US Stocks Plunge, Dow Falls Over 300 Points As Fears Grip Market
- AUGUST 4, 2011, 12:41 P.M. ET
US Stocks Plunge, Dow Falls Over 300 Points As Fears Grip Market
--Dow plunges over 300 points, major indexes slump into correction territory on growth worries
--Bank of New York Mellon prepares to charge large depositors to hold cash, reflecting flight into safer assets
--Central-bank interventions fail to assuage investors
By Brendan Conway and Jonathan Cheng Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Stocks plunged, driving the Dow Jones Industrial Average down more than 300 points, as investors appeared to lose faith in the ability of the world's policy makers to revive the global economy and stave off a rolling debt crisis in Europe.
The Dow slumped as much as 372.52 points, or 3.1%, to a low of 11523.92 in midday action, erasing all its gains for 2011. It recently was down 293, at 11611, a decline of 2.4%. The slump of the past few weeks has driven the Dow down almost 10% from its May intraday highs--a decline that would be classified as a correction.
The Standard & Poor's 500-stock index fell 34 points, or 2.7%, to 1227 in recent action. The S&P recently was in correction territory on an intraday basis, having fallen more than 10% since May. The Nasdaq Composite slumped 74 points, or 2.8%, to 2618.
Investors across the globe have been buffeted by economic and political turmoil in recent days. In the U.S., fears have turned from worries about a possible default by the U.S. government to a weakening economic outlook. A string of data have pointed to a slowing of the recovery and investors are now bracing for the closely watched nonfarm payroll report on Friday. In Europe, leaders are struggling to contain a growing debt crisis. Investors are increasingly worried that troubles are spreading to Italy and Spain, driving down stocks across the region and sending borrowing costs of peripheral nations soaring.
In the U.S., all but one Dow stock was lower as investors sold across the board. All of the S&P 500 sectors were in the red and just 12 of the 500 stocks were up.
"This is a fear-driven market. We're in a mini-free fall. It's not a Black Monday, or Black Thursday, but it's in pretty bad shape--all the big stocks are being liquidated," said Christian Thwaites, president and chief executive at Sentinel Investments.
Gold and silver, which had been up on the day, reversed course as investors sold the metals to meet stock-based margin calls, traders said. If investors have purchased stocks with borrowed money, they often have to front more cash if the price of those shares fall, known as a margin call.
Underscoring that worried investors are increasingly seeking cold cash, the Bank of New York Mellon Corp. (BK) is preparing to charge some large depositors to hold their funds. The biggest U.S. custodial bank said this week in a note to clients that it will begin slapping a fee next week on customers who have vastly increased their deposit balances over the past month.
The bank cited the massive dollar deposits it has received over recent weeks, as investors and corporations retreat from financial markets amid Europe's debt crisis and the recent debate over U.S. government borrowing.
Investors fled to Treasurys, sending the yield on the 10-year Treasury note, which falls as prices rise, down to 2.507.
Fretting about a slowdown, investors were also focused on a pair of policy moves abroad that did little to assuage their immediate worries.
The European Central Bank moved to reactivate two of its anti-crisis measures in attempt to stop the currency bloc's sovereign-debt woes from spreading to Italy and Spain. Japan intervened in currency markets to curb the strength of the yen, which has risen as investors shift into currencies considered safer assets.
"The concern is that you're seeing visible worry by government officials, by central bankers. The [worry] is, 'Are there any bullets left in the government arsenal to help'?" said Russ Koesterich, iShares Global Chief Investment Strategist at BlackRock. "Investors are realizing that the economy is very fragile, [but] it's not clear that governments are able to do much help."
In his press conference, ECB President Jean-Claude Trichet acknowledged downside risks to growth in the region, saying economic risks "may have intensified," and that recent data showed the growth pace in Europe has decelerated.
