All kinds of analysts spent a lot of time during the fiscal cliff standoff fretting about what the markets would do. At what stage, we wondered, would there be wild fluctuations on Wall Street that my give lawmakers more sense of urgency toward a deal?
At the very end, those fears seemed to be becoming a reality. Here is a graph, taken Wednesday afternoon, showing the "Vix," which measures expected future stock market volatility. People on Wall Street call it the "fear gauge," as it captures how uncertain investors believe the near future to be. Higher numbers mean more fear.
See that spike on the far right? That means that at the end of last week, the financial markets really were starting to worry that there would be no timely resolution to the fiscal cliff. It promptly fell on Monday and Wednesday, as a deal was reached and then passed. We in the markets made a pretty big deal of that spike, and an accompanying fall in the stock market, on Friday, and the reversal this week.
But notice something important: That graph only goes back six months. What would it look like if we went back a little further, say a full year?
Huh. Now that spike in volatility at the end of last week isn't looking quite so scary. Last spring and early summer, the fear gauge was even higher. (That, you may recall, was a time when Greece was holding elections and it appeared that the euro currency area could split apart). With that context, investors didn't seem all that nervous about the fiscal cliff after all.
Now let's go back even further. What about the last two years?
Well goodness, now all our palpitations about the little spike on the far right seem horribly misplaced. Through the late summer and fall of 2011, the Vix was way, way higher than it was at any point in 2012. That encompassed a period when the European crisis was at its most severe stage, as well as the debt ceiling standoff in the United States that raised the prospect of a default and led to a downgrade of the U.S. credit rating.
Now, for kicks, what if we go back five years?
Egads! Even the 2011 volatility was nothing compared to the end of 2008 and start of 2009. Suddenly our huge, worrisome spike in the fear gauge at the end of last week looks like, well, nothing much to worry about at all.
So what does all this mean? It doesn't take a Wall Street sharpie to look at the five year chart above and see a pattern. We had a pretty horrendous crisis back in 2008, and several times since then when a new wave of trouble and uncertainty. But the severity of those recurrences seems to be declining over time. Periods of panic in 2010 and 2011 weren't nearly as bad as 2008, and those in 2012 haven't been nearly as bad as 2010 and 2011.
In other words, the sense of imminent, existential crisis is steadily abating. Among the investor class, there is an increasingly deeply entrenched sense that there is little risk that the entire global economy will spiral into some Great Depression-style abyss.
None of this means that there isn't a jobs crisis in the United States, or that the economy is as healthy as we would want it to be. It is that the "tail risk," the truly dark scenarios, are increasingly being pushed into the realm of very distant odds.
And that was true even as we in Washington had an up-close view of legislating at its least attractive, the brinksmanship and horse-trading that led to a fiscal cliff deal that seemed to satisfy no one and laid the groundwork for yet more brinksmanship in two months as the nation runs up against the debt ceiling again.
Now, it's possible that this upcoming debt ceiling negotiation could turn out to be as damaging, or even more damaging, than the one in 2011 (though it is hard to gauge just how damaging that one was given that Europe was in profound crisis at the same time). But it more and more seems the case that the investors with vast sums of money on the line are looking at the latest government negotiations--whether in the U.S. Congress, among European leaders, or in Japan's government--as the kind of routine jockeying that is how democracies operate, not something that has the potential to unravel the global economy. As Greg Ip wrote in the Economist Wednesday, "Markets now live in the policy equivalent of Beirut in 1982. They have adjusted to perpetual political dysfunction."
Recall that in the 1990s, there were two U.S. government shutdowns totaling 28 days, part of a series of bitter standoffs between the Clinton White House and Congressional Republicans. Yet it was also perhaps the single best decade for the U.S. economy in modern times. In other words, the economy can grow even amid government dysfunction.
That doesn't mean it will grow. Back then, there were other factors boosting the U.S. economy, including the information revolution led by the creation of the Internet and a booming global economy.
But having the sense of existential dread about the future off the table is a necessary precondition for a genuine recovery. And the good news is that that day seems to have arrived.