Last time United States had witnessed a recession from the period October 2007 to March 2009. A period of great economic trial for all. This was also the period when Bear Sterns went belly up and was rescued. Then Lehman Brother failed and it was allowed to fail so the world's stock markets crashed and many companies went bankrupt.
It recovered from the recession after a bull run that started in March 2009 to April 2011, this period saw the US Dow Jones Industrial Average climb from 7,000 to 12,800. But with the fall of 10% in equity in a span of 12 trading days, has led to worry that there will be a second crisis. And this view has found support from many experts. (Stock markets in other countries also followed similar pattern like Down Jones, sometimes with a lag)
The man who predicted the 2008 financial crisis, Nouriel Roubini, chairman of Roubini Global Economics and also a professor at New York University, opined that US economy is in for a double-dip recession.
In an interview with Bloomberg he stated the main reason why S&P went ahead with the downgrade now was to blame the junk on market volatility. “They can blame the market volatility for the downgrade. But in reality US did contribute to the debt crisis," he said. He also provided an insight into why the downgrade was done. The credit rating agency was facing flack from European countries for not taking any action on the US, despite downgrading the “too big to fail" Euro-zone.
Now to theme what all can happen, there are two possible scenarios.
The complete loss of faith will lead a panic run from equities in to gold and other commodities. And investor sentiment will go from bad to worse. The governments will try to prop up the demand by issuing more debt but it will not help and the fiscal bomb will eventually burst. There will be lots of pain for everyone.
A run in bond market may happen where investors pull out their money out of sovereign bond markets. These investors will have to find new avenues to make investments. In which case emerging economies and companies investing in emerging economy will see benefit. Governments all over the world will have to restructure themselves, and reduce their fiscal deficits.
In either scenario, some of the fundamental assumptions that growth will remain high and inflation will remain low cannot be applied. The habit of looking at rear-view mirror to move forward needs to be changed. Growth will be slow unless a new euphoria is created. For the moment, it seems the ammunition to steroid the country's growth has run out.