Fear and the global debt problem
Terry Savage email@example.com August 8, 2011 7:12PM
An electronic billboard shows a graph of trading throughout the day and the Dow Jones Industrial Average figures just after the closing bell at the New York Stock Exchange Aug. 8, 2011. The Dow lost 625 points in the wake of Standard & Poor's unprecedent
Updated: May 3, 2013 12:15PM
The huge stock market drop is discounting a long-lasting and deep recession. And it may, as well, have a hand in creating that recession. Nothing engenders fear like a stock market crash. And fear causes economies to slow to a crawl.
The headlines of a 600-point drop in the Dow Jones industrials are shaking public confidence even more than the debt ceiling debacle or the S&P ratings downgrade. In fact, the one positive result of the market slide might be that Americans unite in protest against this very visible loss of wealth — and pressure both parties to come to a sensible agreement to deal with our debt problems. That would be the surest way to start restoring the more than $1 trillion lost in the broad stock market Monday.
This is not just a problem with U.S. markets. There is a global debt problem — and it is creating concerns about European banks, country debt, and the ability of central banks to keep the global financial system intact. Part of that fear of currencies is apparent in the rush to gold — now trading over $1,720 per ounce. Gold may ultimately trade much higher if it is used to form a basis for a new, more trusted global currency. But meanwhile it is as volatile as the stock market, and equally risky.
There is a lot of scared money sloshing around the world, making markets extremely volatile. Selling will likely continue, in order to meet margin calls, and because mutual funds will have to sell stocks to accommodate fund shareholders who are switching to cash.
But cash is costly these days. Money in the bank, though safe, pays no interest. Large depositors are even being charged fees by some banks. Having “chicken money” on the sidelines is always a good idea for people who can’t afford the risk of loss. However, this is no time to decide you’re chicken and join the panic.
At some point the world will notice that America is not going away, though business may slow. And large U.S. companies will continue to have earnings and pay dividends. That will be the signal for the market to turn — but no one can tell exactly when that will happen, or from what level One thing is sure: If the new Congressional budget committee could meet and come up with a quick budget and debt agreement, it would inspire a lot more confidence — and higher stock prices. And that’s The Savage Truth.