Global Recession 2.0?

The 4^th August 2011 will be remembered as the day of US Stock Market Crash 2011. All major indices show a fall of 4% to 5%. The Dow and the Standard & Poor’s fell more than 4 percent, with Dow Jones Industrial Average down by 512 points, and S&P fell 60 points.  Nasdaq lost more than 5 percent, falling a total of 136 points. Things go significantly worse 1 day later when Standard & Poor's downgraded the US from AAA to AA+. The US was downgraded because  “political brinkmanship” had made the government’s ability to manage its finances “less stable, less effective and less predictable.”

The agency’s decision was a reflection of the nation’s massive debt burden and its inability to function politically. Although the fallout largely triggered political recriminations, analysts worried that the consequences of the downgrade, while not fully known, could lead to higher borrowing costs for the government and consumers over time.

Everyone knows that fear of the unknown is usually worst than the actuality. In this case, the fear of a possible double dip recession causes the US Stock Market Crash. Since the US Stock Market Crash happens on a Thursday, the effect on the world would be a black Friday. There is no way the stock markets of the world going up since Wall Street falls by the largest margin in one day since 2009. Whilst Australia ASX rebounded somewhat on August 9 2011, the moment the China economy feels the full effects of the US global debt crisis, since China owns significant US treasury bills, growth will no doubt slow, and the reliance on natural resources from around the globe and particularly Australia’s resource rich economy will decrease.

A day before the great fall, I was just checking out the share price of Google, which was $601.  Now, the share price of Google is just $577. The usual trend is that when stock market crashes, the price of gold and silver increases. In this case, we see a fall in precious metals as well.

Both gold and silver prices fall. Gold has fallen to $1,645 while silver is below $40.

What happens?  Since stock market and commodity markets usually does not travel in the same direction, what causes the fall in gold and silver price.  The reason is the speculation. Speculators bet heavily on margin, and they sell off to lock in profits.  It is possible that they face margin calls in stock market, and they use the cash on speculating in gold and silver to meet margin calls in stock market.

Since US Stock Market Crash 2011 has happened, and there is no much good news about the US economy, the dip in gold and silver price is deemed as temporary. The upward trend in gold and silver price per ounce will continue. It will continue until the US economy recovers, and the country experiences nearly full employment.

That is still a long way in the future. The question now is how bad the US stock market crash will affect the stock markets around the world. The Great Recession of 2008 has infected all developed economies, not the major emerging markets, and many have become mired in slow growth and high unemployment. And it is Europe and America that are marching, alone and together. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fuelled substantial budget deficits. The response - massive spending cuts - ensures that unacceptably high levels of unemployment will continue, possibly for years. What the US and the European need to understand that with contraction, comes the need for stimulus, not drawbacks. This is quintessential Keynesian economics. To seize any form of stimulate expedites a contraction and the very prospect of the US slipping into a double dip recession. And, with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high in America, more stimulus, not austerity, is needed - for the sake of balancing the budget as well. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction