First, on Monday I gaurantee you that if the market functions, there will be a buyer
for every seller. Every transaction has two sides. Whenever you hear commentators
saying "there were more sellers than buyers today so the market went down" you should
wince.
Second, you don't have to be a "patriot" to think that the market will go down, but
that you won't sell. The market could open down -- prices significantly lower than
last Monday's close. That is typically what happens when there is bad news between the
close and the open. If that is the case there is no point in selling even if you know
for certain that the market is going down because there is no opportunity to get out
before the prices go down. Sometimes it seems that the market is dropping over time.
That's because the indicies that are reported in the media are calculated on the basis
of the last transaction. When the market opens in the morning after bad news it can
take some time before all stocks are trading. During that time the indicies are being
calculated using a mixture of the new prices and the last closing price. Thus the
appearance of stock prices dropping over time after the open even though prices are
simnply opening lower.
Third, world stock prices were somewhat lower on Friday than on Monday when US
exchanges were last open. So we probably should expect that the market will open down.
Fourth, as horrible as the events of last week were I don't think they have much
economic significance. a) For all the talk of consumer confidence, empirical analysis
suggests that it is a very minor factor in consumption demand (comparable to interest
rates) and is dwarfed by the importance of income. Further, we don't know how this is
going to affect consumer confidence or purchasing decisions. If people fear ratioing
or shortages they might spend like crazy. Or people may be feeling better about
themselves and their country as a result of the burst of patriotism. b) This isn't
going to be much of a war. We probably don't have much of an enemy. Unless we can link
Iraq pretty tightly to the attack (which seems unlikely) our only enemy is going to be
a handful of terrorist training camps which have probably already been emptied out and
the government of Afganistan. Its not clear what our objective in a war against
Afganistan would be, but assuming we don't try to go in and occ!
upy territory we won't need to spend a whole heck of a lot more money to fight this
war so no big fiscal effects (unless we use this is an excuse to build up our
military, build a missle defense, etc.) c) Rebuilding will take place over time and
will be a tiny tiny drop in the bucket when measured on the same scale as GDP. No
fiscal effect there. (But Fabio, do you really think that Keynsianism is so dead that
an exogenous shock to demand won't affect the economy? Your joking right? Even the
most hard core RBC people are building sticky prices into their economic models these
days and a negative shock will have effects on output in such a model.) d) So that
leaves impacts on financial markets as one more way that this could have an effect.
But world financial markets have been mostly open. Only US equity markets have been
closed. I don't see any reason to expect anything more than a decline at the open of
the magnitude we've seen in world markets over the last week.
Finally, despite all these relatively optomistic thoughts I'm considerably more
pessimistic about the state of the economy today than a week ago. But this is mainly
because of several statistics that came out last week reporting data from before the
bombing that suggest that what looked like a turn around in the late Summer hasn't
materialized. I had thought we might be seeing growth pick up in the third and fourth
quarter. I don't see that happening now.
-- Bill Dickens
