramm told the Washington Times, right? Got him in trouble with John McCain, but was he wrong?

"You've heard of mental depression; this is a mental recession," he said. "We may have a recession; we haven't had one yet.

"We have sort of become a nation of whiners," he said. "You just hear this constant whining … We've never been more dominant; we've never had more natural advantages than we have today."

Maybe it is just a self-fulfilling prophecy. We think things are going to go badly, we prepare for things to go badly, and sure enough …
How do we break the spiral?

You could start by picking up a newspaper and learning this stuff. Works for me.