The ECB left key interest rates unchanged. Trichet's comments on the weakening economic recovery prompted the central bank to resume its program of government bond buying for the first time in five months. But traders said the central bank was only buying Portuguese and Irish sovereign bonds, a decision that Trichet acknowledged was not "unanimous."
"You've got a weak economy, the aversion of a debt crisis but not a solution, and you've got the rest of the globe starting to implode in a lot of areas, especially Europe," said Barry James, president and chief executive of the James Advantage Funds. "It's natural that people would react with fear."
US Stocks Plunge, Dow Falls Over 300 Points As Fears Grip Market - WSJ.com
FT - The Global Economy Won't Recover now or Ever (from Jan/Feb 2011)
Unconventional Wisdom
A special anniversary report challenging the world's most dangerous thinking. - FT Foreign Policy Magazine (Jan/Feb 2011 Edition)
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Immanuel Wallerstein
THE GLOBAL ECONOMY WON'T RECOVER, NOW OR EVER
Virtually everyone everywhere-economists, politicians, pundits -- agrees that the world has been in some kind of economic trouble since at least 2008. And virtually everyone seems to believe that in the next few years the world will somehow "recover" from these difficulties. After all, upturns always occur after downturns. The remedies recommended vary considerably, but the idea that the system shall continue in its essential features is a deeply rooted faith.
But it is wrong. All systems have lives. When their processes move too far from equilibrium, they fluctuate chaotically and bifurcate. Our existing system, what I call a capitalist world-economy, has been in existence for some 500 years and has for at least a century encompassed the entire globe. It has functioned remarkably well. But like all systems, it has moved steadily further and further from equilibrium. For a while now, it has moved too far from equilibrium, such that it is today in structural crisis.
The problem is that the basic costs of all production have risen remarkably. There are the personnel expenses of all kinds -- for unskilled workers, for cadres, for top-level management. There are the costs incurred as producers pass on the costs of their production to the rest of us -- for detoxification, for renewal of resources, for infrastructure. And the democratization of the world has led to demands for more and more education, more and more health provisions, and more and more guarantees of lifetime income. To meet these demands, there has been a significant increase in taxation of all kinds. Together, these costs have risen beyond the point that permits serious capital accumulation. Why not then simply raise prices? Because there are limits beyond which one cannot push their level. It is called the elasticity of demand. The result is a growing profit squeeze, which is reaching a point where the game is not worth the candle.
What we are witnessing as a result is chaotic fluctuations of all kinds -- economic, political, sociocultural. These fluctuations cannot easily be controlled by public policy. The result is ever greater uncertainty about all kinds of short-term decision-making, as well as frantic realignments of every variety. Doubt feeds on itself as we search for ways out of the menacing uncertainty posed by terrorism, climate change, pandemics, and nuclear proliferation.
The only sure thing is that the present system cannot continue. The fundamental political struggle is over what kind of system will replace capitalism, not whether it should survive. The choice is between a new system that replicates some of the present system's essential features of hierarchy and polarization and one that is relatively democratic and egalitarian.
The extraordinary expansion of the world-economy in the postwar years (more or less 1945 to 1970) has been followed by a long period of economic stagnation in which the basic source of gain has been rank speculation sustained by successive indebtednesses. The latest financial crisis didn't bring down this system; it merely exposed it as hollow. Our recent "difficulties" are merely the next-to-last bubble in a process of boom and bust the world-system has been undergoing since around 1970. The last bubble will be state indebtednesses, including in the so-called emerging economies, leading to bankruptcies.
Most people do not recognize -- or refuse to recognize -- these realities. It is wrenching to accept that the historical system in which we are living is in structural crisis and will not survive.
Meanwhile, the system proceeds by its accepted rules. We meet at G-20 sessions and seek a futile consensus. We speculate on the markets. We "develop" our economies in whatever way we can. All this activity simply accentuates the structural crisis. The real action, the struggle over what new system will be created, is elsewhere.
Immanuel Wallerstein is a senior research scholar at Yale University.
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