Are you scared yet?
The stock market has had one of its worse weeks in history, fueled by bleak pronouncements from high tech bellwethers like Cisco and Compaq, and growing fears that the latest Federal Reserve rate cuts , may not be enough to get the economy back on track.
The Nasdaq index lost 8 percent, putting it nearly two thirds of its peak last year. The Dow Jones closed below 10,000, ending its biggest one-week point drop in 11 years, due to the current stock market crash firms who are even thinking of survival must sustain enough profits to be in the market, thus the easiest solution “Get rid of those Lazy Worker”, mainly due to the Stock market crash the unemployment rate in the US is at its all time high, job cuts are estimated at about 86,000 and jobless rate is at an all time high of 4.3%.
Due to this increasing rate of unemployment consumers, are shaken and fearful to invest. America is the proverbial 800-pound gorilla. Consumer spending drives the economy. As that goes so does the country. Could anyone anywhere not be worried?
Judging past performance.
Market turmoil combined with a slowing economy, is taking an increasing toll on investors and business. The situation could be far more serious dramatically cut back on their spending, these figures prove beyond any doubt and the Rainy Day may be here now.
The rest of the world watches anxiously. Europe is less economically dependent on America than ever before- but exports might be hard hit, even so along with global investment. (One respected British think tank recently warned that an American down turn could cause international investments to plunge 30 percent this year.) Asia’s high growth may buffer its economies. But good times may fade if exports slow. Who knows how U.S. troubles may affect Japan, the worlds second largest economy, as it careers from one financial crisis to another?
Welcome to the flip side of globalization.
Both sides of the Story
Japanese Stock market hits 28 month low
Tokyo stocks closed at their lowest point in more than two years on Wednesday, after earlier touching a 15-year low. The benchmark Nikkei average slid 1.4 percent, or 176 points, closing at 12,883. That is its lowest point in 28 months. After the close of trade the Bank of Japan cut interest rates by a fraction in the hope of spurring activity in the world's second largest economy. Japanese stocks suffered from a slide in technology issues and worries about the fragile economy. The Japanese industrial output fell 3.9 percent in January..
Recession risks "very real"
Inventories were also up. Analysts said the data painted an even-gloomier picture of the Japanese economy.
"The risk of Japan going back into outright recession is a very real risk," said Garry Evans, a strategist with HSBC Securities. Japan has been flirting with recession, two consecutive quarters of slowing production. Analysts noted that the broader Topix exchange, down 3.3 percent this year, has fared better than the Nikkei in 2001. The Nikkei, with a heavy technology component, is down almost double. But equity strategists said both the U.S. economic slowdown and domestic Japanese problems are playing into Tokyo's stock trouble.
The U.S. slowdown has hit Japanese electronics equipment makers and auto companies hard.
Definition of Recession
The true meaning of the word
In definition recession means a significant reduction in employment, production, trade and investment. Arthur M. Okun (1928-1980) defined this term as two consecutive quarters of negative growth in the gross national product. In layman’s term recession plainly means economic slowdown in all major sectors of the economy. Economic growth reduces and eventually the economy falls into a depression state.
Types of recession
The U.S. economy is currently in a “Bear market”, a bear market means a 20 percent drop form the market peak, but clarity is not always well served by the language, here are some different scenarios of the U.S. “Bear market”.
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Soft and hard landings – In a soft landing, economic growth slows gradually with out falling too low. In a hard landing, the growth rate falls further and faster.
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U - Shaped Slump – In this, the economy goes down, stays down for a year or so, the rises.
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V - Shaped Slump – in the V-shaped slump the economy goes down for a couple of months of so and climbs back sharply.
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L - Shaped Slump – in the dreaded L – Shaped slump the economy goes down and stays down indefinitely.
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False bottoms – when it appears that a market can’t go down any further, then it does , that’s a false bottom. What investors long for is a true bottom. Because markets cant start climbing until they reach the true market bottom.
Causes of recession
Recession in an economy occurs suddenly and rapidly, the main triggering factor of recession in an economy is the decrease of investment into the economy, which in turn helps to increase unemployment, because with lower investment firms survive in the market by cutting down jobs, and as the jobs go so does people’s consumption capacity they tend to save much more and, again reducing investment, and the spiral grows bigger and bigger.
Crisis in the US economy the true picture
The U.S. economy has enjoyed the longest boom in American history, but is it coming to an end?
