W hen someone is reducing something to a soundbite, especially something as complex as the economy, don’t trust them.
This week, a lot of people are commenting on the massive plunge in the Dow Jones Industrial Index.
Why did the bottom fall out?
The sound bite answer is simple: investors fear rising interest rates.
Like a curious four-year-old, you can keep questioning each answer.
Why are interest rates rising?
Because inflation is rising. The cost of goods and services is going up at a faster rate than in some time.
Why is inflation rising?
A number of reasons – but one of them is low unemployment. In both the U.S. and Canada, unemployment is at historic lows. In the U.S., it hasn’t been this low in 17 years, while in Canada, it was around this low just before the last recession. Before that? You’d have to go back to the mid-1970s to find a lower unemployment rate.
Why does low unemployment cause inflation?
Because when there’s low unemployment, bosses have to compete for workers. And after a year or two of whining about how they can’t hire anyone, they’ve started to open their wallets. Wages are rising.
You can easily run this chain of consequences the other direction. Workers get paid more, so they have more to spend, so inflation increases, so interest rates are likely to go up, so investors get spooked.
You’ll notice that simply saying “interest rates” leaves out the important factor that the cause of the plunging Dow is actually something that is good for working people.
Yes, it’s more complicated than that. Yes, lots of inflation is bad for everybody. But the next time someone tries to sell you on the idea that a dip in the stock market is a bad sign, ask yourself if you’re getting the whole story.
The stock markets are not the only indicator of health for our economy. Never, ever trust anyone who tries to sell you on that idea.
Sometimes, what’s bad for the Dow is good for everyone else.