The Dow Jones fell by more than 400 points on Friday afternoon. Oil plunged beneath $30 a barrel for the second time this week. The default risk for junk bonds soared to a three-year high. Financial news networks ran lots of B-roll of traders putting their heads in their hands. And you surfed the internet looking for someone to tell you whether you should freak out.
Here is a quick tour of four reasons to stare in panic at the scrolling ticker on CNBC, and four reasons to just put on Netflix and chill.
Panic: Our economy is vulnerable to a crisis in China.
If you had to summarize the cause of all this trouble in one word, that word would be China.
Earlier this week in the Washington Post, Larry Summers laid out the grim state of the the Chinese economy:
“Over the past year, about 20 percent of China’s growth as reported in its official statistics has come from its financial-services sector, which has mushroomed to the point where it is about as large relative to national GDP as in Britain, and Chinese debt levels are extraordinarily high. This is hardly a case of healthy or sustainable growth.
In recent years, China’s growth has come heavily from massive infrastructure investment; indeed, China put in place more cement and concrete between 2011 and 2013 than the United States did in the whole of the 20th century. This growth, too, is unsustainable, and even if it is replaced by domestic services, China’s contribution to demand for global commodities will fall way off.”
Robert Samuelson, also in the Post, explains that a collapse in Chinese growth will likely induce the government to devalue its currency, making U.S. exports less competitive in the global market. While exports don’t make up a huge percentage of the U.S. economy, weakened American manufacturing combined with a global growth crisis could continue tanking U.S. stocks.
“Large losses could cause a negative ‘wealth effect,’” Samuelson writes. “When people feel poorer, they spend less (similarly, when they feel richer, they spend more). Economists have long believed that the wealth effect for stocks is small — about 2 or 3 cents for each dollar of profit or loss.”
With the U.S. growing at less than 3 percent annually, that “wealth effect” could be enough to trigger a recession. Especially since we’re overdue for one, anyhow.
Don’t Panic: Our economy is invulnerable to a crisis in China.
Exports make up only 13 percent of the U.S. economy, and a very small percentage of those exports go to China. So any falloff in Chinese demand is unlikely to hit the United States very hard. And a devalued Chinese currency would redound to the benefit of U.S. consumers, who will save money on Chinese imports. Considering how much a strong dollar and low oil prices — economic conditions that would be facilitated by a struggling China — would save retailers like Walmart, the “always low” prices Americans are used to could get substantially lower.
And sure, China’s big. But as CNBC points out, it isn’t much bigger than Japan was at the end of the 1980s, in terms of each nation’s share of global gross domestic product. And while Japan spent the 1990s mired in a lost decade, the United States was wracking up surpluses and imagining it had reached “The End of History.”
In the long run, a collapse of Chinese growth may even be in the global economy’s best interest.
“In our view, the risk in China is not that growth will tank in a hard landing, but that the authorities will keep growth too high for too long, shrinking their space for policy maneuver and increasing the number of impaired assets and making the economy more vulnerable to a shock,” Paul Gruenwald, S&P chief economist for Asia-Pacific, told the network.
Panic: Cheap oil could set the world on fire.
Oil has fallen beneath $30 a barrel, and the sudden influx of Iranian exports into an already-glutted market threatens to send that price as low as $10.
The world still runs on crude, and extreme changes in its price have the power to fundamentally reshape the international order. The Guardian notes that the collapse of oil prices in the mid-1980s helped bring down the Soviet Union and inspire Saddam Hussein’s invasion of Kuwait — events that have reverberated through the ensuing decades. The paper’s editorial board writes that the current collapse of energy prices dims “hopes that emerging powers might continue their growth and modernisation, simultaneously becoming solid stakeholders in a stable international order.”
Petrol-dependent economies like Brazil and Nigeria could face social upheaval as living standards decline — in the latter nation, that upheaval could increase the proliferation of jihadist forces in the region.
While a weakened Russia might strike some as a geopolitical boon for the United States, authoritarian regimes have a habit of deflecting domestic tensions with foreign misadventures. Which raises ominous questions of how Saudi Arabia will behave, in a moment when the kingdom is already engaged in multiple proxy wars with Iran. No one knows how all of this will shake out, but considering that the current international system was more or less designed by the U.S. to advance its own interests, unpredictable change is undesirable — as are heightened poverty rates in oil-dependent economies and, ya know, world wars.
Don’t Panic: Cheap oil will give Americans a raise.
America has a big domestic energy industry, but at the end of the day, this is a consumer economy — and low oil prices give consumers more money to spend.
According to MarketWatch, current crude prices would save the average two-car household $1,000 a year on gas, allowing the middle class to increase its spending on restaurants, tourism, and other discretionary purposes. And those rock-bottom prices offer even greater relief at the very bottom of the income scale. As Yahoo Finance’s Andy Serwer noted last year, households with incomes of less than $50,000 spent 21 percent of their earnings on energy in 2012, while those making more than $50,000 spent only 9 percent.
And as for all that geopolitical fearmongering: The international order should be able to hold out for a few months. Which is about as long as Goldman Sachs believes it will take for a bull market in oil to reemerge.
Panic: Indicators suggest we could be headed for recession.
The manufacturing sector is contracting. The amount of unsold goods that businesses have been stockpiling has steadily risen since 2012. And the spread between the risky corporate bonds and safe government bonds is going up — something that typically happens about 18 months before a recession.
Don’t panic: Indicators suggest we’re nowhere near recession.
Uh, did you see December’s jobs report? Employers hired nearly 300,000 people last month, and the unemployment rate is near 5 percent.
Plus, the quit rate — the measure of Americans’ willingness to ditch their jobs for something better — is holding steady. Ahead of a recession, the quit rate slows down as workers perceive fewer opportunities in the labor market. Finally, the number of people applying for unemployment benefits is quite low — not something you typically see ahead of a recession.
Panic: Writhing on the floor in abject terror at the prospect of future loss is a really good way to burn calories.
Don’t Panic: Dancing is better.
