The Last Time the Market Dropped 50%

The market touched bear territory last week, as the S&P 500 was briefly down 20%. However, that is nothing compared to the last brutal bear market. During the financial crisis, the market dropped 51% in 2008 from where it was in mid-2007. It did not recover completely until 2013. At that point, the global financial system went through a meltdown that almost collapsed the U.S. banking system. Some nations, led by Greece, came close to reaching a point where they were nearly “bankrupt.” In the United States, it took massive government intervention to save the economy from a disaster like that which triggered the Great Depression.

Another Crisis Coming?

The question is whether tariffs, in particular, can collapse the global economy. Several factors indicate it may. And shortage-driven inflation cannot be immediately crushed by the Federal Reserve.

Instead of locking up the credit market, as in 2008, the catastrophe today would be shaped by a combination of inflation and the complete disappearance of some consumer and business products. The effect of 125% tariffs between the two largest economies in the world could trigger hyper-inflation. Car prices could be the least of the problems. Consumers rarely have to buy a car. The average car on the road in the United States is 12 years old. People can hold on to autos.

Among the greatest dangers is that some essential products could disappear. A significant portion of the components of many pharmaceuticals come from China. The American healthcare system would face an unprecedented challenge.

Some items might disappear almost completely, which means the prices of the meager inventories would cripple some industries. Among the most obvious of these is solar power. Almost all components of these come from China.

Inflation reached 17% in 1980. This was mostly because of an energy shortage. If anything, the United States has an abundance of energy today. However, the consumer price index is made up of much more than energy. Key components include autos, apparel, and medical expenses. The prices of each of these could rise well into double-digit percentages. China produces about 40% of the global textile supply.

A huge stock market drop would be caused by a wounded financial system that has no means to improve itself. Shortage-driven inflation would be included on that list.

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