Beginning Of The US Mayhem

stockm1.jpgA story of bear hugs, tamed bulls and a street bathed in blood. The steepest fall in the streets of business and there is no telling where the mayhem will end. Here is the story of the fall of one of the world’s greatest economic empire – the United States of America.

In US, the unemployment rate leaps to a two-year high, record numbers of people are forced out of their homes and the Wall Street nose-dives again. Such is the fallout from a housing meltdown that threatens to slingshot the country into a recession. The big economic question these days is whether the weakening economy will survive the strains or collapse under them.

The odds have grown that the economy will slip into a recession. At the beginning of last year, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable this year.

Hopefully, it can be avoided; President Bush and the Democrat-controlled Congress are exploring economic rescue measures, including possible tax rebates. Federal Reserve Chairman, Ben Bernanke pledged to lower interest rates as needed. The idea is to induce people to boost spending, especially on big- ticket items such as homes and cars, and revitalize economic activity. In the same line, Federal Reserve has cut interest rates by 75 basis points in a surprise inter-meeting decision on Tuesday, making the rates as low as 3.50 percent. This cut would lower the rates that are charged to millions of consumers and businesses for many different types of loans.

The Federal Reserve is not currently forecasting a recession. The Fed said. “We are forecasting slow growth.” Analysts predict the Fed will keep doing the rate cut in the months ahead as part of a campaign that started in September, when the central bank cut rates for the first time in four years.

Trying to put the fragile economy back on to a firm footing is the biggest challenge for Bernanke since his taking over the Fed nearly two years ago. His job requires a deft reading of the economy’s vital signs and keen insights into what makes people and businesses tick. It is their behavior that shapes the economy. And it is in turbulent times that the Fed chief needs to bolster public and investor confidence.

Nevertheless, within minutes of the opening bell on Tuesday, the NASDAQ dropped to a level indicating it has crossed the threshold of what is considered a bear market, or down 20 percent from its October peak close. The Dow Jones industrial average was down 185.91 points, or 1.54 percent, at 11,913.39. The Standard & Poor’s 500 Index was down 22.68 points, or 1.71 percent, at 1,302.51. The NASDAQ Composite Index was down 57.72 points, or 2.47 percent, at 2,282.30.

The fear is that people will clamp down on the spending and the businesses will put a lid on hiring and capital investment, sending the economy into a tailspin. By one rough rule of thumb, a recession occurs when there are two consecutive quarters, six straight months, when the economy shrinks. The National Bureau of Economic Research, the recognised arbiters for dating recessions, uses a more complicated formula. It takes into account such things as employment and income growth. By that measure, the last recession was in 2001, starting in March and ending in November.

Tax rebates aimed at stimulating the economy were part of Bush’s $1.35 trillion in tax cuts in 2001. They were credited with helping to make the recession short and mild.

The current housing slump, made worse by a credit crunch, is weighing heavily on economic activity. Upcoming reports are expected to show that the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first part of 2008. Consumers, whose spending is indispensable to a healthy economy, are expected to have tightened their belts.

High energy prices, weaker home values that make people feel less wealthy, and a deteriorating jobs market all figure into more caution on the part of consumers. On the currency front, dollar is facing serious trouble against world’s other strong and emerging currencies such as Euro and the Asian currencies. The unemployment rate jumped to 5 percent in December from 4.7 percent, fanning recession fears. It was the biggest one-month gain since October 2001, during a time of massive layoffs in the travel industry after the September 11 attacks.

However, practically, the coming quake of fall of the bull of world economy can be clearly and distinctly sensed in the markets, across the world, which are under a beating since last two weeks and primarily India markets that plunged the most!

Saurabh Sharma