Global Crisis/Innovation Blog

Why Did the Stock Market Crash? Why Now?  

By Shlomo Maital

   The 1929 Crash…  and the 2011 Crash 


NEW YORK August  4/2011 — The Dow Jones Industrial Average plunged 4.3 percent Thursday, its worst one-day drop since the financial crisis, as global markets melted down over fears of a new economic downturn.  The Dow closed down 512.76 points to 11,383.68. The broader S&P 500 lost 4.8 percent to 1,200.07, while the tech-heavy Nasdaq Composite plunged 5.1 percent to 2,556.39.   The last time that the Dow fell as many points in a single day was in October 2008, during the nadir of the global financial crisis.    

  Why now? 

  The world is finally realizing that another perfect storm has occurred. 

  • Governments are slashing spending, as they find it harder and harder to borrow, and more and more expensive to borrow.  This, at a time when government demand and government jobs are the only things holding up the economy, in Europe and the U.S.
  • People are cutting their spending, in the face of daily headlines featuring dysfunctional political leaders who cannot even understand the problems their nation faces, let along deal with them, in Europe and the U.S.
  • Businesses are piling up cash, but are not even thinking of spending it on investment. American businesses like Apple have huge piles of cash, but it is held abroad where taxes are low, thus not benefiting America.  
  • World trade is weak; when GDP is stagnant, so are imports and hence exports. The only good news in this is that the price of oil is dropping like a stone.

     Failure to address the fundamental cause of the 2007-9 global crisis (massive expansion of dollars in the world, at a time when the world needs a stable reliable currency) has now led to a ‘double dip’, which is simply a continuation of the original crisis, in different forms.  It is not a double-dip recession, but rather the same one that is getting worse.   US Treasury Secretary Tim Geithner’s New York Times Op-Ed last August, “Welcome to the recovery” should cost him his job.  He just didn’t get it.  What recovery???

    President Obama says his Administration will now focus on creating jobs.  Well, how, Mr. Obama?  How about these data, from The Economist: 

    Some 6.3m workers have been off the job for more than six months, and the average duration of unemployment has grown to nearly 40 weeks.  With over 16% of the labour force jobless or underemployed, some firms are advertising that the long-term unemployed need not apply.   Workers recently laid off have a 30% chance of finding work in a given month. For workers off the job for more than six months, that chance is no better than 10%.    Growing ranks of the unemployed are exhausting the available 99 weeks of unemployment insurance. When the current emergency benefits program expires, the maximum duration of benefits may drop to just six months—a quarter of the current time span—although the Obama administration says it will fight for a new extension.  (Chances the House will approve it?  Zero).  Further attempts at fiscal stringency may hack away at other support programs, including food stamps and Medicaid, a health-care entitlement for the poor.  A staggering 45 million Americans now use Food Stamps.

  Happy 50th Birthday, President Obama. Perhaps, given the above, you should come home from Chicago, call Congress back into session and start to address the deep crisis America and the world finds itself in.  This is no time for summer vacations.