MARY CHILDS, HOST:
One of the greatest American economists who ever lived was Irving Fisher. He was this true visionary, had a ton of really big, important insights into really big, important things - monetary policy, behavioral economics.
JACOB GOLDSTEIN, HOST:
And yet today almost nobody remembers any of that. If people today remember anything at all about Irving Fisher, what they remember is this one thing he said in the fall of 1929. He said the stock market had hit, quote, "a permanently high plateau." A few weeks later, the market crashed. Irving Fisher's fate was sealed. He would forever be the permanently-high-plateau guy.
CHILDS: But now imagine a different scenario. Suppose some big, famous economist said, I am freaking out. Something very bad is about to happen in the economy and soon. And then the economy kept growing for years; just expanding and expanding, adding jobs. The market's just zooming happily ever upward.
GOLDSTEIN: Would that person have been mocked forever as the, you know, imminent-precipitous-crash person?
CHILDS: No (laughter).
GOLDSTEIN: No, no. Everybody would've just been like, hey. Thank you for warning us about that thing that didn't happen. And then if a bad thing had happened, that person would've been hailed as the genius who warned us about the bad thing.
CHILDS: OK. So now it is June of the year 2019...
GOLDSTEIN: Here we are.
CHILDS: ...Which means this month, the economic recovery in the U.S. turns 10 years old. Unemployment is at the very lowest in decades. Wages are finally climbing for most workers.
GOLDSTEIN: And the incentives for us in this moment could not be more clear. It is time for us to bravely declare there are things we should be worried about.
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GOLDSTEIN: Hello. And welcome to PLANET MONEY. I'm Jacob Goldstein.
CHILDS: And I'm Mary Childs.
GOLDSTEIN: Mary, you write about finance for Barron's.
CHILDS: That's true. I write about worried people worrying about things for more worried people.
GOLDSTEIN: Today on the show - what should we be worried about?
CHILDS: It's not rhetorical. We rounded up three legitimately very troubling answers. Actually, we rounded up a lot more than that, but we narrowed it down to three so that you could ever sleep again.
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GOLDSTEIN: OK, just a couple little bits of housekeeping before we get into the show. Number one - there are lots of things we should be worried about that we are not going to talk about today on the show.
CHILDS: Nuclear war.
GOLDSTEIN: Underrated - I think, underrated as a worry right now.
CHILDS: Probably - climate change, mass extinction related to climate change.
GOLDSTEIN: Very big worries - but on today's show, we're going to focus more on the sort of short-to-medium term, more narrowly sort of financial issues.
CHILDS: Thing number two - PLANET MONEY has done a version of this show already - a what-should-we-be-worried-about four years ago. So for our first call, we wanted to follow up with someone from that show who was worried about the stock market.
GOLDSTEIN: Hi, this is Jacob Goldstein at NPR in New York.
ROBERT SHILLER: And this is Bob Shiller.
CHILDS: Robert Shiller won a Nobel Prize in economics for telling us what to be worried about. He looked at the housing market in the 2000s and said it's a bubble; same thing with the stock market in the late 1990s.
GOLDSTEIN: Four years ago, we had you on our show, on PLANET MONEY. You brought up the CAPE ratio.
CHILDS: The CAPE ratio is this thing Shiller came up with. It's a way of measuring stock prices. If you know price-to-earnings ratio, it's a version of that. But basically, when it's high, it means stocks are more expensive. When it's low, stocks are cheaper.
GOLDSTEIN: And here. I can actually just play a little moment from that. Here's what you said in 2015.
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SHILLER: It's high. The only times it's been higher were in 1929 and 2000. In 2007, it was about tied, but it crashed after that.
GOLDSTEIN: So you're saying the only times it's been this high has been right before market crashes.
SHILLER: Yes, right, so I'm worried about that.
GOLDSTEIN: So that was 2015. What happened after that?
SHILLER: The stock market kept going up.
GOLDSTEIN: It did.
SHILLER: OK, so I didn't say that it was going to crash imminently (laughter). Did I?
