What happened in yesterday’s market underlines the deep bind we now find ourselves in. We have politically precluded new revenues and have shifted our attention to deficit reduction at a time when we would need to invest. We have already had two rounds of quantitative easing and interest rates are at record lows so there is precious little that the Fed can do.
At this point a double dip recession is extremely likely with the potential of the second dip being nastier than the first one. Not surprisingly, Treasuries rallied yesterday as investors happily ignored the S&P downgrade and chose the emergency exit from the equity markets instead. With a looming double dip recession it is unclear why anyone would want to hold most equities.
In the end this won’t be all bad for Internet businesses. In fact, they will continue to be the only growth story around and as such are likely to recover long before anything else once the overall downward spiral has stopped. When that will be is of course anybody’s guess.
There is of course also the distinct possibility that this will get so bad that we will come out on the other end with some of the structural changes that we so badly need. That would be a great outcome but it will sure be painful getting there and the social unrest in London is an example of what may well happen more broadly including in the US.