Friday, September 23, 2011

The Great Debt Scare

It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic.

We now have a daily index for the US, the Gallup Economic Confidence Index, so we can pinpoint changes in confidence over time. The Gallup Index dropped sharply between the first week of July and the first week of August – the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting on August 2. The story played out in the news media every day. August 2 came and went, with no default, but, three days later, a Friday, Standard & Poor’s lowered its rating on long-term US debt from AAA to AA+. The following Monday, the S&P 500 dropped almost 7%.

Apparently, the specter of government deadlock causing a humiliating default suddenly made the US resemble the European countries that really are teetering on the brink. Europe’s story became America’s story.

Saturday, September 3, 2011

The Beauty Contest That’s Shaking Wall St.

THE extraordinary surge of stock market volatility during the last month can’t be explained by conventional means. Yes, hundreds of scholarly papers have tried to predict the size of such swings, and whole markets — like those for futures and options thrive on these movements. Yet we still don’t have a clear, mathematical understanding of volatility’s source.

Last month, market watchers might have thought they were witnessing a gamma ray burst from outer space, with waves of sudden, crazy noise: On Thursday, Aug. 4, the market, as measured by the Standard & Poor’s 500-stock index, fell by almost 5 percent. The next day was quiet, but the following Monday, the index dropped almost 7 percent. In successive days, it rose 4.7 percent, fell 4.4 percent and rose 4.3 percent. Bigger-than normal changes have persisted since, though they haven’t been quite as drastic.

Read more