The Dow fell below the 12,000 as nervous investors continued to sell off their stocks. This is the six consecutive day of losses in the stock market, destroying tentative gains made since the recession. The only Fortune 500 companies who successfully made gains were AT&T and Proctor and Gamble. All the other blue chip companies suffered hard losses; the worst was Travelers losing falling 135 points and losing 1.1% of their stock value. Motor company Toyota announced a loss of 1.6 billion in profits, due to the earthquake-tsunami double punch that has crippled the Japanese economy. The S&P and the NASDAQ Composite both fell by roughly 1.1% throughout the course of the day, contributing to their sixth consecutive week of losses. Safer investments, such as US back bonds, surged; driving down the interest rate by 0.04%. The stock market is in the opening stages of a second massive sell off, which will damage the international economy even more than the latest recession.
Why is the Double Dip Recession Happening?
The United States economy needs to get its act together before investors lose their nerve completely and sell everything. The international socioeconomic relies on trust and confidence. As long as everyone can pay of their debts people will gladly invest in any number of derivatives and stocks because it is a profitable thing to do. However, when massive blows to the stock market hammer that confidence consumers quickly stop buying stock, driving down the price. This is bad for the economy because companies rely on selling stocks to the market and their employees to fund their operations. Without the core faith in the stock market investments in new companies grind to a halt. This prevents new companies from entering the market, which further inhibits the economy.
It is a dangerous spiral that quickly stagnates the economy. New businesses cannot form to enter the market and existing companies cannot get the necessary funds to meet market demands. The circular movement of money halts, starving consumers and producers alike. This is the fear of what will happen should this double dip recession ensue; the only issue is that faith in the stock market and investments will be even harder to retrieve because of the recent 2008 recession. The economy could stagnate near indefinitely. One major aspect of this relates to economics, fiat money. The world relies on fluctuating currencies that are valued only compared to each other, they have no value themselves. This is good because it allows for large amounts of money to be utilized.
How Could This Hurt the Economy?
This is potentially disastrous because the money is prone to rapidly inflate and deflate, making counties rich one day and comparatively broke the next. Currencies are traded throughout the international economy, if the American dollar falls do to the currency trading markets driving it down Americans will be hard pressed. They will not be able to pay the mortgage, send their kids to college, or even by grocers if inflation rises too high too quickly. The unstable stock market could toss America into a recession instantly should there be a massive selloff. There is also the threat of a slow transition to a recession; as the American economy is strangled by the reduced investments they produce even less and then there are even fewer investments. This vicious circle is compounded ten times over by the banks leverage working against them, for every dollar they lose in their reserves they lose nine dollars they could invest. The double dip recession would attack America on two fronts, bringing misery to all.