A toxic brew of sluggish economic growth, rising unemployment, and spiking inflation—otherwise known as stagflation—is prompting market watchers to backpedal furiously on earlier predictions of a rally later this year. Noticeably absent from the discussion are the traditional stock market drivers of strong earnings and interest-rate cuts, neither of which seem to be on the horizon. Economists, meanwhile, are beginning to tamp down expectations for global growth not only for the rest of this year but for 2009 as well—especially with oil surging to new heights....
Much of the malaise, of course, stems from the credit crunch, which will soon mark its one-year anniversary. Banks are expected to notch an additional $600 billion in losses in coming quarters from the mortgage mess and the resulting economic troubles, bringing the total to $1 trillion. They're still ducking for cover: In a recent Federal Reserve survey, 70% of banks had tightened their lending standards for home equity loans.
Whether it's technically a recession or not, it certainly feels like one for many individuals and businesses. Credit-card delinquencies are on the rise, meaning banks will have to set aside money to cover a new round of losses from troubled loans. American Express, for example, issued a sobering statement on June 25, noting that the business environment in the U.S. continues to weaken as "credit indicators deteriorate beyond our expectations."
Without access to the HELOC and the second income that our homes were bringing in, people are turning to credit cards. There are a portion of those using credit cards just to get by with the increases in gas and food prices. Then there is the other camp who have not lived within their means for some time and are not ready to start now.