Dick Cheney, the potential Republican vice president, says it might be: "We may well be on the front edge of a recession here," he said Sunday on NBC's "Meet the Press."
Cheney raised the possibility in the process of making the case for tax cuts under a possible George W. Bush administration. Senior White House aides also called Cheney's remarks as a pre-emptive move to reduce economic expectations for a Bush-Cheney administration.
But some private economists say there is a real risk of a recession in 2001.
"I think our view here at S&P is there's a 30 percent chance sometime in 2001 where we may go into a recession," said , an analyst at Standard and Poor's. The firm says a record number of businesses are defaulting on bond payments -- a pattern similar to what happened before the last recession, in 1990-1991.
Among other signs of a slowing economy:
-- Vehicle sales dropped again in November. They're currently down 12 percent from their peak in February.
-- Energy prices were up 13 percent last year and 17 percent this year, acting as a tax on the whole economy.
-- The stock market has gone into a skid. The once high-flying NASDAQ exchange, where much of the high-tech sector trades, closed down more than 45 percent from its peak for the year; other indices are down as well, though more traditional stocks' declines have not been as steep.
As a result, consumer confidence is falling -- in other words, fewer people are planning to buy homes, cars or appliances in the next six months and that, could mean trouble.
Authorities don’t expect a recession, nor do many other economists, but economic growth has slowed from 5.6 percent in the second quarter of 2000 to 2.4 percent in the third quarter -- the slowest growth in four years, but still respectable.
Jobs are still plentiful, but the pace of job creation is down. So are the number of help-wanted ads placed in newspapers. And claims for unemployment insurance are going up as layoffs hit not only the dot-com industry, but banking and manufacturing as well.
Many economists say a slowdown in economic growth is a bigger danger than a full-blown recession, which they consider a remote possibility.
Job cuts soared in March ,Announced cuts rose to nearly 163,000 from about 56,000 a year ago
U.S. Economy looses 86,000 jobs; jobless rate at high of 4.3%
Crisis in Japanese economy at a glance
Fearing recession Japan Cuts Rates.
The Bank of Japan cut interest rates after fresh economic data for January cemented fears of a sharp economic slowdown in Japan.
The central bank's Policy Board lowered the overnight money-market rate to 0.15 percent from 0.25 percent and cut the more symbolic discount rate to 0.25 percent from 0.35 percent.
The move followed the release of data showing a 3.9 percent slump in industrial production for January. The BOJ (Ban of Japan) said it acted because Japan was struggling against slowing overseas growth and declining stock prices.
BOJ Governor Masaru Hayami said the decision to cut short-term interest rates was a precaution against Japan falling into a deflationary spiral.
"I believe a 0.1 percentage point cut would have a big impact. Any more than that would have undermined market functions," Hayami told a news conference.
Dramatic confirmation
The industrial output figures provided dramatic confirmation of the unfolding weakness and an impeccable reason for the independent BOJ to cut rates without its action being interpreted as caving in to political demands.
"This morning's data on industrial production gave the Bank of Japan the fundamental data that justified easing monetary policy.
As for the timing, waiting until the next meeting in March would have meant a build-up of political pressure," said Koji Shimamoto, chief strategist with BNP Paribas.
James Malcolm, an economist with JP Morgan agreed. "The easing is not entirely a shock given the terrible output data we had this morning," he said.
"Entirely a sensible step"
"Those figures certainly raised the downside risks for the economy, so the BOJ has taken a step closer to zero rates, which is entirely a sensible step," he said.
Economists had been bracing themselves for a soft output report because of weakness in the United States and Asia, Japan's major export markets. But those polled by Reuters had expected on average a rise of 0.1 percent compared with December, adjusted for seasonal variations.
Even the most pessimistic forecast was for a drop of 0.8 percent. In the event, the decline was the steepest in six years.
"The number is not good, not good at all," said Shinya Yasumatsu of the Dai-Ichi Kangyo Research Institute.
Technical and electronics company particularly affected
Japanese techs suffered particularly badly. Nasdaq hit a two-year low on March 5 2001.
"High-techs took a beating after the Nasdaq fall," said Akihiko Sakakibara, senior fund manager at Sumitomo Marine Asset Management. The index closed down 4.4 percent.
The Nikkei was undermined by falls in fiber-optic makers such as Furukawa Electric Co. JDS Uniphase Corp, the world's largest supplier of fiber-optic components, said it would cut 3,000 jobs, or 10 percent of its work force. It faces slowing demand and growing competition.
