Fears that the global economy could be slipping back toward recession sent markets plummeting Thursday, with economic and financial problems around the world fueling a vicious cycle that risks spiraling beyond the control of governments.
On both sides of the Atlantic, economic vital signs are rapidly deteriorating. The United States’ recovery is stalling, and Europe’s debt crisis is threatening to strike Spain and Italy, which have two of the continent’s largest economies.
Investors concerned about another recession in the U.S. and the global economy, took part in a massive stock sell-off, sending the the Dow Jones industrial Average down 512 points. The Dow has now given back all of its gains for the year and then some.
Klein: Why the markets plunged
Investors are increasingly afraid that the world’s leading governments, weighed down by debt and wounded by the last economic downturn, might not have the wherewithal to keep the emerging crisis in check.
A dangerous dynamic is taking hold in which the spreading debt troubles in Europe create new risks for the United States, while the chance of another U.S. recession makes the European fiscal crisis even worse. And these perils come as China and other rising economic powers are trying to slow their economies to combat inflation, leaving the world without any obvious tent pole to hold up global growth.
Virtually every asset that investors considered risky was in steep decline. U.S. stocks were down 4.8 percent, as measured by the Standard & Poor’s 500 index, and there were similar drops in foreign stocks, oil prices and the debt of financially troubled nations such as Spain and Italy. Prices soared on anything viewed as reliable, including bonds issued by the United States — still considered the best bet if the global economy melts down. The rate the U.S. government must pay to borrow money for a decade fell to 2.4 percent, down from 3.2 percent a month ago.
Investors have grown so fearful that they are essentially paying the U.S. government to take their money. Rates on some inflation-protected Treasury bonds have turned negative.
And in a sign of the volatile financial times, Bank of New York Mellon said it will charge depositors of large amounts for the privilege — a 0.13 percent fee on cash deposits of more than $50 million. Large institutions have been avoiding the short-term lending markets where they normally park cash, instead putting it in bank accounts — a practice banks wish to dissuade because they already have more deposits than they think they can profitably lend out.
The world’s central bankers took a series of actions to address the turmoil in the markets. The European Central Bank on Thursday resumed buying bonds of European nations that investors have been fleeing, helping prop up the value of Irish and Portuguese debt. The Bank of Japan intervened to try to keep the value of the yen from rising so high that it would undermine an already weak Japanese economy. And on Wednesday, the Swiss National Bank made a similar move, seeking to stem a steep rise in the value of the Swiss franc, considered a global refuge in turbulent times.
Stocks tumbled in Asian markets early Friday. Japan’s Nikkei 225 stock average dropped 3.4 percent in early trading, and markets in Hong Kong, Sydney and Taiwan suffered losses of 4 percent or more.