Niall Ferguson: Welcome to Pandemonium

Mean while the winged Haralds by command
Of Sovran power, with awful Ceremony
And Trumpets sound throughout the Host proclaim
A solemn Councel forthwith to be held
At Pandæmonium, the high Capital
Of Satan and his Peers

—John Milton, Paradise Lost, Book I

“What the hell just happened?” is a question many people are asking as they try to make sense of global financial markets in turmoil. It is the right question. With the emphasis on “hell.”

As I watched the global stock markets tumble, I thought of a trip I took earlier this year to the Louvre with my younger sons. Bored by the throng of people inanely taking identical bad photographs of the Mona Lisa, we stumbled upon a largely forgotten masterpiece, the representation of Milton’s Pandemonium by the Victorian artist John Martin.

“Take a good look, lads,” I said. “That’s where we’re headed.”

There is a time-honored convention among financial journalists to identify a cause, or at least a catalyst, for any financial crash. As Asian, then European, then American markets tumbled on Monday—the worst meltdown in Japan since 1987—the prime suspect was last Friday’s somewhat underwhelming U.S. jobs report. 

“Concerns about a slowing U.S. economy are front and center after job growth slowed sharply in July,” explained The Wall Street Journal. “Investors are worried that the Federal Reserve has moved too slowly and will need to play catch up in cutting rates.” The Financial Times told pretty much the same story. “Markets, which have been rising for most of this year, fell amid fears the Federal Reserve has been too slow to respond to signs the U.S. economy was weakening.”

But Friday’s jobs report wasn’t that bad. The low number of jobs added by the U.S. economy in July (114,000) might be the result of summertime distortions. April’s number was even lower—108,000—though that became clear only after the statisticians revised it. Still, no one batted an eyelid. And so on I might go, explaining to you that things really aren’t that bad in the U.S. labor market and that consumers haven’t yet thrown in the towel in a way that might signal a coming recession.

But a reasonable layman wants to interrupt all this and scream: “Why would even a much worse jobs number in the U.S. cause the Japanese stock market to fall by 12.2 percent in a single day?”—its biggest one-day move in 37 years. Why would a U.S. jobs report cause Japanese bank stocks to fall even further? Why would it cause the South Korean and Taiwanese markets to drop more than 8 percent? And the VIX index of implied volatility to register a massive jump?