Correction or crash? That is the stark question posed by the shuddering world stock markets of the last few days. Sharp falls in values have spread to the American and European heartlands of the global marketplace from Hong Kong and south-east Asia where they started and have gone deepest. Linking the two phenomena is partly artificial, given the differences in fundamental economic conditions between Asian and the main Western markets - or, indeed, between the Asian markets themselves. But globalisation is nowhere more clear-cut than in financial markets, even if they do have their own momentum often far removed from everyday economic realities.
Thus it makes better sense to talk of a potential crash in south-east Asian markets (but not in Hong Kong) and a correction in the US and Europe. Looking for logic in the swings of international stock markets can often be a frustrating exercise. Certainly, the turmoil in Asian markets has the capacity to knock-on and cause upset to the international economy, particularly if it effects the portfolio holdings of major Japanese investors. But the extent of the swings in markets in the US and Europe also result from other factors and show that the turmoil in Asia has led investors to reassess the overall value of shares.
The outlook is now unclear. Having tumbled sharply early yesterday, there were clear signs of recovery later in the day, particularly in the crucial US market. However, such has been the volatility of recent days that it will be some time before the markets settle again. There is always the possibility that their own momentum will trigger movements that are irrational when considered in relation to economic fundamentals, but all too real in their impact on the private and public savings for pensions and other long-term benefits that are so much part of the substance and dynamics of contemporary stock and bond markets.
The link between the markets and the real level of economic activity is not a clear one. Falling share prices have an impact on the overall level of wealth. And thus dropping markets can affect the level of economic activity. But it must be remembered that the value of share markets remains well above what it was at the start of the year. So the main impact in the short term will be on confidence and investment in the major international economies. This in turn could mean lower growth rates. In that case, interest rates are more likely to stay low in the US and European centres. International authorities appear relatively powerless in the wake of such events. There is little they can do to limit the swings in market values. They will, however, have to be cautious in their statements over coming days. There could be a more active role for international authorities in relation to Asian markets - particularly where currencies are under attack, as in Hong Kong.