Bang Bang -You're
The long anticipated
sound of overinflated Internet, Communications and Technology (ICT)
bubbles finally bursting can be heard across all of the world's major
stock exchanges. The resultant stockmarket crashes have indeed been
something to behold. Initial falls of over sixty percent in the ICT
dominated NASDAQ exchange, since its giddy heights of 6,000 plus just
two years ago, have led to a domino effect throughout other technology
bourses, such as the UK's techMARK.
This copycat exchange was launched in order to capitalise on the success
of the NASDAQ and as a result briefly touched highs of 5,700 points.
However, as it is warned in the small print of financial advertisements,
the value of stocks and shares can go down as well as up. This rather
important point seems to have been forgotten by many over zealous investors
over recent years, who have been eager to join the party so as not to
miss out on the promised profits. They have had to learn the hard way.
Rising stars such as the techMARK and many others have been dragged
back to Earth with a bump, by the collapse of share prices in the NASDAQ.
This sharp decline in the value of shares has affected many of the larger
so-called blue chip firms such as Abbey National, British Airways and
Railtrack. These falls have been triggered as a consequence of decreased
investor confidence in the performance of fragile markets. Investors
want a way out, preferably with as much of their initial stake as possible.
It seems that largely as a result of these stockmarket losses, Economists
and Bankers are talking of a massive global recession.
Yet the UK economy is still growing strongly with inflation and unemployment
levels both at their lowest levels for decades. There have been industrial
problems in the past which have affected the general population of the
UK to a far worse extent than fluctuation in the value of shares. The
mass utilities strikes of the 1970s and early 1980s are just one example.
Surely the scaremongering of central bankers Alan Greenspan and Eddie
George is merely the actions of dull men in dull suits trying to justify
their expensive existence. Or is it? If the past has taught us anything
it is that the events of the stockmarkets, particularly in America are
a reliable measure in attempting to gauge the health of the global economy.
As the saying goes, if America sneezes, the whole world catches a cold.
Raging American Bull
It's all very well to make cryptic statements such as these, but what
does all of this actually mean? Will earnings fall in Europe as jobs
are lost in America? Is that holiday to the Caribbean going to have
to be put on hold for another year? The world economy has been enjoying
one of its longest and most prosperous periods of growth in a generation.
Last year the rate of growth was almost five percent according to the
World Bank - a figure equivalent to several trillion dollars. A large
proportion of this growth has been due to the American economic juggernaut,
which has led world demand and whose companies have been only too eager
to create world supply. As companies have prospered, so have their employees,
who continue to feed the monster with their fatter pay packets. Americans
have also bought into the (rather misguided) belief that their companies
will continue to grow at a rapid and sustainable rate for the foreseeable
future, by purchasing company shares as a form of savings.
high level of consumer demand in the USA for both domestic and imported
goods and services has led to the economic growth of other major
suppliers such as Europe and parts of Asia. Higher levels of business
investment continue the global ripple effect, so that European and
Asian demand has grown in line with that of their American counterparts.
There have been a number of significant developments, however, which
have recently altered this rosy picture and led to the gloomy predictions
of worldwide recession.
What is going
Firstly, saturation point has been reached in many areas of formerly
strong consumer demand. For example the global market for computer and
telephone hardware has dramatically shrunk over the last year, causing
international behemoths such as Motorola, Cisco and Intel to announce
profits warnings and subsequent job cuts.
Secondly, much of the consumer spending which has driven the Economic
boom in America has been as a result of credit spending i.e. people
spending money which they simply do not have using their credit cards,
in the expectation that future earnings growth will cover their profligacy.
This has not proven the case, as US earnings growth has risen slowly
in spite of tightening labour market conditions (i.e. less skilled workers
available due to higher levels of employment). As a consequence, consumer
spending has been gradually dropping. This has led to large firms such
as Ericsson and Proctor and Gamble to announce profits warnings and
Both of these points have contributed to the fall in share prices. This
has proven doubly damaging for the US economy, however, as roughly half
of the adult population have invested in shares over the last ten years.
The sudden drop in the value of these hitherto strong assets has meant
that spending confidence has suffered. Also, many US bank loans, both
to businesses and individuals, have been based on the guarantee of stocks
and shares. Now that these have fallen in value, the banks are increasingly
demanding new collateral or their money back. All of this has the cumulative
effect of America's 100 million small investors selling their holdings
and causing the panic selling which has gripped the world's stockmarkets
over the last week.
What can be done?
According to Economists, the solution to stockmarket malaise is to cut
interest rates. The idea is that if the cost of borrowing is made cheaper
both for investors and businesses, then investment will become more
attractive and so shares will stop plummeting in value. Interest rates
have been repeatedly cut in America over the last month and still the
stockmarkets have suffered.
A further solution to a crisis of confidence in the economy is to cut
taxes. This is intended to stimulate consumer spending, as they feel
as though they have more money in their collective pockets. This course
of action is currently being debated in America as one of President
Bush's principal policies. Whether it has the desired effect is another
matter, as people may well feel that there are tough times ahead and
begin to save rather than spend.
In 1997, when the world's economies were reeling following the financial
collapse in Asia, the strength of the American economy dragged us back
from the brink of recession, despite the best attempts of the global
media to convince us otherwise. This time, however, America is the crippled
patient and it is questionable whether the European economy is a large
enough crutch to support it and the rest of the world.
Foot and Mouth
It is possible that we may just have managed to maintain a high enough
level of consumer spending and business investment to stave off a recession,
had foot and mouth disease not reared its ugly head. The disease has
spread from Britain to the Netherlands, France and Ireland and will
surely grip the whole of Europe before summer, such is its infectiousness.
We have already seen the devastation which has been caused in rural
communities as livestock is culled and more importantly, as tourists
are discouraged from visiting. In the three weeks of the foot and mouth
outbreak in the UK, it is estimated that the economy has lost over £1
billion. This figure is set to rise as businesses cancel orders for
new goods and machinery and the ripple effects of a fall in income spread
to towns and cities. It has been mooted in North America that restrictions
on the movement of people from Europe, nevermind livestock, are being
given serious consideration. The effects of such a ban would be horrendous.
world's financiers can pull something quite dramatic from their
briefcases, than there is no way of avoiding the economic slowdown
which has been precipitated by stockmarket crashes. J.M. Keynes
once said that: "In the long run, we're all dead". It
would certainly seem that, in view of the evidence, the world economy
is up against a firing squad from which there is no escape.
© Stuart Macdonald
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