Commentary Magazine


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We’re Cooked

Today, Asian and European markets plunged, threatening to bring American stocks with them. Selling of Dow Jones Industrial Average futures was prohibited early morning as they reached circuit-breaker lows. To calm investors, the New York Stock Exchange had to confirm this morning that it would open as usual. The Big Board also reminded everyone of its own circuit-breaker provisions, which would end trading should the Dow fall through pre-determined levels.

At the opening, the market plunged, shedding 504 points. Yet it could have been worse, “Today might be the day where everybody throws in the towel,” said Peter Cardillo of Avalon Partners before the markets opened. “People are saying ‘I’ve had it, I can’t take it anymore, I’m selling everything.’ ” For some reason, people did not panic, and the Dow bounced off its early-morning lows. If this sentiment holds, the worst that will happen today will be another triple-digit loss, which in these volatile times is no longer news.

Yet just because the global financial system did not fall apart today does not mean it will not crumble next week. In the early stages of this year’s crisis, excesses in the financial system were forcing markets downward. Now, investors are starting to realize that the underlying global economy is weak. Even the most exuberant people on the planet, real estate developers in Dubai, are starting to feel the pinch.

The most telling indicator of global sentiment-the price of oil-shows that pessimism has taken hold. Today, OPEC cut production quotas by 1.5 million barrels a day to stop the “dramatic collapse” in oil prices, but prices fell nonetheless. From a high of $147.27 a barrel in mid-July, oil is now trading around $65. This morning, CNN’s Poppy Harlow mentioned the possibility of $37-a-barrel oil. When people are thinking that the price of this commodity could approach the cost of its production, it’s clear the global economy is failing.

And as it fails, no place is safe, not even the country with the world’s most dynamic major economy. This Monday, Beijing announced that growth of gross domestic product fell to 9.0 percent in the third quarter. That sounds high, but it represents the lowest increase in five years and a sharp slowdown from growth in recent periods. The problem for China is that it has an economy excessively dependent on exports-exports account for an astounding 38 percent of GDP-at a time when consumers around the world are cutting back on consumption.

The coming downturn will inevitably hit China especially hard because its exuberant growth in the past has created dislocations, such as questionable bank loans, unfunded social welfare obligations, and a degraded environment, just to name a few of them. Up to now, the country’s constant growth has tended to hide these problems. Yet as China’s economy goes into reverse, they will inevitably emerge. China’s own protected stock markets have fallen by about two-thirds this year alone.

“Today more than ever the world is looking to China to be a big contributor to global economic growth,” said Henry Paulson on Tuesday. Yet China is looking to the rest of the world to help it get its growth back on track. If that is our Treasury secretary’s game plan, we’re really cooked.