Dow Plunges More Than 300 Points on Grim Outlook
Stocks plunged on Thursday as investors confronted new indications of the depth of subprime losses and housing woes. The Dow Jones industrial average lost more than 300 points, bringing its decline to 15 percent since its peak in October.This should come as no surprise. The so called Bush recovery was never more than a magician's trick with smoke and mirrors. And it was predicted here at MEJ in June of 2005.
Since Jan. 1 alone, the Standard & Poor’s 500-stock index, a broad measure of the financial markets, is down more than 9 percent. And the Russell 2000 index, which tracks small companies, is now officially in a bear market, 20 percent below its peak.
A dismal report on manufacturing activity caught investors by surprise on Thursday morning, sending the main indexes into the red after an early stint in positive territory.
The report, from the Federal Reserve, found that Philadelphia-area manufacturers had contracted much more than expected in a January survey, reaching a six-year low. A similar drop in the index occurred in early 2001, just before the onset of the last recession.
The Austrian theory of the business cycle emerges straightforwardly from a simple comparison of savings-induced growth, which is sustainable, with a credit-induced boom, which is not. An increase in saving by individuals and a credit expansion orchestrated by the central bank set into motion market processes whose initial allocational effects on the economy's capital structure are similar. But the ultimate consequences of the two processes stand in stark contrast: Saving gets us genuine growth; credit expansion gets us boom and bust.The current economic problems are nothing more than the latest failure of supply side economics - aka trickle down economics. In a nutshell trickle down economics says that if you give tax breaks to wealthy investors and corporations they will create jobs and demand. It has never worked but this time it was a bit different. It did create jobs - trickle down - to India and China. But demand was still required and was supplied by lots of unwise credit, lots of increased debt. As it turns out the Austrian theory of the business cycles was correct - credit expansion gets us boom and bust. Well the talk now is about a tax break or even cash rebate to the middle class, the people who will spend it. If this had been done when the tax breaks for the rich and famous was passed we might not be facing another economic crisis. In the fifties we learned that the economic engine is driven by consumers having disposable income. A lesson we seem to have forgotten since Ronald Reagan replaced Dwight Eisenhower as the guiding force of the Republican Party.