Furukawa, Japan's top optical fiber maker, slid 10.3 percent to ¥1,550 as the fiber sector sold off. Furukawa has a 9.8 percent stake in JDS, whose shares had already plunged 15 percent in New York.
Reports of delays in Qualcomm Inc.'s wireless services hurt shares of Japanese suppliers of chips and mobile-phone equipment. Nikon Corp. Nikon, a major chip-equipment maker, dropped 7.0 percent to ¥1,391, after falling 7.49 percent on Tuesday.
"The market here cannot help but react to more U.S. corporate profit warnings," said Hiroyuki Nakai, investment research manager at Tokai Tokyo Securities.
The Nikkei's close was a rebound from an intraday low of 12,784. That was its lowest point since December 1985, when it began its bubble-era run of inflated stock and asset prices.
The capital-weighted Topix index shed 1.07 percent to 1,241.48. That's its lowest close since last Wednesday.
Analysts said the Nikkei could test 12,500 in the near term.
Marc Desmidt at Merrill Lynch Investment Managers said the depressed market reflects a lack of investor confidence in Japan's recovery. Investors outside Japan are particularly skeptical, he said, and the numbers now back that sentiment.
The Bank of Japan was cutting interest rates because Japan's recovery was faltering. It lowered the overnight money-market rate to 0.15 percent from 0.25 percent.
Analysts said the poor industrial production data allowed the bank to cut rates without seeming to cave in to political pressure.
The selling was particularly aggressive ahead of the Bank of Japan policy board meeting. Experts had expected no change.
More trouble
Just as troubling was a 0.6 percent increase in inventories, following a 0.1 percent drop in December, suggesting that manufacturers will have to cut output further to work off stockpiles of unsold goods. The slide was mainly due to sagging exports, the perennial mainstay of the world's second-largest economy. The impact of the slowdown in exports is substantial. Exports of cars to North America fell, and the impact of falling production was also seen in a slowdown in exports of electronics goods
METI downgraded its assessment of the underlying production trend, which it now says is moving sideways. It forecast a rebound in output of 2.7 percent in February before a renewed decline of 1.4 percent in March.
"First sign of slow down"
"It's a very bleak number. It's the first real sign we've got that the Japanese economy is slowing down very substantially." Adding to the gloom were a deeper-than-expected 11.1 percent fall in housing starts in January from a year earlier and a 12.5 percent decline in construction orders.
The Nikkei 225 average fell 2.11 percent in early afternoon trade to 12,784.17, its lowest since December 10, 1985, as investors shortened the odds of a return to recession after a decade of slow, on-and-off growth. The Nikkei later pared its losses, but still closed 1.35 percent lower, while bond prices -- which thrive on economic weakness -- rose sharply.
The risk of Japan going back into outright recession is a very real risk.
Factors responsible for this Crisis.
The US Factor
In the US, the Stock market plays a major role to sustain the economic development of the country, and for years the tech or the technology market stocks were magical. Unimagined wealth was yours simply for logging on to the New Economy mind-set, clicking three times and whispering, “There is no place like a good home page.”
Many bought that line! And were more than eager to invest into the dot.com industries, which need very little capital to run, but had high profits, thus the payoff was significantly over whelming. From the end of 1997 through March 2000, some $112 billion flowed into aggressive-growth-stock mutual funds, the kind that loads up on the Yahoo! , AltaVista and Akamais. U.S. investors anted up $52 billion to buy 585 tech IPOS during the same period-roughly the same amount spent on twice as many deals over the previous years. At the peak, just over a year ago, tech stocks accounted for 35% of the S&P 500’s market value up from 12 % in 1995. It was the mania of the ages and you were in front now. So the question is where did all this magic go, the answer is it just went back in to the bottle.
A Bad case of ‘Mad Dow’ disease
So where did all the dreamers go? Did some one ring the bell saying the jig was up, time to crash out? Nope they never do. The tech industries have always been a spark in the U.S. stock market, but due to their low use of capital these firms proved to be more of a risk, tech industries are easy to setup but are highly competitive, the so called dot.com industries lured investors into their traps and cemented them down good! As competition took its toll major companies shut down and as many stock investors, have lost million of dollars in the stock market they are now very scared to invest their money, and this in turn is causing a further tumble of the economy.
