Black Monday: ‘No reason to flip out, overinflated markets are just telling truth’
RT: The White House has just said the US economy is safe and sound. It's true the US markets have not suffered as badly as in Europe... But do you share the optimism of the White House?
Jeffrey Tucker: …I don’t think there is any reason for a panic. The problem with panic in the US is that it always results in terrible policies. I mean, all day [Monday] you’ve got crazy people running around blaming everything except the real problem: they blame China; they blame the existence of trade itself. We’ve got a lot of demagogues on the loose who are going to try to use this very normal expected market correction to try to fundamentally upset the economic order of the world and I think that is what’s mostly dangerous about it.
RT: Why were US markets able to bounce back so quickly after an opening plunge?
JT: I think there is an element of realism and there is initial sell-off panic. There is a certain herd mentality that takes over Wall Street at these times, and it is going to take a few days for this to fully shake up. Look, markets are very much in need of correction. There is no reason for anybody to flip out. We seem to have this attitude that there is a human right to ever rising stock prices, especially in the US since everybody’s 401(k) s, they are tied to the belief that only stocks can only make you rich forever. I think Americans are going to find out that otherwise, and I hope we can deal with it without doing something crazy.
RT: How much does the American financial market depend on what's happening in Asia or Europe?
JT: I think it’s fairly dependent. There is a reverse effect here too. The dollar is the world reserve currency. After 2008 the Fed couldn’t stop creating new money. Trillions in new money and that money is now all over the world; it has propped up the US banking system. We’ve held interest rates down to zero for seven years. There are consequences to these kinds of policies. You can’t manufacture recovery much less prosperity out of a printing press. When you try to do that, it’s going to have a terrible effect. I would say that the problem with the Federal Reserve is now global problem. I would like to see monetary policy become rational and under control, and least tolerant of some downturns, so that that way we can experience a correction and get back on a solid growth path. That is something that never really happened in a throw-away after 2008.
RT: Money is disappearing off the markets but where does it go? Surely someone must be winning?
JT: Yes, ... money isn’t actually disappearing. What you see is a change in valuations - a change in prices. Prices were inflated and now they are becoming more realistic, that is not actually destroying wealth- it is just a change in valuation. That is what markets are supposed to do - they are supposed to adapt to existing perceptions of resources and future demand. What you have here is the markets telling the truth, and I don’t think we should stop them, we shouldn’t shut them up, we should let them keep talking, because we need to face the truth. We have overinflated markets and it is time for a little bit of realism.
RT: With all the major markets down, is this a buying opportunity?
JT: Mainstream investors always do the reverse. What is going to happen right now, is that every 401 (k) owner in the US is calling his/her broker saying: “Sell all my stocks.” That is the way it works. And it maybe actually be the worst time to be doing that. People follow this herd mentality- it’s unbelievable- people tend to buy when things are going up...- they buy at the height, and then they sell it at the low. This is a universal rule. My recommendation is just to stay calm, stay rational. I don’t think there is any fundamental economic danger here; I don’t think we’re in a midst of global financial meltdown, much less a global depression.
RT: How is this affecting the real economy? Are consumers going to feel the pressure?
JT: I’ll tell you what is going to happen. People are going to get their statements from their 401 (k) retirement funds and be in a panic as they thought they had a million dollars, and suddenly- there are out 250 K of that. They are going to ask: “Who stole my money?” What Americans don’t get is that the money they keep in stocks is a risk. It is not the same thing as savings. This confusion is politically very dangerous because a typical bourgeois American right now thinks that somebody stole their money, and they are going to be screaming out for politicians to offer them crazy nostrums to try to drive stock prices back up again. That is just the truth about American culture today.
Dr. Sreeram Chaulia, of the Jindal School of international affairs says investors are panicking over the slowing down of the Chinese economy since China “has become much more central to global finance as well as to equities and to the global economy as a whole.”
“When China slows down significantly…it will have an impact, ripple effect on commodities and of course on those who export to the Chinese market, and those who have invested in China... So I think we’re seeing a kind of panic right now. But I’m hopeful that it will adjust itself over time,” he told RT. “This is the typical reaction of the markets whenever they see a kind of downward trend. And then they re-adjust themselves and become more rational. So right now we are at the beginning of what should hopefully be a long-term adjustment process where people are allocating their resources based on expectations of how far and how well emerging economies will do.”
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.