home > news > Member Stories > Is This Another Financial Day of Reckoning?

Is This Another Financial Day of Reckoning?

As stock markets plummet and investors pile into Swiss Francs, Is this the return of the credit crunch?

Publish a story

member story

Traders watch in dismay as the Dow Jones plummets.

It all seems painfully familiar. Uncertainity about debt in the United States has spilled over into Europe, and a full-blown debt crisis has spread into the markets. The Dow Jones has plummeted, while across the world, markets are falling. It was believed that a debt ceiling deal in the United States would restore consumer confidence, but since the 2nd August, when President Barack Obama signed into law a debt ceiling deal that also brought in over a trillion dollars, the markets have gone into meltdown. As stocks continue to plunge, BusinessBecause asks: what's to blame?

For some commentators in the United States, the debt ceiling deal – which puts austerity measures on an economy where demand is already low and unemployment stands at almost 10% - is to blame for the markets’ fall. As Stephen Gandel, business editor at Time and regular blogger at the Curious Capitalist, writes, “a cut in spending, be it from consumers or the government, during a recession is sure to cost the economy jobs”. The cut is made worse by the political reality of the post-debt ceiling relationship between the Republicans and the Democrats.

It is highly unlikely that there will be renewed fiscal stimulus until 2012 at the earliest; what is likely, however, is that the Bush tax cuts will be allowed to expire, meaning that just as demand is flatlining and spending is reducing, taxes will go up, further reducing demand. Or, as the liberal economist, New York Times columnist and Nobel Laureate Paul Krugman puts it: “Policy makers have been worrying about the wrong things, obsessing over deficits when the real problem was lack of growth.”

This obsession with deficit reduction has led to a suffocation of demand with dire consequences for the American economy. As goes the United States, so goes the rest of the world, and what the Washington Post’s Ezra Klein describes as a worldwide “run of crises and bad luck”, encompassing the Eurozone crisis and the Japanese earthquake, is not helping matters either.

But perhaps the underlying problem is that the financial crisis in 2007 was not dealt with, merely delayed. The vast debts of the banking sector were taken on by national governments, at massive cost to taxpayers worldwide. But the debts remained “If you took the view four years ago that the quantum of debt in the system was unsustainably large,” the BBC’s Robert Peston says, ”Then…the day of reckoning was being postponed, not cancelled.”.

The day of reckoning may very well be upon us.

Share |

This is member-submitted content.

BusinessBecause does not take responsibility for member-submitted content.

When publishing this story the member accepted responsibility for the content according to the User Generated Content policy in our T&Cs

Comments

8 August 2011

It does always seem to be the case Jhonny

Clive Eastern

5 August 2011

It's always the Swiss bankers who come out on top...

Johnny

Post new comment

Login to post new comment or post a quick comment below (your email address will remain private):

Suggestions:

By Stephen Bush

05/08/2011

Tags:

MBA
Economy
business
Commentary

I can confirm that it is really international. My class has 15 nationalities out of 30 students and the average age is 30 years old.
from Jean-Patrick TSANG KWONG U