The stock market correction I've been expecting for several months is finally upon us. Thursday's 3.1% drop in the Standard & Poor’s 500 index was the worst one-day decline since June of last year and the third worst in the bull market off the March 9, 2009 bottom.
Why the panic? There's the ongoing saga of Greece and Portugal, two troubled economies that are having a hard time financing their national debt. I'm not really sure what all the fuss is about. These are tiny countries with tiny debts.
There are plenty of wealthy individuals around the world -- people like Bill Gates -- who could solve their problems just by writing a check. We're not talking a really big-ticket item here, like bailing out Fannie Mae and Freddie Mac.
And is anyone really surprised? In their new book "This Time Is Different," economists Carmen Reinhart and Kenneth Rogoff demonstrate with hard data that, over many centuries, financial crises have always been followed by sovereign debt defaults. And besides, Reinhart and Rogoff say that over the last two hundred years, Greece has been in some kind of debt default about half the time.
Maybe the problem is that the European Central Bank -- Europe's equivalent of our Federal Reserve -- announced that they would be making no change in their official interest rate of 1% or any of their other policies. That would seem to be good news for Greece and Portugal. Yet many market commentators made it seem as though the ECB was moving to "tighten" policy. At the same time, the Bank of England -- the Fed of the UK -- also decided to leave rates unchanged. But it also announced it was not going to increase its purchase of government bonds -- at least not for now. That, too, was widely interpreted as "tightening." I have no idea why merely declaring that the central bank won't become more loose is the same thing as saying it is tightening.
The ECB and the BoE are not going to tighten. They're not going to make life harder for Greece and Portugal or other larger troubled European economies like Spain.
China isn’t going to tighten, either. But there too, there have been many rumors of it. China is facing massive capital inflows from around the world as global investors throw money at the country they think has the best growth story in the world. So the authorities are clamping down a bit on the really stupid lending excesses. That's not tightening.
The Fed isn't going to tighten, either. Like the BoE, it's reached at least a temporary end in its bond-buying program initiated in late 2008. But that doesn't mean it's going to tighten policy by selling those bonds or raising interest rates. In my opinion, rates are going to stay at zero all year, and the Fed won't sell a dime of its assets. If anything, it will buy more.
Why? First, the global economy is just too fragile. Look what happens when there's a whiff of tightening expectations -- the global markets have a heart attack. The Fed doesn't want that when the recovery from recession is still so tenuous.
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