The first domino: A bad U.S. economic outlook, reflected in Friday's jobs report, helped prompt major stock sell-offs globally over the weekend.

"Japanese stocks collapsed on Monday in their biggest single day rout since the 1987 Black Monday sell-offs," reports Reuters, with the Nikkei 225 index falling 12.4 percent and the Topix index falling 12.2 percent. The Kospi index in South Korea fell more than 10 percent. Equity markets felt the pain in Taiwan, Australia, Singapore, Hong Kong, and China, though to a lesser degree. "At one point, the plunge in Japanese and Korean stocks tripped a 'circuit breaker' mechanism that halts trading to allow markets to digest large fluctuations," reports The New York Times. "But even after those mandatory breathers, the sell-off in stocks seemed to accelerate. Jitters spread to the debt market, prompting a halt in trading in Japanese government bonds as well."

Wall Street's "fear gauge"—the VIX—jumped to its highest level since 2020, when the pandemic prompted a wild market fluctuation. "The market response is a reflection of the deteriorating U.S. economic outlook," Jesper Koll, a director at financial services firm Monex Group, told the Times. "It was a New York sneeze that forced Japanese pneumonia."

The U.S. jobs report, released Friday, found that hiring slowed significantly in July. Unemployment continued its slow creep upward—4.3 percent, the highest since October 2021—and wage growth eased a bit. The jobs report also revised the May and June numbers downward, by a combined 29,000 jobs, indicating that the July downshift did not come out of nowhere. It also "stoked fear of a coming recession" due to something known as the "Sahm Rule," named for economic Claudia Sahm, who identified in 2019 a useful recession indicator that our July jobs report has unfortunately met (more on that from Reason's Eric Boehm).

Inflation has showed plenty of signs of cooling a bit, responding to Federal Reserve rate hikes, but the jobs report means a rate cut "could be on the table" as soon as September, according to Fed Chair Jerome Powell.

In other words, the aspirational "soft landing"—a cooling down of inflation without triggering a recession—may not in fact be materializing. And these American warning signs are leading to global ripple effects.

Bloomberg's Joe Weisenthal has, I think, the smartest and most concise take on what's going on, for those who indulge:

10 THOUGHTS ON TODAY'S BIG MARKET SELOFF

In today's 5 Things newsletter, I jotted down a bunch of random stuff about this moment in stocks, crypto, FX, and macro.

Here they are

1) It was clear instantly on Wednesday that Powell was going to be offsides this market: pic.twitter.com/iJ6ipo7Grc

— Joe Weisenthal (@TheStalwart) August 5, 2024

Scenes from New York: Will Rudy Giuliani's real estate save him?

QUICK HITS

• The U.S. government believes Iran and Hezbollah will retaliate against Israel for the recent assassinations of Hamas leader Ismail Haniyeh in Tehran and Hezbollah leader Fuad Shukr in Beirut.
• Per tabloid reporting, which was partially confirmed by the campaign, Kamala Harris' husband, Doug Emhoff, had an affair during his first marriage (not to Harris). The woman he had an affair with allegedly became pregnant and did not keep the baby, though the campaign has not acknowledged or confirmed that part.
• "Belgium's Olympic committee announced Sunday that it would withdraw its team from the mixed relay triathlon at the Paris Olympics after one of its competitors who swam in the Seine River fell ill," reports the Associated Press. "After a spring with an abnormal amount of rainfall, tests of the river's water found that the levels of E. coli bacteria were more than 20 times higher than what World Triathlon considers acceptable," wrote Reason's Natalie Dowzicky last week. "But the mayor of Paris, Anne Hidalgo, still jumped into the Seine earlier this month in an effort to instill confidence that the waterway was just fine. But a small dip is very different from submerging yourself for hours of racing."

This is the most French possible thing that could have happened when Paris hosted the Olympics:

Running with a really stupid idea because it sounds cool, then somehow ending up fucking over the Belgians. https://t.co/K6Id4CUVV5

— Tom (@Lawmadillo) August 5, 2024

• Fun fact:

Nirvana's Nevermind was released 12,000 days ago. Its release date is closer chronologically to Fidel Castro taking control of Cuba than to today.

