All major American equity markets lost between 3.5 percent and 4 percent of their total value on Monday, August 24. A total of $812 billion in market value disappeared in one day. It caps the biggest three-day drop in market history. The answer is to start panicking, right?
Take it with a grain of salt. When the Dow Jones Industrial Average drops 588 points on Black Monday in 2015, it loses 3.58 percent. When it dropped a mere 38.33 points on Black Monday in 1929, it lost 13 percent. When news anchors call this a historic drop, they’re talking about points, not percentages. They don’t make that clear because they’d like you to stick around, panicking through the entire commercial break.
Asian markets took an even bigger hit earlier on Monday (the Shanghai Composite dropped 9 percent), triggering losses in Europe and finally here. Investors have known for years Chinese growth will eventually hit a significant slowdown, but because they can still make money betting for or against it, there’s been no real market anticipation of this. Professional investors aren’t taking the risk the way the average American retirement account is.
Response has been varied. Republicans claim the market loss is because Wall Street is too regulated to allow traders to innovate. Democrats claim it’s because Wall Street isn’t regulated enough and is innovating in economically unsafe ways. TV evangelist Pat Robertson explained Wall Street’s turbulence is divine retribution for not shutting down Planned Parenthood. The Lord really does work in mysterious ways.
The Wall Street drop is not a reason to panic today – the market should compensate in the short term. In fact, in that short term, many things will become cheaper for the vast majority of American households. Oil is cheaper than it’s been since 2009, one reason the biggest drop-off in the S&P 500 was in energy, which declined 5.18 percent. That’s actually good for consumers. The market is catching up to the fact oil will remain cheap for an extended period of time. It’s a major confirmation gas prices will stay fairly stable and inexpensive. (They should even decrease further as a major Indiana refinery gets back up to speed.)
Cheap gas means transport costs for various industries will be slashed. That will be reflected in the prices of many goods and services. Your daily commute will be cheaper, as will airfare. Food will be cheaper and many small businesses will enjoy less overhead.
Of course, the trouble becomes what’s good for today (cheaper gas & groceries) is bad for tomorrow (decreased value in retirement accounts). This stresses one way in which the short- and long-term interests of American consumers have been overhauled to work against each other in the last 30 years of financial deregulation.
The reason for the cheap oil is because Saudi Arabia has increased overall production. It hurts the Saudis in the short term, but it helps them in the long term. Their infrastructure is strong and can withstand a year or two of decreased profits. Meanwhile, the trials they can endure will devastate many of their competitors and possibly win a price war against American shale frackers.
Should Pres. Obama’s Iran deal pass, the Saudi push will also help to diversify and modernize Iran’s economy. The more modernized Iran’s economy becomes, the greater a chance its religiously fanatical government is tempered. China is key to this strategy as well, being a major supplier of goods for Iranian consumers. With renewed connection between China and Iran, two supporters could also be gained in helping to stabilize Afghanistan.
What China’s “Black Monday” really stands for is a blatant reminder the United States serves two masters. The U.S. wants to overtake China once more and return to its status as the world’s primary economic superpower. Yet our ties to China are so intricate in the form of their investments and our debt, any serious blow to China becomes a serious blow to the U.S. as well. Effectively, the U.S. cannot quickly overtake China without severely damaging both countries’ economies and global interests.
Neither is China calling in those debts, as New Jersey Gov. Chris Christie claimed yesterday despite there existing no evidence for this. As Paul Krugman noted, China can’t call those debts in quickly without spiking US interest rates. Instead, those rates are falling.
Consumers need to understand American debt to China is not a way for either country to collapse the other down the road. It is a strategy to intertwine the countries so that if one falls, the other does too. Consider it economic brinkmanship for a new Cold War. Both countries are too big to fail in the eyes of the other. It’s mutually assured destruction on an economic-industrial scale. It’s not pretty, but it’s a lot better than aiming nuclear weapons at each other.
China’s Black Monday doesn’t show us much beyond two things every government and trader already knows: China is slowing down its industrial development and Saudi Arabia will keep oil production high and prices low. The markets will accommodate both over time. China’s the greater danger because of the volatility of their market, but their interrelation with European, Asian, and American markets means other countries will both feel the sting of that volatility and help temper it. Instead of China getting hit very hard and triggering a major panic, every country gets hit a manageable amount and has a bad few days. It goes the other way, too. What once might have gutted American markets is now spread out among Europe and Asia as well.
No major world power takes the brunt of a market crash anymore. The idea of globalism is everybody takes a little bit of the hurt. This is ultimately good for the average American consumer, and what’s happened in the past few days is just as much a sign of that system’s overall strength as it is a sign of any specific weakness. The U.S. and China are not on opposite sides of the scale anymore, and in many ways that protects consumers in both countries from more devastating risk.
Of course, someone still suffers; that globalism isn’t truly global. Just look at Greece, Central America, sub-Saharan Africa, the Middle East, and Southeast Asia. If you want to panic for someone’s economy, there are a lot of other deserving candidates that help absorb American, Asian, and European risk.