Why the Stock Market Crashed This Week

Photo Illustration: Intelligencer; Photo: Getty Images

This summer, the global economy appeared to have halted its months-long decline for a while, beating forecasts that we were entering a recession and even spurring markets higher while overtaking last year’s memestonk madness. On Friday, however, all hell seemed to break loose. Stock markets in the US cratered to their lowest since 2020 as Wall Street has become all but certain that the world is on the cusp of a grinding slowdown that could last for years as problems related to inflation prove harder to break through prove If everything seems very sudden – well, that’s it. The economy was fine before, so what happened?

What separates today’s market shock from the last two and a half years of the pandemic economy boils down to creditworthiness. Since March 2020, the US has been inundated with around $5 trillion in funds sent straight into people’s pockets in the form of payments. This is part of a global program to prevent the world from imploding as people are forced to stay at home. But there was another form of monetary support that propped up global markets: rock-bottom interest rates. This allowed people and businesses to borrow even more Money with companies borrowing another $2.5 trillion in 2020 and $2.3 trillion the following year — with more of that money going to companies at risk of default. And now more and more companies are turning their pockets and saying they can’t pay the money back.

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Credit is about trust. When converted to a number, e.g. For example, an interest rate, it tells borrowers how likely it is that lenders will repay the money. The higher the rate, the more forbidden it is and vice versa. And this week has been a historic week for the demolition of this trust. On Wednesday, the Federal Reserve hiked interest rates by 0.75 percent for the third straight month, extending the central bank’s most aggressive plan to fight inflation in more than 40 years. It was a move that seemed to bring the world closer to, and even deliberately invited, a recession to prevent prices from rising further. Other central banks around the world rushed to follow the Fed’s lead, and all in a matter of days. And just like that, the world’s money pool began to dry up. Fed Chair Jerome Powell had warned that the world would start to feel “pain” about keeping inflation down. In this case, a recession isn’t even the worst-case scenario, as the prospect of stagflation – with rising prices and a faltering economy – becomes more and more likely.

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But there was another facet of global credit that was cracked on Friday, and it happened in the UK. The country’s new prime minister, Liz Truss, unveiled a budget package of around £190 billion that would cut taxes and increase spending to keep energy costs down. The result was a catastrophic collapse of the British currency against the US dollar to its lowest level since 1985. The message from markets here is that the era of stimulus is over. It is now time to pay.

So people sell stocks. The Dow Jones is in a bear market and is down 20 percent from its peak. Oil is below $80, which sounds great – until you realize it’s a sign that traders believe the global economy is headed for recession. Bond traders are demanding the highest rate payments on short-term US Treasuries since the financial crisis. Credit is the foundation of economies around the world, and when it unwinds, money really starts to dry up. Quincy Krosby, LPL Financial’s chief global strategist, described the mindset on Wall Street right now in a note as “raise money when uncertainty and volatility rise,” meaning hold on to that money any way you can for as long as you can still have time.

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