John Rapley

The new year started with a bang on the world's stock markets. It was the sound of share prices crashing to earth.

United States (U.S.) stock markets have lost more than 10 per cent of their value since the start of January. Markets elsewhere have fared even worse. Stock markets are echoing, loudly, what already started in real estate markets, especially in the U.S. The bubble inflated by years of loose monetary policy finally burst. Americans must now sit and watch as money virtually flies out their windows.

The fear is that if homeowners and investors feel less wealthy, they might pare back their spending, tipping the economy into recession. This anxiety is most acute in the U.S., simply because that is where the bubble grew biggest. A peculiar combination of policies in the U.S., and conditions in the global economy, conspired in the last decade to create a situation in which the American economy sucked hundreds of billions of cheap money in from around the planet.

Rising asset values

This subsidised a historic run-up in debt. Hardly anybody seemed worried by the profligacy of Americans, because they'd largely persuaded themselves that rising asset values would outrun the build-up in debt. Hubris took over. Prodded on by the talking-heads on the business channels, Americans figured they had discovered the alchemy that made it possible to live beyond their means, forever.

What a difference a few weeks make! This week, tumbling markets prodded the Federal Reserve Board - the American central bank - to slash short-term interest rates. The Fed says that worsening balance sheets at the major banks, which are watching their own asset values plunge, could cause them to tighten credit. This could turn a recession into a depression.

But cynics question the Fed's motives. It is not yet clear whether what is bad for Wall Street will be so bad for main street. It is not that the U.S. economy will not notice this bout of hardship. But so far, the evidence is not yet compelling that employment and wage growth will suffer as badly as the markets. Fed doubters suggest that the central bankers are just doing all they can to please their friends on Wall Street, by trying to shore up over-inflated asset values.

If so, their cuts will either fail to have the desired effect; or they will, but at the price of stoking inflation later. This, in turn, would force sharp interest rates sharply higher at some point in the future, provoking further falls in markets. The choice in America appears to be pay now, or pay later. But it looks like Americans won' escape the bill for the partying of the '90s and noughts.

As for the rest of us? It's far from clear that a global recession is in the cards. Growth remains strong in some of the emerging poles of the world economy, particularly in Asia. If the fashion for talk of 'decoupling' - the idea that Asia can happily sail past a U.S. recession - has gone out, nonetheless, the fundamental conditions in these economies remain good.

World asset markets

That's not to say this won't be a nail-biting time. World asset markets will continue to gyrate wildly. Nor is it to dismiss the challenges to which Jamaica will need to rise if its largest trading partner slows down. But it's probably too soon to hide under tables, waiting for the sky to fall. We're a long way from repeating conditions remotely like those of the Great Depression.

With that said, for an American who bought into what was supposed to be the greatest boom in history, the depression has got to be great.