Constant Variables

He wasn’t an economist or even market pundit, but the Greek philosopher Heraclitus might have made a living in the profession were he alive today.  He is known at Atlas for his pithy quote which translates roughly to, “change is the only constant in life.” 

Economies are in a constant state of flux, often shaped and reshaped by unforeseen events that come from outside the system. These exogenous shocks serve as catalysts of change, at times altering the previous balance and forcing both markets and policymakers to adapt and seek new equilibria.  Covid-19 is an obvious example, but even since its outbreak, there have been others, with the most recent possibly being the war currently happening in the Middle East.

Economies don’t tend return to their previous equilibrium after a shock.  Take recent inflation for example.  It has been much higher than the old normal once the American economy began to operate more fully after being shut down.  There are numerous reasons for this, but it is at least partially because the economy now has a lot more money sloshing around the system after fiscal and monetary responses to support households and firms were unleashed starting in 2020.

Conflict is on the rise globally.  Russia invaded Ukraine going on two years ago.  Then at the end of September, America warned about a buildup of Serbian troops along the Kosovo boarder.  And now our headlines are filled with grim images from Israel and the Gaza Strip.  These all qualify as exogenous shocks, and none of them are at points which would suggest a new equilibrium is on the brink of discovery.

At the risk of whistling past the graveyard, let’s end with some optimism.  Market-based economies like America’s have a knack for changing and adapting.  Yes, exogenous shocks can be disruptive, but once a nascent equilibrium has been reached, a new environment should emerge which fosters the next era of development.  Like the fertile ground left by a river which has altered its course, new shoots will emerge, but the water may feel turbulent and muddy for a while longer as we all experience this new period of change.