MEGAN BASHAM, HOST: Coming next on The World and Everything in It, the Monday Moneybeat.
NICK EICHER, HOST: For four days last week, the stock market whipsawed a full percentage point up or a full percentage point down. That’s a turbulent week all by itself. But Wednesday was way worse: three percentage points, straight down.
The one big reason was a frightening signal from the market for U.S. Treasury bonds. What happened was the yield on a 10-year bond dropped below the yield on a two-year bond.
Investors typically demand more in interest for tying up their money in longer-term debt. When they don’t, though, it means they lack long-term confidence in the economy.
This yield-curve inversion, as it’s known, is pretty rare, and historically, it correlates with the coming of an economic recession—suggesting it’s a year or two away.
When traders on Wall Street got wind of that, it was time to sell, and sell they did. By Friday, the market had rallied, but it wasn’t enough. All the major indexes suffered a third straight losing week on the New York Stock Exchange:
The Standard & Poor’s 500 was off one percentage point. The Dow Jones Industrials down 1-and-a-half. The Nasdaq shed eight-tenths and the Russell 2000 index of smaller-company stocks lost 1.3 percentage points.
BASHAM: What’s worrying investors are the effects of the trade war between the United States and China, as well as weakness in other major global economies.
China is suffering its slowest economy in a quarter century. The slowdown there is part of what’s ailing Germany, whose companies typically make money selling expensive industrial equipment to companies in China. That’s not happening much lately.
So in the second quarter of this year, Germany’s economy actually shrank.
In this country, factory production in July fell four-tenths of a percent. It’s off half a percentage point on the year.
EICHER: It wasn’t all terrible news last week. Two reports were cause for optimism, one from the Commerce Department and one from the Labor Department.
Commerce reported retail sales for the month of July and they were up considerably: seven-tenths of a percentage point, following a three-tenths rise the previous month. Online sales grew 2.8 percent. That’s a very good sign, because overall consumer spending, of which retail sales are a key number, accounts for more than two-thirds of all economic growth.
The other economic report came from the Labor Department: Worker productivity is on a pretty good pace, up 2.3 percent in the second quarter, following on the heels of a 3.5 percent first quarter. That’s much better than what we’ve been doing since 2007. The average year’s productivity gain for more than the last decade was just 1.3 percent.
NOW … that’s a lot of numbers.
BASHAM: It is a lot of numbers.
EICHER: Yes, meaningful numbers, but still, numbers.
Now, I’ve received nice messages, saying, basically, it’d be helpful from time to time to have some explanation of basic economic concepts.
BASHAM: Oh, listen, the letters were from me! We’ve managed, I think, to make complicated legal cases more accessible.
So doing the same with economics sounds like a good idea.
EICHER: Yeah, we’re still kicking around some ideas. But I did reach out to a new friend. He’s an economist at Virginia Commonwealth University. Several days ago, I offered him a free lunch.
BASHAM: OK, there’s an economic term I understand pretty well: there’s no such thing as a free lunch.
EICHER: He certainly understood that, too.
AUDIO: Imagine if I was trying to buy stuff at the grocery store and I had no money.
So you barter with the cashier. What kind of deal do you make?
AUDIO: I can right now explain aggregate supply and aggregate demand to you in exchange for this ice cream.
I’m an economics teacher.
Stephen Day, economist at VCU. Now, I think that’s a good trade but I’m not the cashier at the store.
Don’t think it’d work.
AUDIO: At all!
So you trade with VCU, explain supply and demand to students.
AUDIO: I get a paycheck and money, and I pay the grocery store in money, and that facilitates that trade.
I mean, if you’ll explain supply and demand for ice cream, what does a chicken sandwich buy? How about an explanation of the meaning of money and how it relates to trade and trust?
Let’s talk, Stephen, about a world where you have to do business with people you don’t know.
AUDIO: In ancient economies they would’ve given gifts to each other and kind of kept a mental record of who had given a gift to what. And they kind of keep a mental balance.
But you can’t rightly do that with someone you don’t know, let alone, someone who’s hours away from where you live.
AUDIO: Let’s say that somebody that you want to trade with is a lettuce farmer. You want some lettuce, but what if you don’t want lettuce right then? What money does is it allows you to always have something that the other person wants. It makes trade easier.
Another thing that money does, it’s a store of value. So that lettuce is going to rot.
Right. Fresh lettuce gets unfresh pretty quickly.
AUDIO: But money doesn’t, you can keep it around for some amount of time and inflation aside, it doesn’t lose its value. Right?
AUDIO: And it can also be used as a unit of account to measure value. In fact, the anthropologists tell us that might be the first thing it ever did was to communicate value.
It makes trade easier. It’s a store of value. It communicates value.
AUDIO: That’s why we have money. And then the trick after that is just getting people to trust that money system.
And avoid doing things that undermine trust in the money.
AUDIO: The main thing is printing too much of it, devaluing it too much.
Stephen Day, economist, Virginia Commonwealth University. Enjoy the sandwich. And that is today’s Monday Moneybeat.