The failure of stocks to hold on to any sustainable gains indicates the nervousness in investors, as the world economies continue to be threatened at this time by slowing and potential credit issues. As we have seen, there have been trillions of dollars of capital infusion into the world credit markets in an attempt to keep the credit lines open to businesses and consumers. The United States offered a $161-billion economic stimulus program and followed it up with a $700-billion financial bailout program The U.S. government is also injecting a staggering $150 billion in American International Group, Inc. (NYSE/AIG), after helping to bail out mortgage giants Fannie Mae (NYSE/FNM) and Freddie Mac (NYSE/FRE), which are now both trading at under a dollar.
It is clear that the economic and financial situation, not only in the United States but also globally, needs to be remedied or we could see economies in many countries tank. The real concern is the domino or multiplier effect, when weakness in one economy spills over to other economies.
Across the Pacific Ocean, China is no different. The country is a key component of the global economic machine, and will need to stabilize its economy; otherwise the ripple effect to the rest of the world could be devastating, The strong linkage of world economies, unlike in the past when economies were more localized, makes the current situation difficult for the world central bankers and governments.
For its part, China understands its need to remain strong. On Monday, the country announced a major $586-billion economic timulus program, which is critical due to the country’s key role in the global economies. Yet the size of the package may only be enough to prime the economic pump and it could have trouble getting it going. China’s GDP growth is slowing, but is still expected to be in the high single digits, which is impressive compared to the decline we are seeing in the U.S.
China’s manufacturing sector is struggling with lower demand for goods. This is a real threat and suggests that the risk of global slowing is serious. The People’s Bank of China has cut key interest rates three times in six weeks in the concerted global effort to avoid a worldwide recession.
Yet the battle will be whether the global rate cuts and capital infusion will be enough to avert global slowing.