A trader at the New York Stock Exchange on March 18. Trading was temporarily halted that day following price drops (XINHUA)
In less than a fortnight in March, the U.S. stock market experienced four epic blowouts with sharp falls triggering circuit breakers that temporarily helped prevent a further plunge. The so-called "Trump boom" in the wake of Donald Trump assuming office as U.S. president in 2017, characterized by rapid GDP growth, declining unemployment, a stable consumer price index and a bullish market, is becoming a thing of the past. Instead, a recession is looming large as indicated by many signs.
Market panic is soaring. The mechanism that automatically stops trading when prices hit predefined levels and proved effective in coping with violent market fluctuations before has, however, failed to reverse the downward spiral despite imposing several suspensions in a row. The Federal Reserve Bank of New York, part of the U.S. Federal Reserve System, injected at least $1.5 trillion worth of liquidity into the markets in the hope of easing strains, but to the shock of many, the move made little difference. Behind the market crash lies investors' impaired confidence in the U.S. economy.
While most economic indices in the U.S. registered losses, there was one notable exception. The Chicago Board Options Exchange Volatility Index, colloquially known as the "fear index," rose to 82.69 on March 16, the highest since the 2008 global financial crisis. U.S. analysts predict that the U.S. is likely to post zero growth in the first quarter and a deep recession in the second.
In addition, the standard of living is on the decline. Prospects of high employment, a point of pride for the Trump administration, are bleak. Kevin Hassett, former Chairman of the Council of Economic Advisers, which advises the U.S. president on economic policy, estimates that the United States could lose up to 1 million jobs in March because of the severe disruptions caused by the novel coronavirus pandemic.
U.S. Treasury Secretary Steven Mnuchin warned on March 17 that without action the pandemic could drive up U.S. unemployment to 20 percent. Federal Reserve Bank of St. Louis President James Bullard is even more pessimistic. He predicted the unemployment rate may hit 30 percent in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50-percent drop in GDP.
A macro-level economic recession will inevitably lead to a decline in consumption. Since the 2008 financial crisis, the U.S. middle and lower class has been increasingly tightening their purse strings. Because of the coronavirus pandemic, consumption powerlessness, as described in Japanese authors Atsushi Miura's book on the emergence of lower classes and Kenichi Ohmae's How to Ignite the Low Desire Society, has become more common in the U.S. "Movie box-office revenues are down more than 60 percent in data through March 15 and more than 70 percent relative to the average of recent years," JPMorgan analysts wrote in a research note. The Federal Reserve Bank of New York's general business conditions index fell 34.4 points to minus 21.5, the lowest level since 2009, a report out on March 16 showed.
Besides market turmoil, social fragmentation has exacerbated. Social issues stemming from economic problems have a deeper influence on people in the U.S. In 2019, eminent Yale Law School professor Daniel Markovits' new book The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite was published in September, triggering a huge uproar in the U.S. The book's tenet is that U.S. meritocracy has become a mechanism for the concentration and dynastic transmission of wealth and privilege across generations. It has intensified competition, dismantled the middle class and widened the wealth gap, leading to social fragmentation.
In this fragmented society, the pandemic has reignited racism and caused social security to deteriorate. A recent report by the Washington, D.C.-based think tank Pew Research Center says uncertainty and anxiety are mounting. If the unemployment rate keeps increasing, issues such as racial tensions will continue to ferment.
The U.S. Government is losing credibility. As the economy slows down, what it needs to do most is consolidate public trust and boost society's morale. However, instead there are reports of some politicians taking advantage of the situation to serve their own interests.
Richard Burr, Senate Intelligence Chairman and a member of Trump's Republican Party, faces accusations of insider trading after he received two confidential briefings on the coronavirus situation and soon afterward sold 33 stock holdings before the markets plunged. At the same time, he was telling the public that the epidemic was controllable and preventable in the U.S. Some more senators are also reported to have sold off their stocks beforehand.
The core of U.S. democracy is a collective leap of faith. When public officials, reporters, experts and politicians share information, people assume that they are being honest about it. But the senators have undoubtedly undermined the trust the public invested in them.
Finally, the United States is shirking its global leadership responsibility. After the Cold War, successive U.S. administrations stressed the importance of the U.S. maintaining its global leadership, a position that is slipping away with the current government pulling out of international agreements. Former U.S. Vice President Joe Biden, who is eyeing the presidency this year as a Democrat candidate, has underlined the need to rebuild confidence in the U.S. leadership. Writing in the Foreign Affairs magazine about what his foreign policy would be if elected, he asserted that the United States "cannot be a credible voice while it is abandoning the deals it negotiated."
However, this U.S. administration, rather than acting as a global leader to deal with the coronavirus pandemic, is instead trying to cover up its poor response by calling the virus the "Chinese virus," a move that has been criticized by many.
"The president is turning to racist rhetoric to distract from his failures to take the coronavirus seriously early on, make tests widely available, and adequately prepare the country for a period of crisis," former Secretary of State Hillary Clinton tweeted.
Analysts find more similarities between the current stock market rout and the situation during the Great Depression that started in 1929 and lasted till the late 1930s, than with the financial crisis in 2008. Both times a Republican president was at the helm in the U.S. and both crises started with the stock market going into freefall after an extended period of bullish market.
Some are attributing the current market turmoil to unpredictable and short-term external shocks, such as the pandemic and the fluctuation in oil prices, regarding it as a black swan, or unpredictable phenomenon. However, others think it is a gray rhino, a large and visible risk that was ignored, caused by the accumulation of risks in the structure of the domestic economy.
Historically, the U.S. economy has experienced cyclical depressions and the current situation shows the fundamental problems have not been addressed. Many researchers point out that the rapid growth of the U.S. stock market in the last 11 years was mainly due to the long-term low interest rate offered by the Federal Reserve to induce enterprises to over-expand their businesses. The companies bought back shares, pushing up stock prices and creating a wealth accumulation effect.
This, coupled with quantitative easing and other factors, boosted consumption and employment, and fueled short-term prosperity. At the same time, in order to stabilize the economy, the U.S. Government continued to borrow, resulting in a 100-percent increase in leverage.
At today's critical stage, an improper response to the pandemic will further weigh down the U.S. economy with the ensuing recession exacerbating the polarization between the rich and the poor and fragmentation of the U.S. society. And all this will only undermine the Trump administration's efforts to make America great again.
The authors are researchers with the Academy of Contemporary China and World Studies
Copyedited by Sudeshna Sarkar
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