There is more uncertainty about the course of the global economy over the next year or so than at any previous time in the lives of many of us. At the same time, in this Internet age, we are bombarded with numbers and information as never before. In a time of uncertainty, how can the average person draw any useful conclusions from the torrent of stock indices, consumer confidence numbers, layoff announcements and so forth that appear daily?
Let me give two pieces of advice. First, focus on the real economy, not the monetary one. Second, don’t be scared by gross changes, but pay attention to net ones.
What do I mean by the real economy? It is the ability of an economy to produce real goods and services to meet peoples needs and wants. People don’t eat dollar bills. They don’t protect their bodies from winter storms with dot-com stocks, and they don’t fill their tanks with crude oil options. They eat meat and vegetables, put on jackets and fill their tanks with gasoline.
Values in the monetary economy can change tremendously without seriously impairing the real economy. Stock values can fall sharply, but the companies those shares represent can still crank out products.
Financial commentators point out that more than a trillion dollars of financial wealth has been wiped from the nation’s balance sheets in the last three weeks. But that overstates the true situation.
Think of your own home. What would be a greater loss: to have a fire in your house that caused $40,000 in uninsured damages or to have the appraised value of your house drop by $40,000 because of a weakened housing market? Both would affect your net worth, but a fire would reduce your standard of living much more than an equivalent reduction in housing values.
I own a farm in southwest Minnesota. In 1980 it might have brought $400,000 if sold at auction. By 1985, it would not have fetched $150,000. Were we poorer? On paper, yes, but our lifestyle did not really change.
So pay attention to measures of the real economy, how much output is being produced and how many people have jobs. Don’t worry about the total market value of all firms listed on Nasdaq today versus a year ago.
What do I mean by net changes rather than gross one? The news is full of canceled conferences and vacation trips. But if a couple cancels a planned trip to New York or Prague because of safety concerns, it does not mean that the money they save will be put under their mattress. They may drive to northern Minnesota or the Black Hills. They may play a few extra rounds of golf, go to the movies more or buy some new furniture. The total reduction in their household spending probably will be much less that the amount saved by canceling their big trip.
Similarly, big layoff announcements catch the public’s eye. When an airline or aircraft manufacturer lays off 10,000 workers it rates big headlines. But even in a slowing economy, some people get new jobs every day. The total change in the number of employed people is usually less than the sum of all layoffs.
I’m not trying to be Pollyanna here. We are more likely to have a recession, and possibly a severe one, than we were on September 10. But the outlook for our country and the world is not nearly as black as some would paint it. As always, people should manage their affairs prudently. But there is no reason for panic.
When reading the news, look beyond the headlines and ask yourself: “Is the event reported going to affect the real economy? May it be partly offset by countervailing actions that are less visible or news worthy?” I suspect that for thoughtful people, the answers to these questions will be “no” and “yes” respectively more often than they anticipate.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.