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Fear Nothing but Fear Itself

By May 31, 2019 March 16th, 2020 No Comments

The famous old saying goes we have nothing to fear but fear itself.  However, today, it seems we have nothing to talk about but fear.

Statements on the current outlook for the economy and financial markets are filled with fear – “Trade War,” “Brexit Collapse,” or “Fed Failure.” Meanwhile despite these depressing headlines, the economy continues its upward trajectory. Progress is achieved in the face of fear.

The three main indicators of the macro economy – income, prices, and employment – are all showing continued gains. The nation’s income, or real gross domestic product (real GDP) rose 2.2% in the most recent quarterly report.[1] While this rate of growth is lower than the previous quarter, it is still healthy growth; well above the average growth rate over the past decade of 1.7% percent.

The price level in the overall economy is currently rising at an annual rate that policy makers of the 70s and 80s would have killed for. The Consumer Price Index (CPI) rose at annual rate of 1.9% in the most recent monthly report, better than the 2% rate the Federal Reserve has said is consistent with a healthy economy.[2]

Meanwhile, the US labor market is strong. The national unemployment rate, at 3.8%, is below what many economists consider normal.[3] Better yet, the number of job openings exceeds the number of unemployed workers.[4]

All this begs the question: What is there to be afraid of?

Economic theory and historical experience suggest there are at least two unresolved policy issues that could derail the positive economic environment; government debt and slowing international trade.

The US continues to have a relatively large amount of debt, and other major governments around the world continue to add to their outstanding debt.

Total federal government debt in the United States as percentage of GDP is at 104 %, compared to only 65% before the 2008 financial crisis.[1] In Europe, this number has risen from 60% to 92%, and in Japan it stands at 195%.[2]

Recently, a small group of economists have put forth arguments for why we should not care about the level of government debt in the United States. The so-called Modern Monetary Theory (MMT) claims those governments that borrow on their own currency can take on as much debt as they wish while inflation is low.

This group has a point, but it’s no free lunch. Classical economist David Ricardo (1772 – 1823) showed that government debt is just another form of taxation. When the public recognize taxes will be raised in the future in order to make payments of principal and interest on this debt, the current debt financing is equivalent to a tax.  That is, there is no real difference if the government taxes its citizens or borrows to finance current spending.

Therefore, it seems what the MMT proponents are arguing for is just another tax. An increase in government debt will affect the economy like any other tax. If governments continue to run budget deficits and borrow more, the economy will slow, just as it would with any new tax.

The second fearful factor is slowing trade.

In January the International Monetary Fund (IMF) cut its 2019 forecast for world economic output from 3.7% to  3.5%. This month the IMF cut it again to only 3.3%.[3] Both times the IMF analysts cited ongoing disputes over cross-border trade policy.

One of the most basic principles of economics is that trade makes everyone better off because it allows people to specialize in those activities in which they have advantages, both in skill and costs. Unfortunately, politicians often think about international trade as a contest – we must be losing if our imports exceed our exports. But the opposite is true: we benefit from trade because it allows for specialization.

These politicians want to manage trade, not open it or free it up. Not surprisingly, such a desire to control trade leads to “disputes”. While government officials are negotiating “deals”, business owners and managers hold back, waiting to see what happens. This uncertainty leads to slower growth.

More than a decade ago member governments of the World Trade Organization (WTO) launched negotiations for lower trade barriers around the globe, but nothing significant has been achieved.[1] Instead, the US and other governments have been negotiating regional trade pacts. Such agreements aren’t as beneficial as a global deal that would increase cross-border trade and help raise growth rates everywhere.

Perhaps all the “fear” talk is warranted. While the questions of government debt and trade policy remain unanswered, investors have reason to believe the economy will slow.

Corporate profits will decline in a slowing economy, but interest rates remain historically low. This means that while prices may not rise this year as much as they did last year, stocks are still a better way to protect purchasing power than bonds.

If we stay invested in stocks for the long run, we should fear nothing else – but fear itself.

Peter R. CrabbPeter R. Crabb, Ph.D.

Professor of Finance and Economics

Department of Business and Economics

School of Business

Northwest Nazarene University


Dr. Crabb holds a Ph.D. in Economics from the University of Oregon and an MBA in Finance from the University of Colorado.  His research in economics and finance is published in the Journal of Business, the Journal of Microfinance, and the International Review of Economics and Finance, among others.  Dr. Crabb lives with his wife, Ann, and their four children in Canyon County, Idaho.  Dr. Crabb’s regular Financial Economics column is published by the Idaho Statesman. Previous work experience includes international trade, banking, and investments.


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