Irrational fears once again drive markets down excessively

Once again the irrational fundamentals on which the stock market is based have come to the surface with today ‘s over 4 % fall so far in the value of the Dow Jones index.At one point the market was down over 5 %. This is a significant one day drop in the Dow but by no means anywhere near the largest one day drop in its history. Previous shocking drops were of the order of 11 % or more at various unstable times in the history of the markets. Post Keynesians generally understand that markets are driven up and down by irrational exuberance followed by irrational fear. The irrational exuberance since President Trump was elected has been followed now by irrational fears that inflation is about to break out.

There is no credible evidence of  that at this time though it may possibly become a problem if accelerating economic growth drives the unemployment rate below 2-3 %. The likelihood of that however is small because the Fed has foolishly signalled it leans toward interest rate increases when in reality none are necessary. Instead if the Fed becomes obstinately opposed to growth and low unemployment by shifting to a more monetarist policy approach then it will reinforce fear rather than continued optimism. Also the nature of wage setting under conditions imposed by globalization and Neo-con agenda setting make it difficult for workers to raise their wage. Of course as part of this spread of irrational fear there are also hysterical claims being made about the American public sector deficit and debt. The debt is easily managed in a growing economy and its burden is vastly exaggerated. The most recent figure for the gross federal debt to GDP statistic was for Quarter 3  2017. The value was 103.8%. Well below its historical maximum. Furthermore this is the figure for gross debt while the better more meaningful data point is for net debt to GDP which is smaller. To arrive at this value you subtract from gross debt:  financial assets corresponding to debt instruments, monetary gold and special drawing rights, currency and deposits, debt securities, loans, insurance, pensions, standardized guaranteed schemes and other accounts receivable.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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