On Monday, Aug. 5, 2024, the Dow Jones Industrial Average dropped 1,033.99 points, or 2.6%, to end at 38,703.27. The Nasdaq Composite lost 3.43% and closed at 16,200.08, while the S&P 500 slid 3% to end at 5,186.33. The blue-chip Dow and S&P 500 registered their biggest daily losses since September 2022. Japan’s stock market posted its worst drop since Wall Street’s Black Monday in 1987, contributing to fears of global turmoil in the markets (according to cnbc.com on Aug. 6).
What caused the stock market crash, and are we facing a new financial crisis? Some analysts blame it on the unexpected jump in the unemployment rate announced on Friday before the crash. The news caused panic that the US economy is in much worse shape than previously believed, and that a recession was looming (CNN, Aug. 5). CNN’s Fear & Greed Index, which measures seven barometers of market sentiment, was at an “extreme fear” reading on Tuesday morning after the crash.
“One trigger for the selloff was the unraveling of the Japanese yen carry trade. That’s when investors borrow yen to invest money in other assets like stocks and bonds with higher-yielding returns. That has been a popular trade in recent years, since Japan’s low interest rates kept the yen cheap against the US dollar. But all that changed when the Bank of Japan last Wednesday raised interest rates for the second time this year, strengthening the yen” (CNN, Aug. 9).
Analyst Ben Norton interviewed economist Michael Hudson to discuss the extreme volatility that gripped the financial markets that horrifying stock market crash day (geopoliticaleconomy.com, Aug. 7). “Is this another Black Monday?,” he asked.
“It was the biggest market plunge since the beginning of the pandemic in 2020, when many investors were selling off their holdings, fearing that there was going to be a big recession. The volatility index, the VIX — which is a measurement of how rapidly stock prices move in the S&P 500 biggest companies on US stock exchanges — is at the highest level since the beginning of the COVID-19 pandemic,” Norton stressed.
Michael Hudson responded with acidic chastisement of the way governments and financial institutions handled economic and financial crises:
“It’s not so much that we’re in a recession; the whole economy has been shrinking really, since 2008. The idea of a recession is a fantasy created by the National Bureau of Economic Research. And the whole principle underlying all of its models is that the economy works in a sine curve; it goes up and down, and there are automatic correction factors. Once it goes up, there are internal correction factors that move it down, but it’s always rescued, because when an economy moves down, labor becomes cheaper, there’s unemployment, it is hired again, and employers can make more profits, and there’s a recovery.
“This is not how economies have worked for the last 5,000 years. What does the National Bureau leave out of account? That every recovery from a recession has started from a higher and higher debt level. Now the economy has reached the very peak of its debt-carrying capacity, and there is no way that it can recover. Every recovery has been weaker, and weaker, and weaker, because the debt that it has come has been sort of like driving a car and stepping on the brake.” (Ibid.)
The increasing debt that has been supporting the “recovery” is paid for by the 90% of the economy that is indebted — wage earners, corporations, local governments, and the federal government. The ones benefiting and enriching themselves are the creditor class, basically the 10%, or even the 1%, and especially the 0.1% high-worth individuals, Hudson explained. He called it a grand “Ponzi” scheme/scam, where new debt pays for old debt, and the principal just rolls over.
And government claims credit for continued GDP growth — much of which so-called growth in national income has been financial returns. Interest payments are counted as part of the GDP. Penalty fees are part of GDP. Rising housing prices are counted as part of the GDP. And yet it’s harder and harder for people to buy housing, and they have to pay more and more mortgage debt in order to buy the higher priced housing. All of this is called the boom, and it’s not a boom at all. It’s impoverishing the real economy of production and consumption. But it has been making money for the financial economy, which is really extractive,” Hudson warned.
But Hudson, the “prophet of gloom,” might have been rebuffed by the sprightly rebound of the markets. Stocks ticked up Friday as the stock market built on its incredible comeback from Monday’s violent rout. The broad market index ended the week just shy of completely reversing its weekly losses (cnbc.com, Aug. 10).
The S&P 500 advanced 0.47% to finish at 5,344.16. The Nasdaq Composite added 0.51% to close at 16,745.30. The Dow Jones Industrial Average inched up 51 points, or 0.13%, to end at 39,497.54. Week to date, the broad market index was just 0.04% lower. During Friday’s session, it had managed to briefly turn positive for the week before losing some of its gains. Meanwhile, the blue-chip Dow and tech-heavy Nasdaq were down on the week by 0.6% and 0.18%, respectively.
And how were the Philippine equities and financial markets affected by “Bleak Monday” (not “Black Monday,” after all — based on the easy rebound of US stocks)?
The PSEi index seemed not to have been moved by the “thrilla” of the Aug. 5 “Bleak Monday.” The index closed at 6,434.73 on Aug. 5; 6,433.24 on Aug. 6; 6,535.17 on Aug. 7; 6,549.27 on Aug. 8, and 6,647.80 on Friday, Aug. 9. Not much of a change from the month before, July. Perhaps the 12-hour time difference from New York gave time to the local bourse to observe the easing of the US stock market fall, and to keep its confidence in mighty America to lead the world economy.
Count on America to borrow more and more, to keep the economy and the markets working, we hear the economist Hudson rant in fretful warning. And we, in the small developing economy of the Philippines, must feel alluded to, with our burgeoning debt that justifies our obsession to grow our gross domestic product (GDP) and be recognized as a partner-player in the global economy.
“Our gross domestic product (GDP) growth has accelerated to 6.3% in the second quarter, faster than the adjusted 5.8% growth rate recorded in the first quarter of 2024. This significant development brings our real GDP growth to 6% for the first half of the year, keeping us on track to achieve our target growth rate of 6% to 7% for 2024. This performance keeps our position as one of Asia’s best-performing major emerging economies,” National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan announced on the Philippine Economic Performance for the Second Quarter of 2024 (Philippine Statistics Authority, Aug. 8).
The day before the glorious GDP announcement (and a day after “The Crash” in the US stock markets), House Assistant Minority Leader and Gabriela Women’s Party-list Rep. Arlene Brosas lambasted the increase in the debt servicing allocation in next year’s proposed P6.352-trillion budget at the expense of programs that are actually beneficial to Filipinos. She pointed out that “interest payments on debt would rise by P178 billion to P848 billion in the 2025 budget, from P670.4 billion in last year’s General Appropriations Act.” It is a “debt trap,” a “debt-driven disaster waiting to happen.” (Philippine Daily Inquirer, Aug. 7)
Brosas criticized the Marcos administration’s borrowings, saying “each Filipino family now owes P558,114,” and questioned how the loans were spent. The government has borrowed an average of P204.7 billion monthly over 23 months, more than double the rate of the previous Duterte administration, she said (Ibid.).
Philippine debt: a Ponzi scheme to fund development, and for bragging points for hallowed GDP growth?
Bleak Monday could have taught some important lessons to our country and our leaders.
Amelia H. C. Ylagan is a doctor of Business Administration from the University of the Philippines.