GOLDSTEIN: You didn't. You didn't. What do we - what did you make of it? Were you too pessimistic four years ago?
SHILLER: Oh, I think - I mean, I didn't see that stock prices would go up as much as they have.
CHILDS: Today that number that he watches - the CAPE ratio - is even higher than it was four years ago, and Shiller still thinks that the stock market will probably fall because that's what always happens.
GOLDSTEIN: And this is more or less the same thing he said when we talked to him in 2015, right? Stocks are high. They'll probably fall. He doesn't know when. But this time, when I talked to him, he got into this whole bigger-picture way of thinking about the economy and landed on this whole other sort of thing to worry about.
CHILDS: He says when he thinks about the future of the economy - when this fall will happen, whether it'll be sudden or gradual, what effect it might have - he actually doesn't think about, like, what the Fed is going to do or, like, commodity prices or any other technical measure. He thinks about how people feel about the economy.
SHILLER: So right now the stock market is perceived as high. I know that. I've been surveying people. And also the housing market is perceived to be high. It's not gotten people worried yet. But if you're talking about worst-case scenarios, they could suddenly get worried. So the...
GOLDSTEIN: Who is they there? Who is they?
SHILLER: I'm talking about everyone in America.
GOLDSTEIN: OK, OK.
GOLDSTEIN: And then so what happens if everyone in America gets worried?
SHILLER: Well, then they would become less excited about investing in the stock market...
SHILLER: ...And about - and also in the housing market. Prices start to fall.
CHILDS: Those falling prices freak people out. They worry, so they cut back their spending. They start saving more, which means sales and profits for companies start falling. So then companies start laying people off. Unemployment goes up. The economy starts shrinking - recession.
GOLDSTEIN: So you feel like we're all just sort of floating on this kind of cloud of optimism. And the fear for you is not some technical change in the world but just some kind of ephemeral change in people's emotions that suddenly will go from being hopeful to being scared and that that itself will cause real economic harm.
SHILLER: Yes (laughter). You got it. You know, that has happened before.
GOLDSTEIN: That is a very meta worry.
SHILLER: Well, it's - I think that's what we have to worry about.
CHILDS: So really worry number one is not about the stock market. It's worry about worry.
GOLDSTEIN: Thank you for your time. I appreciate it.
SHILLER: My pleasure.
GOLDSTEIN: I'll call you again in four years.
SHILLER: (Laughter) OK.
GOLDSTEIN: Take care.
SHILLER: And don't tell me I was wrong.
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CHILDS: So at Barron's, I write about corporate debt, which means I spend all my time talking to this little group of people that lend money to companies. And it's kind of like this weird little island. It's all the same people who go to the same conferences. And right now everybody on that island is freaking out.
GOLDSTEIN: Mary, I have to say when you started telling me about life on this island, I actually got worried. Like, I really did, you know? I mean, I haven't thought much about corporate debt before. But as we were reporting this story, it became clear to me that in the, you know, relatively near future, corporate debt could be a big deal not just for this little universe of lenders and borrowers but for, like, millions of ordinary people who just go to work every day and don't think anything about this stuff. Those people could be affected in a really big way by what's going on here.
CHILDS: One of my very favorite people to talk about this is Anne Walsh.
ANNE WALSH: I'm Anne Walsh. I'm the chief investment officer for fixed income for Guggenheim Partners.
CHILDS: Guggenheim Partners runs mutual funds, manages money for big investors. Anne Walsh's job is basically lending investors' money to big companies.
GOLDSTEIN: How much - more or less, how much money do you manage?
WALSH: $180 billion.
GOLDSTEIN: $180 billion. It's a lot (laughter).
WALSH: It's a lot, yeah. It's a lot of money.
CHILDS: It's a lot of money. And normally, when you have $180 billion to lend, you get to make the rules. Lenders like Anne make actual rules. People call them covenants, and they're a huge deal in this world. You can make a rule saying, hey, company, we will lend you this money as long as you don't go out and borrow a bunch more money, or there are rules that say you can't sell your important stuff or saying that if something bad happens, you have to call me immediately. And we will have a very strongly worded conversation about it.
