The Age of the Doomsday Predictions

By Biagio Raimondi


 By Christopher Burns

By Christopher Burns

With an economy at full employment, stable growth, and decent inflation, financial columnists sure have a lot to complain about.  It seems rather paradoxical that many market speculations lean towards dire negatives despite the increasing strength of the economy.  However, stability is boring and doomsday sells.  Readers are more inclined to read an article that depicts a potentially threatening situation rather than one that shows little change.

 

Recently, The Wall Street Journal printed an article entitled “The Fed Is About to Start Unwinding Its Huge Crisis-Era Holdings; What Could Go Wrong Is Hard to Predict.”  Historically, when the Fed unwinds its bond holdings (begins selling its hold of bonds, thereby increasing the bond supply and lowering bond prices), interest rates subsequently rise (due to the inverse relationship of bond prices and rates).  This is an indicator that the economy is showing signs of improvement after a recent struggling period.  

 

On the surface, initial improvement after a period of instability seems to justify the worrisome headline.  But many economists would argue that higher long-term rates are long overdue.  This decreasing of bond holdings comes with a multitude of benefits, such as the government having a greater ability to combat recessions.  The problem, however, is that positives don’t always attract readers.

 

Many fiance newspapers are notorious for engaging in yellow journalism, by which they attempt to grab the reader’s attention by fabricating and exaggerating events.  Oftentimes such headlines will warn of events that will directly lead the economy into a recession.  This is of high interest to the reader because of the possibility that such events could negatively affect them.  Even though these articles are speculative, they nevertheless have impacts on the economy and even could become self-fulfilling.

 

Investors are timid, as they should be.  Market exposure frightens the average investor.  At the end of the day, it is the investor’s hard-earned money that could potentially be lost with another economic crisis or even a couple of words.  Take for instance government officials’ responses that have been causing market fluctuations, as seen with President Trump’s comments about North Korea, which sparked panic sells of stocks.  If mere comments can spark such a prevalent market reaction, then surely published articles on The Wall Street Journal could have enormous negative effects on the modern-day investor.  

Articles like this have the potential to send any consumer's marginal propensity to expend downward.  When troughs in the business cycle are expected, people tend to save more money than they normally would.  If consumers lessen their spending, then economic growth will surely slow.  This is a potential domino effect that would make articles about doomsday come to fruition.  

 

Though most investors may suffer, there are some parties that benefit from the negative effects on the market caused by these articles.  Such investors engage in “shorting the market.”  This simply means that they bet on a bearish market, other than a bullish one.  When the stock market dips, they make money, as seen in the 2015 film The Big Short.  Some companies use this technique to hedge their investments.

 

It is not difficult to see why publications print stories about frightening events that could happen in the future.  It increases interest and viewership of the article.  The nightly news fixates its reports on stories of crime and tragedy because that grabs the viewer’s attention.  Ever since the financial crisis, it almost seems that everybody is trying to predict when the next doomsday will come.  There will inevitably be another recession, so columnists write about signs pointing towards that inevitable, simply because it makes an interesting article.  But when articles like these cause investors to become timider, they no longer predict the next crisis; they create it.


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