Just when you hope that the economy will catch a wind and start taking off, here comes a bunch of news that things aren’t so great right now. The American Dow Jones had a 500+ point hit, with 150 points coming in the final hour. While the decline (4%) is no record breaker–in fact, we’ve had 7% decline days, occasionally, based off less hyped news than the phony default crisis–it seems reasonable to point the finger at Congress and its screwing around since the year began as the reason for the funk.
Never mind all the whacked out economic philosophies out there, that, somehow, cutting the budget is going to lead to prosperity, the plain truth is that there is lack of what economists call “aggregate demand” right now. That’s why the economy is growing just 1%, if that. The reason there is no demand is that there aren’t many open jobs. It’s like the financial crisis just cut out 3% of the economy, 3% of the jobs, and nothing to fill in the space that that hole left.
As long as there was the stimulus from the early Obama Administration, and the “QE2” Federal Reserve Bank easing, there was a wind for the U.S. economy’s sail to catch. The QE2, which was basically a money creation program, ended on June 30, then the phony default crisis began. During that critical month, more and more reports began to come out, saying that the economy was in fact as weak as what many people sensed. Congress, and particularly the Tea Party element, wasted time, and when they finally caved into the Republican hostage taking on the issue of whether it would be new revenues or just cuts, it was clear that there really isn’t much to move the American economy forward.
The programmed cuts in the deal (effective 2013) also mean that it’s unlikely there will be Stimulus Number Two, and I think that’s what sent the market tanking.
I don’t see this latest upset as a financial crisis a la 2008, because bonds of any decent quality are having a great rally—they’re up. (The headlines aren’t telling you that investment-grade corporate bonds are doing almost as well as government ones, which wasn’t the case in October 2008.) But the market moves are very much like the ones presaging a mild recession.
Throughout the golden years for the middle class in the 20th century, the government always kicked into action to make sure the downside of a contraction was mild. Nowadays, it seems like some politicians stoke up any kind of trouble in the economy for political effect or supposed political gain. Are the Republicans trying to start a recession in order to make it better for themselves in 2012? You have to wonder.
[Update: October 13, 1989. There was a day. An airline merger fell through, and the stock market went down 6.9%. Though people at the time blamed it on UAL (the company involved), later researchers showed that very little of the selling involved that deal, and it was instead a case of market jitters, probably for reasons having to do with the 1990 recession that was on the horizon. Once the selling starts, it’s hard to contain.]