The American Interest

Waiting for the Big One

The global economy is like the St. Andreas Fault.  You know that a terminal disaster is inevitable, but you keep your fingers crossed and try not to think about it.  When a tremor occurs, you often fear it could be the Big One and sometimes panic, but then, when the dust settles, you sigh with relief to find yourself alive and the Golden State still above the ocean.

In the last week of January, the world had a major tremor that, at first, looked like the Big One.  In two frantic days, America’s economic woes suddenly spread across the oceans and infected Asia and then, within hours, Europe.  The news that losses from America’s subprime home-loans crisis were costing Chinese banks some untold billions triggered a massive sell-off in Asia.  On January 21, in Tokyo, the Nikkei had its worst two-day drop in 17 years.  The following day, Hong Kong’s Hang Seng lost a tenth of its value, with similar losses posted in Singapore, India, Taiwan, South Korea, and Australia.

As the major Asian indices officially entered a bear market, the panic swiftly gripped Europe.  More than $150 billion was wiped off the value of Britain’s stock market on January 21, with the FTSE 100 Index posting its steepest fall on record.  The combined losses of the London, Paris, and Frankfurt markets alone amounted to more than $350 billion—the precise equivalent of Mr. Bush’s 2003...

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