Fortunately, we can now research this in detail with modern techniques of data analysis. We can trawl through social media and websites to see stories advance in real time. And we can plough through archives to see narratives rise and die over decades and centuries.

This reveals that narratives follow the same course epidemiologists have discovered in diseases — a steady beginning leads to a spike, and then a swift decline, with the chance of later recurrence. The epidemic is more deadly if it ties in with an existing constellation of concern.

This gets us closer to how people think and react to economic data. So, the latest US employment data show a sharp rise in payrolls of 313,000 last month, while the unemployment rate stays low at 4.1 per cent and — critically — the annualised rate of average hourly earnings growth has dropped to 2.6 per cent. The 2.9 per cent rate announced a month ago had triggered a brief panic.

What narrative fits? A popular one is Goldilocks — an economy that is not so hot that it boils over into inflation, and not so cold that it lacks growth. The Federal Reserve does not need to raise rates, and Goldilocks goes home happy.

An alternative is MAGA, Make America Great Again. President Donald Trump has cut taxes and regulations, and animal spirits are rising. As political beliefs now frame and lead economic perceptions, this one matters as well.

But where does that leave the narrative of the last week? That was Trade War — a fraying global order, with slow growth and deepening inequality, falls apart as the US erects barriers, others retaliate and trade grinds to a halt.

Mr Shiller shows that the "trade war" story has spread like an epidemic, gaining strength from its link to the Great Depression. Anything linked in the public mind to the 1930s is contagious.

He suggests this is overdone. Tariffs tend to be in retaliation for something else. Protectionism ebbs and wanes but global trade generally continues. The trade war narrative is so strong now because it ties with another narrative endorsed by the many who dislike the president: that he is dangerous and evil.


The strength of this narrative means any retaliation would cause markets to fall. But for now, the ongoing drama of how fast the global economy is growing, and whether it will bring inflation and higher rates in its wake, has primacy.

MAGA does not work. Job growth is in line with trends established before Mr Trump took over — growing, but the rate of growth is steadily slowing. Fewer jobs were added in the last 12 months than the last 12 months of President Obama.

What about Goldilocks? That is closer. Such low unemployment with low inflation is impressive. But the participation rate is rising, meaning people are being drawn back into looking for jobs. And wage growth over the last three months has hit an annualised rate of 2.95 per cent. The economy is delivering more for Mr Trump's voters on Main Street — and maybe it is just a little too hot.

But one narrative fits perfectly: the Punch Bowl. It is the Fed's job to remove the punch bowl as the party is getting started. Monetary policy is very loose after emergency measures were maintained too long. Janet Yellen, one of the original crisis-fighters and a political liberal, wanted to get on with tightening. Her successor Jay Powell feels the same.

The correct question for now, therefore, is not whether the Fed needs to raise rates (inflationary pressure is maybe not that obvious) but whether it can (and with jobs growth this strong, it surely can). The story for the rest of this year likely involves four rate rises. Markets are not braced for that narrative.

The story of what happens once this narrative unfolds remains to be told.

Financial Times