World Economy

Market Gyrations Deepen Global Recession

Market Gyrations Deepen  Global RecessionMarket Gyrations Deepen  Global Recession

The turmoil on global financial markets last week shattered the claims of the world’s economic and financial authorities to have a solution to the breakdown of the capitalist system that began with the financial crisis of 2008.

As a number of commentators observed, the wild swings on Wall Street and in bond markets signified that the crisis that erupted six years ago not only remains unresolved, but could return in an even more explosive form, WSWS (World Socialist Web Site) reported Tuesday.

The realization that nothing has been done to stabilize the financial system coincides with the recognition that so far as the underlying real economy is concerned, the world is moving into a period of stagnation and ever-deepening recession.

Earlier this month, the annual meeting of the International Monetary Fund (IMF) took place, bringing together the world’s state treasurers, central bankers and top economists. It was held in the wake of data showing that the Eurozone is moving into its third post-2008 recession, growth is slowing in China, and the pace of economic expansion is sharply falling in emerging markets. Nothing was put forward to counter this situation.

At the beginning of the year, the conventional wisdom in leading bourgeois economic circles was that growth in the United States, albeit somewhat constricted, would eventually pull the rest of the world behind it, bringing about a return to global expansion.

That comforting scenario collapsed in a heap this week. Data from the US, including falls in retail sales and a slowing of manufacturing in the New York region, and concerns over the impact of a rising dollar on US exports, pointed to the opposite situation: rather than leading the world to a recovery, the US economy may be pulled back by powerful downdrafts internationally.

The economic model that depicts the US as a locomotive for the rest of the world is a relic of the past.

As far as the financial markets are concerned, it is becoming increasingly clear that the pumping of ultra-cheap cash into the global financial system by central banks and financial authorities over the past six years, estimated at between $7 trillion and $10 trillion, coupled with a low-interest-rate regime, has only created the conditions for another crash.

A number of explanations have been advanced for the turmoil, which saw yields of US Treasury bonds plunge by 35 basis points in a matter of minutes last Wednesday as panicky investors dumped stocks to buy what are considered the safest of assets. The explanations include the use of computer trading by investors seeking to speed up their transactions and beat the market. However, as all such systems are based on the same premises, they produce herd-like behavior in which asset managers all try to exit at the same time, compounding the crisis.