On the Edge of a Precipice
The US Stock Market Collapse Could Trigger the Biggest Global Recession Since the 1930s

There is an army of pundits out there willing to say that there is little to worry about. Policy makers everywhere are oozing reassurance, intoning the mantra that the economic vibes are good. Lawrence Lindsey, George Bush's economic adviser, was at it in the Financial Times yesterday, insisting that a recession in the US was "unlikely".

In reality, of course, nobody knows for sure what is going to happen. Financial analysts have their charts which are supposed to be able to predict the future from the past, and these now spell trouble. Economists who look at the hard economic data say that cheaper money and higher spending means things are getting better. But both presuppose that economics is a science rather than a modern form of alchemy, and that the practitioners in its black arts are anything more than highly-paid witch doctors. The only theory that is really relevant to the stock market is chaos theory. The recent history of the dollar is a case in point. For at least the past five years, the strength of the US currency has been eating into corporate profitability and contributing to a record trade deficit. Markets knew that the dollar was overvalued, but kept on buying it regardless. Over the past two months, the mood has changed and the dollar has fallen by 14% against the euro, breaking through the one-for-one parity level yesterday for the first time in more than two years. When will the fall be arrested? Who knows? On some estimates, the dollar is still 30% overvalued, but a rapid fall of that size would feed back into the equity markets, with foreign investors rushing for the door.
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