Keith Woolhouse
Sun
For years, we’ve been led to believe that economies couldn’t crash and stock markets couldn’t plunge, because our political and financial leaders had plentiful fail-safe options they could use to circumnavigate the economy around and through depressions, recessions, contractions, inflation and what have you. Tweaking interest rates is the preferred choice to stimulate the economy or ward off inflation to keep everything ticking over.
Once again, we’ve been led up the garden path. While the powers that be have the instruments to deal with economic downturns, it’s usually not until the meltdown has taken hold that they act decisively. Then, it’s like trying to extinguish a forest fire — as fast as they put it out in one area, it flares up in another.
Forest fires, by the way, are contained by creating a firebreak, a gap in vegetation, and letting the fire consume everything up to that point. That’s similar to what’s occurring with the measures being put in place to contain the financial damage from this economic firestorm.
There’s another similarity between wildfires and the economy. Wildfires are an integral part of nature’s ecosystem, helping some plants evolve while promoting germination in others, so what we’re witnessing now is a man-made disaster imitating nature. Eventually the ravaged markets will flourish again.
The reality is that the financial meltdown that has raced through world stock markets is part of a natural economic cycle. Anyone who insists it caught them by surprise clearly hasn’t been paying attention to the headlines. The warnings have been obvious for months, sparked by the subprime mortgage mess and followed by a collapse in the housing market (not just in the U.S., but also in Europe), falling corporate profits, excessive price-earnings multiples, stock markets that continuously reached for new highs, rising unemployment, a decline in consumer spending and a commodity price bubble.
But that’s in the past. The burning question demanding an answer is: When will the economic wildfire be snuffed out?
Federal Reserve chairman Ben Bernanke predicts the global financial markets crisis is likely to restrain the economy well into next year, at least six months longer than most economists had forecast at the outset.
Last Wednesday’s extraordinary move by the central banks of Canada, the U.S., Britain, the EU, Sweden and Switzerland to cut their key lending rates by half a percentage point had been widely anticipated.
Hong Kong dropped 100 basis points. China‘s central bank trimmed its key rate by 27 basis points. Last Tuesday, Australia had cut its rate by 100 basis points, double the expected amount. Only Japan among the world’s leading economic nations failed to act. But with an interest rate at 0.5 per cent, it has little wriggle room.
Financial market leaders and economists had been urging for days for action on the interest-rate front as essential to get the world economy back on track.
While lowering interest rates too far, too fast can fuel inflation, given the ongoing brutal economic free fall, it appears to be the prime mode of attack.
With markets trading at levels not seen since 2003, and the S&P/TSX and the Dow Jones average below 10,000 points and the S&P 500 below 1,000 points, there is no telling where the end lies. The most positive prediction: around mid-2009, followed by an agonizingly slow recovery.
At times like this, most analysts agree: Don’t panic; stay the course; you don’t lose until you’ve sold; consider dollar-cost averaging; timing this market is hopeless. It needs cash and courage to step into the markets now.
© The Vancouver Sun 2008