An Interview with Economist Peter Navarro on the Economic Crisis

October 27, 2008 by  
Filed under Economics, Investing

Peter Navarro, Ph.D. is a professor of economics and public policy at the University of California, Irvine, and a regular contributor on CNBC.  I first learned about Professor Navarro when I reviewed his audio course Principles of Economics: Business, Banking, Finance, and Your Everyday Life.  Later, I discovered that Prof. Navarro had a website ( where you can obtain free educational materials on economics as well as learn about and order the books he has written.  

I contacted Prof. Navarro and he kindly agreed to answer a few questions about recent Congressional action intended to address the economic crisis in the United States.  After the interview, I encourage you to visit Prof. Navarro’s site and subscribe to his RSS feed so that you can read his blog and excellent newsletter.  Now to the interview.

Mr. ToughMoneyLove:  Now that the “rescue bill” has been enacted into law, what positive macroeconomic effects (if any) do you anticipate once the Treasury begins using resources under its new authority to actually acquire the so-called “toxic” assets from financial institutions that own them? 

Prof. Navarro:  “The bailout will help stabilize the business investment part of the GDP growth equation but it won’t help consumers or our flagging export industries.  It prevents a global depression but won’t, alone, forestall a major recession.” 

Mr. ToughMoneyLove:  How soon would you expect to see any measurable economic benefits from actions taken by the Treasury under its new “rescue bill” authority?  

Prof. Navarro:  “The credit markets are stabilizing and will continue to do so.  There’s a lot of money in the system now.  It’s not the magic bullet, however.” 

Mr. ToughMoneyLove:  “What initial changes in economic metrics should investors look for that would signal that actions taken under the “rescue bill” may be having a positive affect on U.S. economic conditions?” 

Prof. Navarro:  “The stock market will be a good leading indicator of economic recovery.  Until its downward trend reverses, we will be deep in the muck.” 

Mr. ToughMoneyLove:  What other fiscal or monetary policy actions do you think the government should undertake to deal with the current economic crisis? 

Prof. Navarro:  “We can’t cut our way out of this mess.  Rate cuts won’t stimulate business investment because you “can’t push on a string” and business confidence is low.  Tax cuts won’t work because consumers will save, not spend, whatever Uncle Sam tosses their way.  That leaves a fiscal stimulus dominated by government spending aimed at infrastructure and energy independence.” 

Mr. ToughMoneyLove:  What investment advice do you have for baby boomers with a 5-10 retirement horizon as to how they should react to current economic conditions?  How about those investors with a 20-30 year retirement horizon? 

Prof. Navarro:  “Increase your economic and market literacy.  Take control of your portfolio.  Don’t do anything in a panic.” 

In reading Prof. Navarro’s responses to my questions, I am first impressed with his direct and succinct approach to the issues presented.  You find more of the same in his newsletter, which can be very helpful to the investor who believes that consideration of macroeconomic principles must be part of the overall investment analysis.  This is in stark contrast to the bloviating we hear from politicians in Washington, most of whom are dangerously ignorant in basic economics

Prof. Navarro believes that the “rescue bill” will stabilize credit markets but will not prevent a major recession.  This is not what many want to hear.  He is similarly pessimistic about the ability of government to stimulate the economy through interest rate cuts and tax cuts.  On this point we closely agree, as I believe as Prof. Navarro does, that any fiscal stimulus should not come from consumer spending but instead from government investment in energy R&D and alternative energy infrastructure. 

My favorite takeaway from Prof. Navarro’s assessment is from his statement that the “stock market will be a good leading indicator of economic recovery.”  Why is this important?  If you believe in market timing, then presumably you have left the market at this point and are waiting on returning based on some objective criteria.  In the case of the present crisis, even a professional economist believes that one of the leading indicators of economic recovery will be a positive turn in the markets themselves.  If that is the case, if you wait to invest until the first indicators of economic recovery, you will have already missed the early stages of the market upswing.  These can be sudden and substantial.  That is why I am not a market timer. 

Thanks again to Prof. Peter Navarro for his contributions to the hard truth from Tough Money Love.

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