2021年7月20日 星期二

Of Delta and the Dow

What, if anything, can we learn from a stock market swoon?
Carlo Allegri/Reuters
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By Paul Krugman

Opinion Columnist

On Oct. 19, 1987, stocks plunged: The Dow fell almost 23 percent in a single day. Over the next week the media attempted to link the plunge to various news items that had been reported over the days preceding that Black Monday.

But Robert Shiller of Yale University (a future Nobel laureate) was uniquely positioned to figure out what had actually happened. He had been conducting surveys of investor behavior and had a list of fax numbers that allowed him to ask a wide range of investors, just hours after the plunge, what had motivated them to sell. And he found essentially no evidence for any of the rationales offered after the fact. For the most part, investors attributed their decision to sell to the fact that … stock prices were falling. It was basically a self-reinforcing panic.

I bring up this old story as a caution against taking any efforts to explain yesterday's stock price decline too seriously. Most news reports are attributing the crash to fears about the Delta variant and a resurgence of Covid-19, and it's true that the epidemiological news has gotten worse lately, largely because so many people are refusing to get vaccinated. But was there substantially more reason for pessimism on Monday than there had already been the previous week? We really don't know what triggered the sell-off.


That said, we have a pretty good idea what didn't cause the stock plunge: It clearly had nothing to do with the fears of inflation some economists and pundits have been trying to stir up.

How do we know this? If you want evidence about what investors think will happen to the economy, you don't want to look at just stock prices. You also want to look at long-term interest rates.

In fact, you mainly want to look at long-term interest rates, for a couple of reasons. One is that the bond market isn't as sexy as the stock market; it gets far less attention from the general public. As a result, there's probably less emotion-driven bond trading than stock trading — you hear about "meme stocks" like GameStop, but I've never heard anyone go on about meme bonds.

The other is that the effects of the economy on bonds are clearer than the effects on stocks. The prospect of a boom raises expected profits, which pushes stocks up — but it also raises expected future interest rates, which pushes stocks down. Stocks can therefore go either way; but interest rates on long-term bonds, which mainly reflect expected future short-term rates, give a clear indication about which way investors think it's going.


So, about stagflation: Back in the spring a number of economists, most vocally Larry Summers, warned that President Biden's first major piece of legislation, the $1.9 trillion American Rescue Plan, was too big. Putting out that much money, they warned, would cause the economy to overheat and bring back something like 1970s-style inflation.

It's important to note that they weren't talking about the kind of inflation we've seen over the past four months, which is largely driven by what should be transitory factors as we emerge from the pandemic. A remarkably large share of recent inflation has been driven simply by a presumably temporary spike in the price of used cars.

No, what Summers and company were and are concerned about is something a bit longer-term: An unsustainable large boom in spending that, like the boom in the late 1960s, will lead to a rise in underlying inflation — and eventually force the Federal Reserve to push the economy into a recession to get prices back under control.

This isn't a crazy scenario. For a variety of reasons, I don't think it will happen, but that's not an argument I want to rehash right now. My point, instead, is that what we saw in the markets Monday wasn't at all what you'd expect to see if investors were suddenly starting to worry that Larry is right. Yes, fears of stagflation would send stock prices lower. But they would also send long-term interest rates higher. And what actually happened was the opposite: Bond yields plunged to their lowest level in five months.


For what it's worth, Monday's market action was what you'd expect to see if investors suddenly became concerned that the Biden stimulus was too small, not that it was too big. What actually happened? I don't know; maybe it was the Delta variant. Although maybe somebody can still do a Shiller-type survey.

And let's also note that while it's always worth paying attention to what the markets are doing — unlike pundits, myself included, investors are putting real money on the line — the actual track record of markets at predicting future inflation, or, well, anything is quite poor.

Above all, remember the three key principles when thinking or writing about financial markets: 1) The stock market is not the economy. 2) The stock market is not the economy. 3) The stock market is not the economy.

Quick Hits

Stock prices move too much.

After that 1987 crash, economic growth … accelerated.

Markets aren't worried about inflation.

Unfortunately, their track record at predicting inflation is terrible.

Feedback If you're enjoying what you're reading, please consider recommending it to friends. They can sign up here. If you want to share your thoughts on an item in this week's newsletter or on the newsletter in general, please email me at krugman-newsletter@nytimes.com.

Facing the Music

Death Valley hit 130 degrees the other day.YouTube

In 1975, they had no idea.


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