  Adaptation level and animal spirits (Middleton 1996) presented a
psychophysical theory of confidence levels based on the oldest and probably
most widely observed law in psychology, the sensitivity to adaptation level.
For Americans, whose attachments to employment and livelihood are often tenuous
in a country without a European-style social safety net, it is the sensitivity
to the unemployment rate that drives confidence levels. In Animal spirits and
recession forecasting (Middleton 2001; see also Ball 2001), the adaptation
level theoretic metric of animal spirits, A, was combined with the slope of the
U.S. Treasury yield curve in a logistic recession forecasting model that has
correctly predicted every turning point in the economy since then. The model
currently forecasts increasing confidence and an end to the recession in
mid-2009. The question, given the severity of the current slump globally, is
whether this forecast is plausible in the face of possibly very large increases
in macroeconomic volatility.
