Is the Stock Market Channeling Goldilocks?
Despite the stock market‘s recent surge in the US, some are questioning whether the market is indeed channeling Goldilocks, or if we could be on the verge of a downturn. According to the article, the US economy’s current situation is influenced by the government sector, and fiscal policy. These two factors could contribute to a generalized downturn, which could lead to a decline in profitability.
East Asia’s stock market surge is a good thing for the U.S. economy
Despite the turmoil that has engulfed the financial markets for almost nine months, no one has yet pointed to a direct link between the East Asian recession and the United States economy. However, it’s not too hard to imagine how such a link could arise.
Asia is a diverse continent, with a large number of historical connections, cultures, and environments. It is the largest continental economy by GDP. Its major economies include Japan, China, India, Indonesia, and South Korea. Southeast Asia is home to Thailand, Vietnam, and Indonesia.
The United States has a huge trade deficit with East Asia. The dollar has appreciated against many Asian currencies. This will lower demand for U.S. produced goods, and increase the demand for imported goods. The depreciation will increase price competition and will decrease exports. It will also reduce corporate profitability.
Another potential harbinger of the East Asian crisis is the commodity markets. Several commodity exporting countries are in debt. They may be forced to renegotiate their debts and restructure their currencies in order to keep their exports competitive. The fall in prices of commodities like copper will reduce export earnings. This could create a “competitive depreciation” spiral.
The East Asian model encompasses highly interventionist strategies in Japan and Korea, and distributionally neutral policies in most of the rest of the region. It also includes explicitly redistributive policies in Malaysia and Indonesia.
Fiscal policy and the government sector are exerting a contractionary influence on the economy
During a recession, fiscal policy and the government sector can exert a contractionary influence on the economy. This is a temporary effect. As the economy recovers, the impact should be reversed.
Fiscal policy is a financial policy based on government spending and taxation. It aims at influencing economic activity through changes in spending, taxation, and borrowing. Depending on the objectives of the government, fiscal policy can either be expansionary or contractionary.
As the economy enters a recession, state and local governments cut spending. Governments can also directly affect economic activity through taxation and transfers. These include capital expenditure and recurrent expenditure. They also impact asset markets such as the housing market.
Contractionary fiscal policy shifts the aggregate demand curve to the left. It decreases the spending by consumers and businesses, thereby reducing demand for goods and services.
Contractionary measures also reduce the amount of investment. As a result, prices come down. They also lead to a decrease in household wealth. This is because of the “crowding-out” effects.
The impact of fiscal policy on asset markets is also relatively uncertain. However, academics have recently rekindled interest in the relationship between asset returns and macroeconomic variables.
The effect of fiscal policy on asset prices is particularly important for policy makers. It may have an impact on the stability of financial markets and housing markets. It may also impact the spread of sovereign risk.
