[FONT=Times New Roman, serif]Is This The Big One? [/FONT]
[FONT=Times New Roman, serif]By Mike Whitney [/FONT]
[FONT=Times New Roman, serif]21/0[/FONT]1/08 "ICH" --- - On [FONT=Times New Roman, serif] Monday, fears of a US recession spilled over into Asian markets sending stocks tumbling. Indexes were hammered across the board in what turned out to be the worst day of trading since 2001. In India, the Bombay Sensitive Index plunged 1408 points, to 17,605. In China, the Shanghai Composite dropped 266 points (or 5.5%) to 23,818, while in Japan, the Nikkei fell 535 points, to 13,325 points. The bloodletting stretched across the continent and into Europe where shares nosedived by more than 4% by mid-morning “putting them on track for their biggest one-day fall in more than four and a half years.”[/FONT]
[FONT=Times New Roman, serif]The huge sell-off is a sign that global investors do not believe that the Fed's rate cuts or President Bush's $150 billion “stimulus package” can revive the flagging economy or breathe new life into the over-extended US consumer. After Monday's sharp downturn, the prospects for averting a deep and protracted recession are slim to none. [/FONT]
[FONT=Times New Roman, serif]Economics Professor Nouriel Roubini summed it up like this nearly a month ago: [/FONT]
[FONT=Times New Roman, serif]“The United States has now effectively entered into a serious and painful recession. The debate is not anymore on whether the economy will experience a soft landing or a hard landing; it is rather on how hard the hard landing recession will be. The factors that make the recession inevitable include the nation's worst-ever housing recession, which is still getting worse; a severe liquidity and credit crunch in financial markets that is getting worse than when it started last summer; high oil and gasoline prices; falling capital spending by the corporate sector; a slackening labor market where few jobs are being created and the unemployment rate is sharply up; and shopped-out, savings-less and debt-burdened American consumers who — thanks to falling home prices — can no longer use their homes as ATM machines to allow them to spend more than their income. As private consumption in the US is over 70% of GDP the US consumer now retrenching and cutting spending ensures that a recession is now underway. [/FONT]
[FONT=Times New Roman, serif]On top of this recession there are now serious risks of a systemic financial crisis in the US as the financial losses are spreading from subprime to near prime and prime mortgages, consumer debt (credit cards, auto loans, student loans), commercial real estate loans, leveraged loans and postponed/restructured/canceled LBO and, soon enough, sharply rising default rates on corporate bonds that will lead to a second round of large losses in credit default swaps. The total of all of these financial losses could be above $1 trillion thus triggering a massive credit crunch and a systemic financial sector crisis.” ( Nouriel Roubini Global EconoMonitor) [/FONT]
[FONT=Times New Roman, serif] Decades of stagnant wages have left the American worker hamstrung and unable to continue to account for 25% of global consumption. Tightening credit and lack of personal savings have only added to his problems. The American consumer is tapped-out. That means that aggregate demand will fall dramatically across the world triggering increases in unemployment, decreases in capital expansion, and widespread slowdown in business activity. These are the beginnings of a deflationary spiral that will wipe out trillions of dollars of market capitalization in the real estate, equities and bonds markets. Even gold and oil will retreat significantly. (as we saw in Monday's results)[/FONT]
