The Economy: we have nothing to fear except fear itself

What to make of all the headlines:  debt crisis in Europe, US credit rating downgrade, stock markets plunging.  Here’s the thing about “markets”:  as well as being indicators of the state of the economy, they are increasingly collective expressions of emotion.  The herd mentality rules.  So when scary things happen, people run for the exits.

This is understandable and make no mistake, it’s not a good thing when this happens.  But the fears that can drive big market movements are often based on the prevailing sentiment of the day, and not so much the underlying fundamentals.  The biggest worry is the fear itself, because it becomes self-fulfilling.

There is clearly a big problem in Europe with governments living beyond their means.  And if we’ve ever wanted an indication of how damaging partisan politics is, just look at what has happened to the US government’s credit rating.  But it’s important to understand that even as markets fall, there have been few basic changes in the actual economic situation – what has changed is how the markets feel about the situation.

Here in Canada we can take some solace that we are in much better shape than most.  But we will not be insulated from what’s going on – turmoil in financial markets causes a crisis in confidence, which makes business slow down or stop their expansion plans, and that can hurt the pace of hiring.  And when the US economy suffers, Canadian businesses suffer too.  But despite all this, my sense is this is a storm that we will ride out, being more on the edges of it than in the midst of it.