What will happen if the stockmarket crashes?

[zoami_sosa]

I know it is not going to be like the Crash of 1929, if it were to crash it will affect more than just USA. Yet will it affect countries like China or/and Japan really bad? I supposed, it will affect them, but in such a large scale that their economies will go down the drain? I don't think so, but my boss said, "If the stock market crashes, everyone goes down with it." So, I wasn't so sure.

[akula]

thar's a very good question

[jdoc]

Good question, but a little vague. What stock market(s) are you referring to? The NYSE? Nikkei? All major world markets? This is a very multi-faceted question, since there are so many different parts that make up our economy.

Our global economy is inextricably co-dependent on the functioning of capital markets. Look what happened in 1998 when Russian bonds collapsed - half of Asia went into economic depression.

That said, a major downward adjustment in stock prices may have only a limited effect on the worldwide economy. Most large companies are awash in cash on their balance sheets right now, and are using their money to either buyback shares or purchase other companies. This differs greatly from the late 90s when companies bought other companies by using their stock instead of cash. So I don't think it would effect large company operations a great deal. Institutional investors, particularly pension funds could be in major trouble though, as many of them already have unfunded liabilities which would only get worse if their equity holdings took a dive. Individual investors wtih any significant holdings outside of retirement accounts might feel the pinch too, although they are more diversified than any other point in history through real estate, bonds, derivatives, foreign currencies, etc. This could decrease discretionary spending, which would in turn reduce economic growth. But in the U.S. at least the growth in discretionary spending hasn't been because of dramatic stock returns, it's been through real estate equity growth.

I could go on and on and on, there's so many ways to look at this type of issue. Suffice to say that I'm more worried about the major drivers to global growth right now: the U.S. consumer and the economies that cater to them (eg. China, India, etc.). Without significant growth from other countries like Japan and the EU, a lot of the current good times rests disproportionately on the backs of how much John and Jane Smith in the U.S. spend.