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Thoughts on Thursday’s Wild Market Ride

For anyone visiting my Making Sen$e page Thursday to find out why markets are quaking, allow me to repeat the phrase that ought to be the motto for this page, so often have I used it: Credit comes from the Latin credere: to believe. And belief is the premise on which any economy is built. The Greeks borrow money. Their lenders expect to be repaid, with interest as the price of the loan.

The premise is that the Greeks will use the money wisely and earn enough to pay that interest and eventually, the principal, by growing their economy. That’s the rationale behind all investment, all economic growth. I forgo consumption today by investing money in you, on the assumption you’ll do something productive with the money and have enough left for both of us.

But if instead of investing the money, the Greeks act as if the lenders were bearing gifts and the lenders come to realize they won’t be repaid, well, the economic premise is shaken. Or shattered. The lenders act quickly to recoup what they can, selling Greek IOUs at whatever they’ll fetch in the open (though now closing) market. And if the same might happen to Portugal’s IOUs? And Spain’s? And Ireland’s? And California’s…Sell, baby, sell.

So the bonds (IOUs) of shaky borrowers sink in value, as lenders scramble to unload them. And relatively “safe” obligations rise in value, like U.S. Treasury Inflation-Protected Securities (TIPS), which are soaring today. Just like gold. And if everyone’s suddenly increasingly disbelieving and scared — well, we’ve been through this quite recently, right? When people stopped spending. Stopped lending. Which meant companies couldn’t sell their goods and services. Which meant their profits plummeted. Which meant the companies were less valuable entities. Which meant SHARES of those entities were worth less. Which explains why stock markets plunged, as they did again today.

Some have watched the world’s markets rally this last year in sore amazement, given the unemployment still out there, the lack of transparency that reigned for so long, and all that brings new surprises in the business media almost every day. To the skeptics, this week’s wild ride comes as no surprise.

This post is cross-posted on Paul Solman’s Making Sen$e page.

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