Friday, July 4, 2008

Stock Market Disaster

Economist Dr. Ravi Batra, of Southern Methodist University, predicts a stock market disaster in about six months.

He argues that the stock market is in the midst of a historic decline due to an excessive reliance in the U.S. on foreign debt. This debt imbalance is causing the value of the U.S. dollar to fall, leading to rising oil and commodities prices as speculators move money out of dollar investments into commodities, such as oil and food.

Batra believes the federal government, under the Bush administration, will do everything in its power to prop up the market until after the November elections, which will be followed by a somewhat rudderless period during the transition to the new presidential administration. It is during the months between November and February, Batra says, the stock market will plummet.

Acccording to Batra, the predicted steep decline will fall particularly hard on those with fixed incomes and those whose retirement is tied up in private investment, much of which will be seriously depleted as the market falls.

So What?

Alan Greenspan and others have predicted that the recession we are now entering will be the worst since WWII. This is to say that it will be the worst since the Great Depression (but nobody wants to say the D-word). You can think of the Great Depression as a failure in two ways: a failed business model predicated on unregulated markets and vast income inequality; and a breach of the social contract. The unregulated markets of the Great Depression were mainly banks that were involved in a speculative stock market that crashed October 29, 1929. Investors couldn't meet their margin calls, banks couldn't meet their obligations to depositors, and about three-fourths of them closed precipitating a crisis of confidence in national institutions. Today's unregulated markets are the mortgage industry, hedge funds, and credit swaps. Income inequality in greater in the U.S. now than at any other time in history--much greater. Some call this a post-Fordist economy. The Ford plant in Dearborn Michigan was organized around the principle that the workers should be able to afford the cars they were building. When workers can no longer afford to buy the stuff they make, this is called a post-Fordist economy. That's where we were in the Great Depression, and we are really close to being there today. When workers can't afford to buy the stuff they make, that stuff doesn't sell. It collects in warehouses and so the retailers stop ordering from the factories. Then the factories slow down and start laying off workers. This results in even less buying power in the market and so forth. Globalization has spread this phenomenon across the globe, meaning that we now live in a global post-Fordist economy. Ouch!
Likewise, many people see the state of today's civil society as a breach in the social contract. The social contract, simply put, is this: government by consent of the governed. When over 70% of the people feel that the country is going in the wrong direction, that is a problem. When too much time passes without significant change, that is seen as a breach in the social contract. What happens next?
I guess that depends on us.