DOW plunges 735 points. Worst week since March 2003. Signs the war in Iraq is strangling the economy

[Mugsy]

Via "Mugsy's Rap Sheet":

DOW plunges 735 points. Worst week since March 2003.
Signs the war in Iraq is strangling the economy.

Apparently, the bloodletting was not over when the Dow Jones Industrial Index (DJIA or “DOW” for short) plunged 311 points last Thursday. Hype over the looming “14,000 point milestone” wafted through the press for days after the DOW leapt 283 points on July 12th… the day the Democratic Congress announced it would be voting to pull all U.S. forces out of Iraq within 120 days. (...) it took four days to climb the last 50 points to cross the 14,000 threshold on July 20th. Then the bottom fell out, losing 149 points the next day, bouncing back a little only to lose 226 points on Tuesday, 311 on Thursday, and now another 208 points on Friday, making this the worst week for the DOW since March 11, 2003. Hmm, seems like I remember something significant happening in March 2003, but I can’t quite put my finger on it. (the DOW leapt 282 points two days before the invasion of Iraq on news that war might be avoided.)

So, why did the DOW see its worst week since the invasion of Iraq (and the worst week for the S&P 500 since September 11th) after such a rapid 1,700 point climb in just four months? As I wrote yesterday, interest rates were cut to the bone after 9/11, boosting new home sales to record highs as unwitting home buyers agreed to “adjustable rate” mortgages with low monthly payments. Those mortgages are responsible for the skyrocketing number of foreclosures and defaults as interest rates were increased to attract foreign investment to pay for the war in Iraq (rising steadily since June 2003.)

Add to that the price of oil jumping $2 a barrel to within $.01 of its all-time high of $77, and you have all the ingredients for a floundering economy.

(...)

Read the full story on "Mugsy's Rap Sheet"

[Rockholm]

1. I believe interest rates will come down as a result.

[Captain Angry]

5. They're stuck.

If you lower interest rates, the frivolous borrowing begins again, and inflation continues onward. It keeps foreign investors at bay.

If you raise rates, the borrowing slows, the saving begins, and unemployment grows. But it encourages people in other countries to buy our debt at the higher payout.


So, they have to balance it. I think they're heading up, not down. People will not buy US debt unless they are paid well to do so, so I think interest rates will increase to keep the money coming in that is letting Bush do what he wants to do.

[Rydz777]

8. I think you nailed it. The Fed is between the proverbial rock

and a hard place. As long as Bush is financing his Iraqi war with borrowed money the gov't needs high interest rates to keep selling those bonds. But there is always an "on-the-other-hand" Helicopter Ben Bernanke has said that he would inflate ("throw money from a helicipter") to avoid recession.

[Captain Angry]

11. We'll see. If Bernanke drops bags of money, it will make things look good.

And, then when the next administration takes office, we'll see how hard they jerk the reins. I'm sure it will have nothing whatsoever to do with who is in the White House at the time.

[Rockholm]

13. The whole mess really sucks. Bush has really effed us up.

And I do mean royally. Great op-ed in The Boston Globe today by Robert Kuttner. Pretty scary stuff ahead, possibly.

http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/07/30/the_crash_that_could_come/

I for one am not one of those DUers who want gloom and doom. You know the ones. The ones who want the housing market to crash, the stock market to crash, etc. I would hazard a guess that most of us own our homes and don't want their values to drop and again, a good number of us also own stocks and bonds in one form or another.

[tjwash]

12. Come down? They're almost paying people for taking federal loans as it is.

nt

[shaniqua6392]

2. No way! Bush said the economy was doing great!!

Nothing to worry about. Move along now.:sarcasm:

[Tandalayo_Scheisskopf]

3. The one thing that the market has proven, of late...

Is that there is some very serious glue sniffing going on there.

[enid602]

4. GDP

I think last week's Wall Street pummeling was also an international financial reaction to Bushco's restatement of YTD '06 GDP to make it look like GDP's risen over the last 12 mos. Can't fool them. If we're in a recession now (with Government spending at an all-time high), what will it look like when our creditors pull the plug on us?

[opihimoimoi]

6. It will look like chaos to our realm....recession/ depression/major meltdown.

[soothsayer]

7. isn't that only like 2.5%? no big whoop.

[B Calm]

9. and the republican economic disaster continues....

[Mutineer]

10. Not to discredit the blogger here, and that's an interesting theory

but the Dow plunge was widely credited as being the result from bad news from the Housing market which showed slow sales for both existing and new homes, and a plunge in house prices, plus increases in foreclosures, which the blogger does reference in their theory but that's the first time I've seen a theory like that pushed as a reason why and I spend a lot of my time (work) reviewing economic trends. The Dow plunge we're seeing right now has to do with the ripple effect that occurs when house sales trend down: it impacts not just builders and realtors but industries that manufacture construction supplies, stores that sell them (Think Lowes, Home Depot) and to Big Box retailers like Wal-Mart and Target and furniture stores, etc. And the war going badly doesn't explain why the Dow was at record highs the week before.

[Elspeth]

14. Big business is losing money. Now there might be a pullout.

That is the grim reality.