FE Editorial : Dow against double dip

Mon, Oct 19 09:16 AM

The Dow Jones industrial average crossed the 10,000 mark on Wednesday last week for the first time since October 2008—at that time, in contrast to this time around, it was on its way down from a peak of over 14,000. Now, the Dow has gained over 50% of its value since a terrible low in March 2009—that was when the decline after the Lehman crash bottomed out. Stock markets are always characterised by animal spirits; so, symbolic numbers mean a lot. Getting back to 10,000 after a year when the economy went through its worst cycle since the Great Depression will be a major confidence-booster to investors in the US and indeed investors in other parts of the world. It is important, also, to remember that recovery of stock markets in the US means a lot for the overall economy than, say, for a country like India. The US markets are a lot deeper than ours and many more people directly or indirectly have a stake in the stock market. In India, only a small minority has a stake.

Imagine how pensioners, who finally see their 401(k) retirement packages come back to life, feel. This will certainly spur them to consume more, a stimulus which is much needed. Similarly, other savers who directly or indirectly invested in the markets will have just witnessed a return of some of the wealth they lost in the last one year. This wealth effect is likely to be as significant in the upturn as it was during the downturn. Remember also that stock markets always tend to recover faster than the real economy does. In this, they are an indicator of imminent recovery of the real economy in the US. And even if the figures on unemployment don't look so cheery for the moment, they are likely to begin to recover at some point in the remainder of this financial year. That's good news for the US and good news for the rest of the world that still depends on the US as the leading economic engine. If there is indeed a solid recovery by the end of the financial year, we will have witnessed a turnaround that was expected to take much longer when the crisis broke out in September 2008. This definitely proves the importance of the coordinated fiscal and monetary stimuli taken across the world. In the US, one can expect cheap money to be around for a while yet in combination with a sustained stimulus. There is too much at stake to risk a double dip now.

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