The U.S. is a consumer driven economy and this stoppage of investment have dropped the dollar value to $10.6 trillion dollars , by February 2001. Lack of investment with further jobs cuts is taking their toll on the Americans. Consumers are scared and Savings are up. If this keeps up the U.S. in for some real hard times ahead.
The other side of the Pacific
Japan is the country which is hit hard by the slump in the U.S. economy, Japan is the second largest economy in the world and is totally export dependent on the U.S. As the demand for Japanese cars and electronics rock bottomed the Japanese have entered into a phase of recession.
Japan’s problems make prospects of the U.S. economy look downright sunny. The main cause of this reduction in trade surplus is the fall of exports. By the end of this month the Japanese government, will have a total public debt of $ 5.5 trillion dollars, a head spinning 130% of GDP, on the other hand the Americans have a mere $3.4 trillion in Federal public debt, i.e. 35% of GDP.
Foreign investors are not eager to invest into the Japanese economy in their current situation, as a result Japanese economy, will plummet even further.
Will this be the end of the Japanese capture of the world market? Well, its too soon to say.
Impact of the crisis in other countries.
Third world countries will die
The U.S. is the largest consumer market in the world, it is refereed to as a huge 300-pound gorilla, and as the economy of the collapses so does the world. The countries mostly affected will be the third world or developing countries.
Third world countries like India, Pakistan; Sri Lanka will be most drastically affected by the upturn of the two most powerful economies of the world. If we emphasize on Bangladesh we can see evident proof that there will be serious economic implications in our economy.
Crippled in the Grasp of Recession
The major exports of Bangladesh are garments, jute, jute goods, leather, and shrimp and the countries exported to are US 33%, Western Europe 39% (Germany 8.4%, Italy 6%) (FY91/92 EST.) Because of the U.S. economic slowdown the demand for the exported commodities will reduce significantly, as the result Bangladesh will suffer from a much more greater trade deficit, Stopping the progress of Bangladesh in its tracks.
As for imports Bangladesh is ever more dependent on the U.S. than any other country of the world. The major import items in Bangladesh are, capital goods, petroleum, food, textiles and fertilizers. And the import partners for Bangladesh are Hong Kong 7.5%, Singapore 7.4%, China 7.4%, Japan 7.1% and U.S. 9.84% (FY91/92 est.) and the total imports in 1998 totaled $4.7 billion, of which $ 53.752 million was from the U.S. alone, the crippling U.S. economy can no longer sustain the export of its goods to Bangladesh due to its own problems, Bangladesh is on the forefront of being affected by this recession.
Welcome to the flip side of Globalization
The world has now become the Global village and chopping of the head of the lion will leave the rest of the body dead, this is what is happening to the U.S. the coldness of the economic slowdown is felt very strongly mainly by Japan, who is the second largest economy of the world, and the largest importer of electronic and automobiles to the United States. As soon as the slump hit America Japans trade surplus plummeted to a rock bottom of a mere 64.8 trillion dollars in 2001 while it was at a staggering 800.9 trillion dollars at the beginning of the last decade. The Japanese economy slowly moved towards recession independent of the U.S. but the recent U.S. economic slowdowns have boosted the economy into ruins.
Not only for Japan all major export countries to the US will be seriously affected due to reduced demand within the US economy. The scenario of 1932 is even closer than we think.
Conclusion
The big question is whether this will indeed change is the weeks ahead, especially if the carnage in Wall Street continues. We might better cast our horizons lower – and look towards what the Joneses are doing. One afternoon last week Lindsey McKenzie, a nursing assistant with tree kids, tried on three pairs of sandals at George’s Shoes in Boston. She held on to a black and a white pair wistfully. You could almost see her Neurons wrestling with the eternal question.
“To buy or not to buy?”
“I don’t have the money this week,”She finally told the clerk. She exited the store, her belt a notch tighter, figuratively.
The fate of the worlds economy now rests on a billion such small decisions, played out in a store aisles and around kitchen tables across America.
The end is closer than we can imagine!
Bibliography
Books
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Modern economics , 4th edition, published 1994 by Philip Hardwick, Bahadur Khan and John Langmead.
- Dictionary of Economics , reprinted 1992 by C.S. Nagpal
- Introductory economics by G.F. Stan lake MA BSc(Econ)
Current resources
Magazines
- News week publication March 26 2001
- Times publication March 19 2001
- Dhaka Courier publication March 10 2001