GOLDSTEIN: So these covenants, these rules - they used to be totally normal in this world, but now that has changed. Those rules have largely gone away.
So if you went to a borrower now - somebody wants to borrow money. And they're a little bit of a - you know, they're a little bit of a risky company. And you said to them, I will lend you money if you promise not to go out and borrow a bunch more money. What would they say to you?
WALSH: They'd say, we're going to go find somebody else to lend us this money. And...
CHILDS: And that's easy.
WALSH: It's easy. It's - there's so much out there. What's happening today is that companies are able to borrow money with none of those protections built in.
CHILDS: Because more and more people and institutions have had more and more money that they needed to invest to lend out. Pension funds and rich people, Saudi Arabia - they are all competing to lend enormous sums of money, so now borrowers have the power.
GOLDSTEIN: So you have $180 billion to lend. And yet you don't have sort of the power in this relationship.
WALSH: That would be correct.
GOLDSTEIN: That's extraordinary.
WALSH: Well, they're...
CHILDS: That's wild.
WALSH: (Laughter) Think about that.
CHILDS: Corporate debt in America is now at the highest level ever and with the loosest terms of all time. So right now lenders are being the cool mom. They're letting companies run around willy-nilly, spending all the money, running up the credit card with no curfew. So in the weird little corporate debt world where I live, this is what everyone's worried about.
GOLDSTEIN: So what Anne told us is there is a next step here. And that next step is why everybody else, all the other people who don't live in your little corporate debt world - everybody else should also be worried.
CHILDS: All those companies borrowing all that money, they do normal things like run retail shops, where ordinary people go to work every day. So at some point, some of those companies won't be able to pay their debts.
WALSH: So you have companies that start to default. They can't refinance. They can't operate their businesses. They have to lay off employees.
GOLDSTEIN: Then those employees have to go find another job.
WALSH: Well, right now that's not such a big deal. Right now it's OK to find a job.
CHILDS: But if the economy slows, if there's a recession, all that corporate borrowing with almost no rules could mean lots and lots of companies won't be able to pay their debts. And they'll have to lay people off. And that is a terrible time to get laid off.
WALSH: In a recession, all of a sudden, those excess jobs go away. And it becomes a lot harder to become reemployed.
GOLDSTEIN: I mean, that is its own spiral then - right? - because then there's more people without jobs. They're spending less. That's bad for companies. I mean, that's the classic downward spiral, right?
CHILDS: So this is worry number two - big lenders stop lending. Companies that might've survived if they hadn't borrowed so much and on such easy terms just die.
GOLDSTEIN: After the break, one more thing to worry about.
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GOLDSTEIN: Last and final worry - trade war.
CHILDS: Trade war.
GOLDSTEIN: Trade war.
CHILDS: For this chapter, we called up Chad Bown, an economist at the Peterson Institute who basically specializes in trade wars.
CHAD BOWN: What I actually focus on is the areas of friction. And trade is right where things kind of begin to fall apart.
GOLDSTEIN: So this is your moment.
CHILDS: This is the Super Bowl.
BOWN: This is - yeah, that's my moment. It's my Super Bowl. This is what I have, for better or for worse, been preparing my entire life for.
GOLDSTEIN: So President Trump has imposed tariffs on about $200 billion of Chinese goods, has threatened additional tariffs on another $300 billion or so. And what that means is American companies that import those goods have to pay a tax of 25%.
CHILDS: And Chad is worried that the tariffs are going to hurt the economy and in a way that might not be obvious.
GOLDSTEIN: And frankly, that I find pretty interesting - what he told us is a lot of the taxes so far, the ones that have already been put in place, are on what economists call intermediate goods; basically, just stuff companies use to make other stuff.
