The American Debt Market: A Cause for Concern

For many Americans, the world of finance can be summarized in a single standard: the Dow Jones. This made for a somber moment when, for a few minutes on Friday, June 27, the New York Stock Exchange’s key index found itself 20% lower than its recent crests. This dip confirmed that the American Stock Market, in the long-term, is headed downhill.

Investors are worried. The market started to really give way after the dip in 2000, which was 3% higher than Friday’s closing. Since the Internet bubble burst, the Dow Jones has performed 40% lower than the American gross domestic product. A long period with few results should not be surprising. After the stock market dip in 1966, it was almost two decades – and two-figure inflation rates – before American values regained ground.

More importantly, the Stock Exchange is no longer at the center of finance. Rather, credit is. The price of stocks has influence over industrial investments, household consumption, and economic development. But the cost and availability of debt is even more significant.

It is debt that investors should survey, not the Dow Jones, because it is there that there are reasons to worry. In 2007, the credit system and currency began to fall.

SHOCK

Credit for businesses and consumers, normally cheap and easily available, is no longer. On the other hand, raw material buyers can always borrow, pushing retail prices higher across the world. The result is a distressing mix of inflation and scarce credit. The financial system is wobbling and central banks are paralyzed.

The reversal of the credit market is a shock for stocks, with profits eroding, demand decreasing, and the costs of debt and raw materials rising.

This final chapter of the market’s dip, observed since 2000, may endure. If the recession slows inflation, stocks will suffer. But even if inflation stifles profits, stocks will still suffer.