Repeat of 1997, This Time It Is The West
This recent stock market decline can now be compared to the 1997 Asian Financial Crisis also called the Asian Contagion. This time around it is the European Union collapse that is the leading catalyst for the declines in the stock market. Throughout history the markets have a tendency to repeat themselves in different regions. The debt that all Western countries have is really overwhelming when you think about it. What else could we expect when these numerous countries have higher debt than their national gross domestic product?
The United States is really not very different than Greece, or any other European Union nation when it comes to debt. This is also another problem for the world since the U.S. Dollar is the world's reserve currency. In the past, all of these stock market crashes were resolved by printing more cash and throwing the money at the problem. This is called creating liquidity. This will obviously be the remedy this time around as it has been in the past via QE-1, and QE-2. Whether or not creating cash reserves can fix the problem remains to be seen. This time around it seems as if the markets are not responding to the cheap money as well as it has in the past. After all, the Fed funds rate has been at zero percent since December 2008. This time around, once the $600 billion QE-2 ended the stock market has cratered. The major stock indexes are lower by nearly 20.0 percent since the May 2, 2011 high.
The European markets remain very fragile. The problems in Europe are being resolved by the same method that the Federal Reserve solved the problems in the United States, by buying government bonds. This is really just a band-aid on the problems that are in place in the Euro-zone. As the debt crisis begins to expand into Italy, Spain, and even France, the problems will simply become worst in due time. At this time, the stock markets are extremely oversold and bounces will occur. So far, every bounce has been met by selling. We shall see if these markets can firm up for a little while, however, the major problems for the European Union and the United States will be here for years to come. We can only hope that the Western countries do not face another Weimar Republic situation in the future. History has a tendency of repeating in future generations.