CHILDS: So if you think about Ford or GM, for example, they make cars in Michigan. But a lot of the stuff they use to make those cars comes from China. So if you go down the tariff list, which I happen to have right here...
GOLDSTEIN: I love a tariff list.
CHILDS: You can see lots and lots of car and truck-related things, like electrical lighting equipment of a kind used for motor vehicles or cycles other than bicycles...
GOLDSTEIN: Good, give me another one.
CHILDS: ...Brakes and servo brakes and parts thereof...
GOLDSTEIN: OK, brakes.
CHILDS: ...Fuel, lubricating or cooling medium pumps for internal combustion piston engines not fitted with a measuring device...
GOLDSTEIN: OK, pumps seems like the keyword there.
CHILDS: ...Air-conditioning machines of a kind used for persons in motor vehicles.
GOLDSTEIN: AC, sure. So there's actually more than a hundred car-related things on this amazing list that has all kinds of things. And what that means is now Ford and GM and every other company that makes cars in the U.S. has to pay a 25% tax to buy those parts from China, or they could stop buying those parts from China. But if they did that, they would probably have to pay more.
BOWN: You know, part of President Trump's goal in all of this seems to be to want to bring American production, American manufacturing back to the United States. Some of these tariffs may be successful in doing that. He may force companies that - if you want to sell to American consumers, you have to make it here. But the implications of that are the prices to American consumers are going to be a lot higher. And these American companies that are making here - they're not going to be able to produce products that are going to be commercially viable anywhere else in the world. So you can sell them to American consumers, but 95% of the world's consumers don't live in America. You know, they live in Asia or Europe or elsewhere. And they're just not going to be willing to pay these much higher prices.
CHILDS: So that's where we are now. It's harder for U.S. companies to compete around the world.
GOLDSTEIN: OK. But I still feel like I could be, like, a little bit more worried on this one - Chad Bown.
BOWN: So a really bad scenario would be President Trump following through in imposing all of his tariffs on China on, you know, the full 500-and-something billion dollars' worth of imports at 25%. Then President Trump - getting upset that progress isn't happening with Mexico with the border. And he decides to impose tariffs on imports from Mexico. And then he further gets upset with Japan and Europe that don't do something that he wants, perhaps on NATO or cooperation somewhere else and then imposes tariffs on cars coming in from those countries.
Now all of a sudden if you're going out and buying a car, car prices are going to be higher for you. If you're going back-to-school shopping with your kids and trying to buy clothes or supplies, prices are going to be higher for you. If you're an American company, you want to sell your product in Europe or in Asia, you're not going to be able to compete anymore because your costs are so much higher. And so this, I think, really is the big concern. The effects on the U.S. economy could be coming from a lot of different angles.
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CHILDS: I feel like after the last one, the last time PLANET MONEY did a similar show, like, everything was fine. But I feel almost sure that not everything is fine now. I'm worried.
GOLDSTEIN: Mission accomplished.
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CHILDS: Email us at firstname.lastname@example.org or you can find us on social at @PlanetMoney.
GOLDSTEIN: Special thanks today to the Center for Automotive Research. Robert Shiller has thought for a long time about why emotions are important to economic outcomes. For more of him on that, check out a recent episode of our sister show The Indicator. Just last week, they talked to Shiller about that. The headline on that show is Animal Spirits. And the name of the show is The Indicator.
CHILDS: Today's show was produced by Darian Woods. Alex Goldmark is our supervising producer. And Bryant Urstadt edits the show.
GOLDSTEIN: If you like the show and want to help us out, please leave us a review online. It actually helps other listeners find PLANET MONEY. If you don't like us, don't leave us a review.
CHILDS: You don't need to bother. It's fine.
GOLDSTEIN: I'm Jacob Goldstein.
CHILDS: And I'm Mary Childs. This is NPR. Thank you for listening.
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CHILDS: I get to be cool at bars now, everyone. People will finally be listening to me.
GOLDSTEIN: This stuff is cool, is interesting.
CHILDS: I agree. Thank you. It's important to know about corporate debt - important and cool.
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