Market turmoil and the economics of self-harm

[CHIMO]

All money-managers' eyes were on the US jobs report Friday morning, after the US stock market yesterday suffered its biggest drop since 2009, and panic surged through financial markets worldwide. The headline numbers were not as bad as many had feared: the US economy added 117,000 jobs in July, and the unemployment rate edged down from 9.2 to 9.1%. But the decline in the unemployment rate was due to people leaving the labour force, not finding jobs; and the overall picture of the job market in the US is still terrible. Just 58.1% of the US labour force is employed – as bad as it has been since the recession. As my colleague Dean Baker noted, "with the government shedding 30,000 jobs a month, we will be fortunate if the unemployment rate doesn't rise over the rest of the year."

The weakness of the US economy was part of what sent markets into a frenzy Thursday, but it was not the main part. The eye of the storm this time is in Europe, and the European Central Bank gets the credit for triggering Thursday's events. The ECB announced that it was reviving its programme to buy the bonds of distressed governments after a four-month hiatus, but then said that this would not include Italy or Spain.

This set off fears of a financial crisis, for two reasons: first, because of the fear that the financial markets would continue to speculate against Italian bonds, driving interest rates up to the point where Italy would not be able to borrow on the markets and would have to seek loans from the European authorities – as Greece, Ireland and Portugal have already done. Italy's public debt is $2.6tn, which is more than triple the entire economies of the other three countries combined. The European authorities – sometimes referred to as "the troika" of the European Commission, European Union and the IMF – are not yet prepared for a "bailout" for this level of debt.

The second source of fear concerns the European banks, who have hundreds of billions of dollars lent to Italy and Spain. As the interest rates on these bonds rise and their value shrinks, these banks face problems of liquidity and potential losses. The European banks' problems also contributing to fears of a financial collapse.

http://www.guardian.co.uk/commentisfree/cifamerica/2011/aug/05/us-economy-jobs-report