When stock markets tumble they make headlines. #BlackMonday is trending on Twitter.
This crisis has been long in the making. To overcome the North Atlantic Financial Crisis – you may refer to it as the Great Recession of 2008 – governments and central banks began to flood the market with money.
Quantative Easing it would appear was the sticking plaster that masked many sins. Global stock markets soared. The real economy barely showed signs of life.
Beijing, reluctant to see decades of hard economic growth succumb to the greed of Wall Street, spent almost $600bn propping up its economy. That delayed the inevitable. Not just for China but for many commodity and oil exporting nations.
Over the last 18 months, currencies have been in free fall as more than a $1 trillion owned mostly by Western funds head back to the US as the Fed considers raising interest rates. At the same time, China hasn’t been buying and hoarding commodities.
That is why we see nations like Brazil, where more than 50 percent of its exports are raw-material related, heading for recession. Brazil has made great strides – more than 40 million people have been lifted out of poverty in a decade. To pay for poverty-reduction programmes the government has relied on income from the sale of commodities and resorted to borrowing money. But it’s done little to diversify by spending on infrastructure and education.
Commodity prices have been on a downward trend since their peak in March 2011. Miners have been in trouble, for some time firing workers.
Beijing is struggling to manage an economic transition from the factory of the world into a consuming nation. Its currency devaluation probably sent the signal Beijing was out of ideas and the best thing was to help its exporters.
China’s attempts to get banks to lend money to businesses have faltered as too many are burdened with debt.
The growing legion of stock market investors stand to lose not only their savings but the money they have borrowed to bet on stocks.
China, having failed to stop the rot in its stock market with $400bn in state funds, is now deploying its $547bn pension funds. Stopping markets from crashing is like catching a falling knife. It’s best to stand back and let the rout run its course.