As Iceland slides closer towards bankruptcy, the global implications of the economic crisis are becoming more evident.
Updated: May 3, 2013 12:14PM
The bad news just keeps coming - and despite all action by Congress, Treasury, the Fed, and now by central banks around the world, the markets shrug off the attempts to rescue the global economy. Once a selling panic is triggered, it's hard to lure money back into the markets. Since we've never seen anything quite like this, and since this is a new and very interconnected world, there are many questions, and few simple answers.
1. Why are stock markets around the world falling together?
Global financial markets are instantly linked with both information and emotion. The United States is the global center of commerce and consumption. When our economy slows, it is reflected in our stock markets, and in the stocks that represent the slowing economies around the world.
2. Who has the "power" to stop the slide?
Markets are always more powerful than any one man, or any one government. We might as well ask why we can't control hurricane winds or flood waters. Market forces are based on human emotion -- and at the end of every market swing, there is always an extreme of pessimism or optimism, leading to irrationally low or high prices for assets.
3. Then why did the central banks all cut interest rates?
They were attempting to slow the tide of selling, and encourage lending by cutting rates. And working together, they have a better chance at instilling confidence as well as liquidity into the global financial system.
4. Couldn't the government just "buy" the banks?
Actually, that's the next potential step -- one that never seemed possible in our free-market economic system. But it's happening around the world. The banks' accounting rules say they need more capital, not just liquidity, in order to make loans. The next step may be for the government to buy shares of U.S. banks.
5. What else could happen?
Well, there's all that credit card debt out there -- nearly $1 trillion. And as the economy slows, and unemployment grows, it will be difficult to pay down those balances -- much less go shopping for more stuff. Beyond that, there's a global network of financial contracts called derivatives, made between financial institutions. It's hard to imagine the consequences of those deals coming unraveled.
6. How long will this last?
That depends on what "this" is! The financial markets are moving swiftly, and a bottom could come sooner, but lower, than most people think. But the damage to the economy has already been done, and it may go deeper and last longer than you think.
7. What can I do to survive?
Pay down your bills, save more and spend less -- all of which will contribute to the oncoming economic slowdown, but will make your finances stronger. Seek help or advice from someone in your family or community. And perhaps own some gold stocks or coins to "hedge" your bets on the value of the dollars you've saved.
But we're all in this economy together, long past profiting at each other's expense. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd. Comment at suntimes.com.
The bad news just keeps coming -- and despite all action by Congress, Treasury, the Fed, and now by central banks around the world, the markets shrug off the attempts to rescue the global economy. Once a selling panic is triggered, it's hard to lure money back into the markets. Since we've never seen anything quite like this, and since this is a new and very interconnected world, there are many questions, and few simple answers.