I am very fond of the quote “How can I tell what I think till I see what I say?” because it captures what I have long been convinced of , that the ideas in one’s mind, even those that one thinks are clear, are often inchoate and confused, containing illogicality and errors that are only manifested when one openly articulates the ideas, especially in written form. The quote is attributed to E. M. Forster and can found in his 1927 book of essays Aspects of the Novel. But he is not the original source for the line. He is in fact approvingly quoting a character in André Gide’s novel Les Faux Monnayeurs. (The fact that this quote is a translation from the French explains why the quote is sometimes rendered differently, such as “How do I know what I think until I see what I say?”)

The reason for this preamble is that in most instances, my posts are not written from the point of view of an authoritative expert on the topic but rather consist of my efforts to try and understand something by putting it out there. And today’s topic is the first in a series on macro-economic indicators: what they are and what they mean. Since I am not only not an economist nor have I taken even a single course in economics at any level, this series of posts will consist of my attempts to put together a coherent picture based on my casual reading on the topic. The subject is dull. Economics is not known as the dismal science for nothing, but it is important, and I will try to stumble my way through it.

The main macro-economic indicators, at least in the US, are (1) the stock market, (2) the bond market, (3) the exchange rate for the US dollar in relation to gold and other currencies, and (4) size of the deficit, (5) the national debt, (6) the Gross Domestic Product, and (7) the trade balance. These things do not act independently of course. They are linked together in many ways but the link that I am going to focus on is interest rates, the cost of borrowing money.

Interest rates are key in influencing the first four indicators particularly. Most of the time, interest rates are passive in the sense that they respond to other factors. The main exceptions are the interest rates set by the Federal Reserve, one of which is known as the Federal Funds Rate that is periodically reviewed and set by the Federal Open Market Committee that meets eight times per year at which “the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth”. It is “the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight”. It is currently at 3.75%. Another key interest rate is the Discount Rate which is the interest rate charged to commercial banks for short-term loans obtained from a Federal Reserve Bank lending facility. It is currently at 4.00% for banks on a strong financial footing but could be higher for others.

Stock prices are theoretically based on the value of the company and its value theoretically is obtained by adding all of its assets and dividing by the number of shares that have been issued. So that each share represents ownership of that fraction of the company. This should be a fairly stable number especially if the assets are mainly tangible in terms of property and inventory. But some assets (such as intellectual property) are intangible and the value of the assets are particularly volatile and can fluctuate wildly. Stock prices are also driven by the laws of supply and demand, so that if people start buying up a stock for any reason (rational or irrational), its price can rise while if they start to sell, its price can drop so that its relationship to the underlying assets can become quite tenuous. In general, people are happy when the stock market as a whole goes up since most people have some investments in stocks either by purchasing them directly (as a very few people do) or because their retirement accounts are invested in them (as is the case for most people). What causes a company stock price to rise is the expectation that its revenue and profits are going to grow, while the belief that it is stagnant or about to decline will cause the price to fall.

These fluctuations do not cause major concern unless the prices rise dramatically suggesting the existence of a bubble. This rapid rise can cause people to think that they have more wealth than they actually do and spend more than they should. When the bubble pops for whatever reason, much off their wealth is wiped out. This can cause individual pain and, if it is widespread enough, lead to a recession where everybody starts cutting back on spending, leading some companies to cut costs or even go into bankruptcy and the loss of jobs.

The US stock market is currently riding high, which is surprising considering that the country is at war with no end in sight, oil prices are high and rising, and inflation is also high. What seems to be driving the stock market is the AI boom with tech companies and billionaires spending trillions of dollars on the software as well as building massive data centers all over the country. Investors seem to be betting on a big payoff in the future and thus are willing to pour money into this sector of the economy.

What worries some is that the AI optimism may be the result of a bubble, its prices rising on beliefs of growth and profits that are unrealistic and bound to come down sharply at some point, dragging the overall stock market down with it, perhaps precipitously.

But while casual observers focus on the stock market, the professionals look at the bond market that is less volatile (and thus less useful for speculative investments and quick returns) but provides a better measure of the state of affairs.

Next in this series: Interest rates and the bond market