Vanshika Khemka G0853394L

Class Assignment 1
Global financial markets were bashed once again by the Zero US Jobs Report on 2 Sep 2011. This follows from swings in the market during the distressing month of August. Please discuss. On September 2, 2011, the U.S. Bureau of Labour Statistics reported that the nonfarm payroll employment was unchanged in August and the unemployment rate held at 9.1%. In simple words, there were no jobs created in the United States of America in the month of August and the rate of unemployment was at 9.1%, unnervingly close to a double-digit figure.

Stocks fell by 2% on that day. The Dow Jones industrial average was down 253.16 points at 11,240.41. The Standard & Poor's 500 Index was down 30.46 points at 1,173.96. The Nasdaq Composite Index was down 65.71 points, at 2,480.33. This fall had been occurring since the beginning of August all over the world starting with the S&P 500 and Dow Jones losing 6.7% and 5.6% respectively on August 8. This, in turn, led to a worldwide fall in markets. Australia plunged 2.9%. Great instability in the markets prevented short-selling in Belgium, France, Italy and Spain. In Asia, the Japanese government had to intervene to keep the exchange rates steady in order to make the exporters compete. In the UK, the FTSE 100 Index fell almost 1100 points. This is what the market situation was at the outset of August; not a very good sign for the global economy. So why were the global financial markets bashed by the Zero US Jobs Report? It is important to note that the US economy does not operate by itself. Over the few months, the manufacturing industry in the US has been on a steady decline and this leads to them having to import from most Asian countries. This, along with the financial markets and investments, ties up the US economy to almost every important country in the world making any crisis in the US economy a global crisis. Zero jobs means no new employment opportunities for the unemployed. This, in turn means, a huge backlash in consumer spending in the economy since people do not have the jobs and consequently, the remuneration to pay for consumer products in the US. Their purchasing power drops by a great magnitude. And, because of the massive de-industrialization in the United States of America, a large part of the manufacturing and industrial sector rests in the hands of the Asian countries. Thus, when no new jobs were created, the impact was felt by the world. No consumer spending led to a lesser number of consumers spending on the products supplied by

Vanshika Khemka G0853394L the Asian countries and as a result the Asian countries faced a major backlash. "When employment drops, incomes fall. When income falls, sales fall. When sales fall, production falls. When production falls, employment falls," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. Its a vicious cycle. Rumor has it, that the possibilities of a double-dip recession are high. This time, the slowdown comes after the earthquake in Japan, a spike in oil prices and the European Debt Crisis, in addition to the political gridlock in America. Even if the economy does not contract, the projected growth rate is so slow it will not be enough to absorb new people entering the labor market, much less the unemployed. In addition to the financial markets, the political situation is in turmoil in the US because of the spat between the Republicans and the Democrats and the task that President Obama has at hand. On the Jobs creation speech declared by Obama on Sep 8, he has proposed certain solutions that are supposed to assist in solving the crisis. His $450 billion dollar job creation bill is almost equivalent to 3% of the GDP, however the chances of it being approved by the Congress is bleak. The payroll tax cuts suggested is not the most efficient choice which means that for the big firms, there is no incentive for them to hire more people, thus not addressing the unemployment situation at hand. These may seem like a huge change but the question is, is it the most efficient? Where does the problem still persist. Even after the proposed bill, long-term interest rates need to be lowered, QE3 should be off the tables as more capital investments are now required. Gold reserves from the treasury could be sold in order to inject another round of economic stimulus. China should appreciate the yuan in order to make US exports more competitive. The infrastructure industry should be uplifted. Tax incentives should be given for hiring rather than the payroll tax cuts. Jobs and money needs to be injected into the US economy so that consumer spending increases, unemployment falls and the economy grows and gradually gets out of the quicksand it is in at the moment. A lot needs to be done and just concentrating on the numbers is not enough. A whole new system has to be developed so that the global economy can get out of the problem. As Kenneth Rogoff said, "We have never left the recession by any reasonable measure. If you're 10 feet below water, and you come up a foot, you're still drowning. The question of whether we are growing at 1% or falling at 1% is not the big issue. We need a massive instrumental change and that will not come by small measures. It will be a slow and long-drawn process, but that is the best chance of survival.