I can’t help but think what’s going on in global markets seems like a re-run of what happened in the fall of 2008, when Lehman Brothers failed, banks had to be bailed out and the worst recession since the Great Depression ensued.
AP business writer Alex Veiga neatly sums up what’s got people worried:
Investors are increasingly worried that the mounting market turmoil could put a brake on the global economy at a time it is already struggling with a litany of issues — from China’s slowdown, low inflation and plunging energy markets.
And note this from a Reuters report by Marc Jones from London, quoting Rabobank European strategist Emile Cardon:
“What is different to previous times is that the bad news in now coming from everywhere, China, Portugal the U.S. the commodity sector the banking sector. It’s like several smaller crises could combine into one big crisis.”
Investors are dumping stocks, commodities and corporate and high-yield bonds and scrambling to the perceived safety of Uncle Sam’s paper. Year-to-date, the yield on the 10-year U.S. government note, one of the most important global benchmarks for interest rates, has crashed from about 2.25% to less than 1.60%. Yields on longer-term bonds are also falling — investors are bidding up the prices of these ultra-safe securities, reducing their yields. This has flattened the yield curve, as the Reuters reporter noted, “in a way that has presaged economic recession in the past.”
What’s different today from September 2008? At least two things in my mind.
First, U.S. banks, if not their European cousins, are well capitalized, much stronger than in 2008. Uncle Sam is not going to have to shovel huge gobs of cash into the banking system. Whatever else its faults, Wall Street is not in need of another bailout.
Second, the collapse of commodity prices puts more money into the pockets of consumers, both in the U.S. and globally. Note this from Diana Choyleva, chief economist at Lombard Street Research in London, writing in the Financial Times January 21:
It sounds paradoxical, but much weaker Chinese growth is exactly what the global economy needs to rebalance. In a world of sluggish consumer demand, the slide in commodity and energy prices that China’s slowdown has helped to bring about entails a huge transfer of income from producers of natural resources to consumers. Globally the resulting boost to household incomes will more than outweigh the hit to corporate revenues and spending.
Choyleva also put her finger on the problem:
Unfortunately the more investors fret and the more turbulent financial markets are, the more probable it is that western consumers will save the gains in real income that they are enjoying rather than spend them, cutting short a global recovery.
That may be exactly what we are seeing now.
Is the U.S. economy headed into recession? I don’t know, frankly; answering the question is beyond my pay grade. What I do know for sure is that this recovery, now more than six years old, never amounted to much in the first place. Compared to past recoveries in the era since World War II, it remains a Great Disappointment. And it is getting rather long in tooth.
It’s an old line, incorrectly attributed to Mark Twain: “History doesn’t repeat itself, but if often rhymes.” I can’t improve upon it except to say: Recessions happen.