— Dan Szymborski (@DSzymborski) August 1, 2024

The post Markets in Panic appeared first on Reason.com.

Congressional Budget Office (CBO) projections provide valuable insights into how a big chunk of your income is being spent and reveal the long-term consequences of our government's current fiscal policies—you may endure them, and your children most certainly will. Yet, like most other projections looking into our future, these numbers should be taken with a grain of salt. So should claims that CBO projections validate anyone's fiscal track record.

So much can and likely will happen to make projections moot and our fiscal outlook much grimmer. Unforeseen events, economic changes, and policy decisions render them less accurate over time. The CBO knows this and recently released alternative scenarios based on different sets of assumptions, and it doesn't look good. It remains a wonder that more politicians, now given a more realistic range of possibilities, aren't behaving like it.

First, let's recap what the situation looks like under the usual rosy growth, inflation, and interest rate assumptions. Due to continued overspending, this year's deficit will be at least $1.6 trillion, rising to $2.6 trillion by 2034. Debt held by the public equals roughly 99 percent of our economy—measured by gross domestic product (GDP)—annually, heading to 116 percent in 2034.

The only reason these numbers won't be as high as projected last year is that a few House Republicans fought hard to impose some spending caps during the debt ceiling debate. The long-term outlook is even scarier, with public debt reaching 166 percent of GDP in 30 years and all federal debt reaching 180 percent.

No one should be surprised. To be sure, the COVID-19 pandemic and the Great Recession made things worse, but we've been on this path for decades.

Unfortunately, if any of the assumptions underlying these projections change again, things will get a lot worse. That's where the CBO's alternative paths help. Policymakers and the public can better see the potential risks and opportunities associated with various fiscal policy choices, enabling them to make more informed decisions.

For instance, the CBO highlights that if the labor force grows annually by just 0.1 fewer percentage points than originally projected—even if the unemployment rate stays the same—slower economic growth will lead to a deficit $142 billion larger than baseline projections between 2025 and 2034. A similarly small slowdown in the productivity rate would lead to an added deficit of $304 billion over that period.

Back in 2020, the prevalent theory among those who claimed we shouldn't worry about debt was that interest rates were remarkably low and would stay low forever. As if. These guys have since learned what many of us have known for years: that interest rates can and will go up when the situation gets bad enough. So, what happens if rates continue to rise above and beyond those CBO used in its projections? Even a minuscule 0.1-point rise above the baseline would produce an additional $324 billion on the deficit over the 2025-2034 period.

The same is true with inflation, which, as every shopper can see, has yet to be defeated. If inflation, as I fear, doesn't go away as fast as predicted by CBO—largely because debt accumulation is continuing unabated—it will slow growth, increase interest rates, and massively expand the deficit. To be precise, an increase in overall prices of just 0.1 points over the CBO baseline would result in higher interest rates and a deficit of $263 billion more than projected.

Now, imagine all these variations from the current projections happening simultaneously. It's a real possibility. The deficit hike would be enormous, which could then trigger even more inflation and higher interest rates. The question that remains is: Why aren't politicians on both sides more worried than they seem to be?

What needs to happen before they finally decide to treat our fiscal situation as a real threat? President Joe Biden doesn't want to tackle the debt issue. In fact, he's actively adding to the debt with student loan forgiveness, subsidies to big businesses, and other nonsense. Meanwhile, some Republicans pay lip service to our financial crisis, but few are willing to tackle the real problem of entitlement spending.

The time for political posturing is over. The longer we wait to address these issues, the more severe the consequences will be for future generations. It's time for our leaders to prioritize the nation's long-term economic health over short-term political gains and take bold steps toward fiscal responsibility. Only then can we hope to secure a stable and prosperous future for all Americans.

COPYRIGHT 2024 CREATORS.COM.

The post The Congressional Budget Office's Alternative Scenarios Forecast a Dire Economic Picture appeared first on Reason.com.