Just Say No to “Death Spirals”
One thing I read frequently among economists as well as the popular press is the notion that things can descend into “death spirals.” Like, “if the dollar goes below such and such a level, it will be in a self perpetuating cycle of devaluation until the currency is dead in the water,” or, “this economy is shedding jobs, which will lead to less consumption, which will lead to fewer jobs, which leads to even less consumption…until we all go to zero.” Etc.
This type of thinking is, in general, nonsense. I’ll agree that in certain situations it can happen. For instance, if a country (like, say, the PIIGS) has its debt yields surge on fears it might default, and then those yields get up to territory where they can’t meet their short-term financing needs, then they’re pretty much on a self-fulfilling course to default. (Mind you, I’m not saying that will happen to the PIIGS, but it’s not an impossible scenario either.) You might even make the same case for something like how Bear Stearns got squeezed in the early part of 2008.
But by and large, this type of thinking has prevailed for a very long time in the court of economic reason and usually ends up wrong. Simply, economies mostly don’t go into death spirals—at some point they hit a recessionary nadir and then recover. This happens time and again, yet people get obsessed with vicious cycles of impending doom.
Right now, this kind of talk is swirling among those who study currencies, with particular worry on the dollar. Think twice before believing in it—currencies wax and wane, but the dollar isn’t going to ruin anytime soon.