The Dow Jones Industrial Average dropped about a thousand points in the first five minutes of trading today. It’s recovered substantially at this point (about 10:45 east coast time) and is down around 650 points for the day so far. The S&P 500 is down almost 50 points and the NASDAQ is down about 115 points. Sounds like we (by which I mean you, who may be an actual investor for all I know) are in for a real cool ride.
The last thing I’m even going to pretend to try to be here is some kind of stock market guru, but this downturn appears to be starting in China. Before the New York Stock Exchange opened and began plummeting this morning, China’s markets declined so badly that they’ve now lost all of their gains on the year. China’s economy certainly looks like it’s hitting a rut: manufacturing is down, growth is down, and earlier this month Beijing devalued the renminbi (yuan), which is good for Chinese exports but bad for, well, everybody else. China’s commodity purchases have been dropping, and that means the global market for raw materials is shrinking severely. Generally speaking, China is probably headed into a bumpy transition from a mostly manufacturing-based economy to something more mixed, and from an economy that was growing at ridiculous speeds to one where growth is slowing down to levels more in line with other industrialized countries.
Krugman argues that what’s really happening is that, in his words, “too much money is chasing too few investment opportunities”:
More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a “global saving glut”: a huge excess of savings over investment in China and other developing nations, driven in part by policy reactions to the Asian crisis of the 1990s, which was flowing to the United States in search of returns. He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. (Some of us did.) But his suggestion that the U.S. housing boom was in part caused by weakness in foreign economies still looks valid.
Of course, the boom became a bubble, which inflicted immense damage when it burst. Furthermore, that wasn’t the end of the story. There was also a flood of capital from Germany and other northern European countries to Spain, Portugal, and Greece. This too turned out to be a bubble, and the bursting of that bubble in 2009-2010 precipitated the euro crisis.
And still the story wasn’t over. With America and Europe no longer attractive destinations, the global glut went looking for new bubbles to inflate. It found them in emerging markets, sending currencies like Brazil’s real to unsustainable heights. It couldn’t last, and now we’re in the middle of an emerging-market crisis that reminds some observers of Asia in the 1990s — remember, where it all started.
This glut of capital is apparently now heading back to the US, which means more bubbles for us, I suppose. Krugman suggests that this savings glut has a number of causes, including slower population growth, a dearth of any fresh investment-generating technological innovations, and pro-austerity policies shrinking government spending and therefore demand. Unfortunately, since politicians (at least in the West) are hard-wired to think that leadership means making “tough choices” (on behalf of other people, naturally) means austerity forever, you can expect the beatings to continue until, ah, actually they’re just going to continue.
Meanwhile, oil is still cheap, which is good news for consumers but bad news for energy companies and kind of a mixed bag for the planet (cheap oil means cheap gas means more driving, which is bad, but cheap oil also makes things like fracking nonviable, which is good). Cheap oil might help the US ride out the worst of this Chinese fallout. Or it might not, I seriously don’t know.
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