CHINA CONCERNS TRIPPED UP THE MARKET!
Over recent months I’ve noted in this column how, even as the U.S. seems not to care what the rest of the world thinks of it, the rest of the world is becoming much more powerful in its own right, at least economically. So while it used to be said that when the U.S. economy sneezes the rest of the world catches a cold, it has been just as accurate over the last five or six years to say that when Asia, or South America sneezes the U.S. economy catches a cold. That is the downside as the world more and more becomes one economy.
In 1998, the roaring 1990s bull market in the U.S. came very close to ending with a plunge into a bear market, through no fault of its own, but due to the crash of overheated economies in Asia; which quickly spread to South American countries, and seemed headed for U.S. shores. The Dow plunged 19% in a matter of weeks on that fear, almost reaching the 20% decline that officially defines a bear market, raising fears that panic might set in and bring on a market crash. The problem was solved by swift action by the U.S. Federal Reserve, which immediately and aggressively cut interest rates, while the International Monetary Fund dispatched $billions in emergency loans to Asian countries. With that encouragement the U.S. stock market took off again, unfortunately into what became its own bubble a year or two later.
Memories of 1998 plagued the U.S. stock market this week, as it declined sharply, in spite of a continued stream of better than expected economic numbers and 1st quarter earnings reports. The market’s new worry was concern over the economy in China , half a world away.
As I noted in this column two weeks ago, the Chinese economy has been thriving for several years and is significantly overheated, perhaps even in a ‘bubble’. Concerned, the Chinese government is taking steps aimed at slowing it down by adopting a tighter monetary policy. The U.S. market caught up to that concern this week. Its new worry is that the Chinese government may have as big a problem slowing its economy as other countries frequently do, and may overcorrect, and drive its economy to the opposite extreme, into recession.
China is not as important a trading partner with the U.S. as we may think when we see all the ‘Made-in-China’ labels on WalMart products. But that’s where this one-world economy comes into the picture in a big way. Too much of an economic slowdown in China would spread to Hong Kong, Malaysia, Singapore, and other Asian countries that are large trading partners with China, which in turn would keep the dominoes falling, into Europe, South America, and the U.S. And so the U.S. market worry has become whether China’s communist government, still learning the ways of a free enterprise economic system, can pull off the difficult stunt of bringing an overheated economy in for a soft landing, without overshooting the runway and bringing it down into a recession, which in turn would have a domino effect on the rest of the world’s economies.
It’s a legitimate concern, since even the U.S. Federal Reserve, which has often seemed to pull economic rabbits out of its hat to stimulate slowing economies or faltering stock markets, has just as often failed at the opposite task of slowing an economy that’s growing too fast, too often bringing such economies into recessions.
Keeping in mind how much more it has become a one-world economy even than in 1998, the U.S. stock market was crossing its fingers this week that China has better luck.
Speaking of how quickly and to what extent it has become even more a one-world economy, on Saturday, May 1, another already sizable economic force outside of the U.S. , the European Union, became an even larger behemoth. Ten more countries, Slovakia , the Czech Republic , the Baltic states , Cyprus , Malta , Hungary , Poland , and Slovenia , became members. That will be of as much importance to the U.S. down the road as the coming out of China into a world economic power.
With the addition of ten more countries, the European Union now numbers 34 countries, united as a single international market. It encompasses 455 million people. Not as large as China , but 55% larger than the U.S. As China did when it moved to a free enterprise economic system, each country within the European Union maintains its own political and cultural integrities. But there will be no trade barriers between them. The thirty-four countries of the EU will use a single currency, the Euro, which has already been coming on strong as an international currency, providing considerable competition to the U.S. dollar. Therefore, selling, shipping, manufacturing, and payments between the countries, will be far less complicated for their corporations, and banking relationships.
This week the U.S. market seemed to worry that while the U.S. is otherwise occupied protecting itself militarily, and focused on changing the political systems in other countries, the rest of the world, has not worried about political differences but focused on economic alliances, and the resulting one-world economy may be facing its first big test. Can China slow its economy without affecting the U.S. market?
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