Don’t mistake our sense of humor for a lack of seriousness, but we think it says something about the state of the economy when articles in satirical publications such as The Onion (a faux newspaper) seem as prescient and grounded as those appearing in the Wall Street Journal or the New York Times.
On February 16, The Onion reported “U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion.” In May, the stock market seemed to prove the point. As we write this, no one has yet explained why the stock market suddenly dropped by a thousand points on May 6, only to recover so much by the closing bell that people were actually relieved that the day ended with only a 300+ point loss.
Worries about European debt have been blamed for much of the recent volatility, particularly in Portugal, Ireland, Italy, and Greece, the so-called PIIGs. Despite occasional “relief rallies,” such as occurred when the European Union agreed to a nearly $1 trillion fund for troubled members, overall market sentiment seems be dragged down by fears that Europe’s prospects for long-term growth may be hampered by its attempts to reduce debt. Individual nations are adopting plans to raise taxes and reduce spending, which sounds like a logical way to reduce sovereign debt. The unintended consequence of higher taxes, however, can be a reduction in tax revenues as business activity slows. And Keynesian economists will tell you that reductions in government spending during recession might also further slow economic activity.
And the fun doesn’t stop there. The month’s extreme volatility produced the “flight to safety” one might expect (except for the fact that even gold took a dip around May 21). With irony that The Onion would appreciate, the flight to safety in this case strengthened the dollar, which of course makes U.S. exports less competitive, which slows economic recovery here.
We never tire of pointing out that “it’s all connected,” but we hasten to add that often, it’s all connected by perception, delusion, and self-fulfilling prophecy.