Investors are increasingly fleeing to the safety of gold, bonds and emerging markets as fears mount that the U.S. economy will continue to sputter and that policy makers are about to make matters worse.
A day after the U.S. Federal Reserve Board signalled for the first time that it is worried about the risks of economy-crushing deflation and Larry Summers, the White House's top economic adviser, announced his resignation, gold soared to a fresh record, the U.S. dollar plunged against the euro and other major currencies, and stocks weakened across the industrial world.
The latest news on the U.S. economic front added to the jitters, as house prices plumbed a six-year low, after a raft of foreclosed homes hit the market in already depressed markets in the southern and western states.
Many investors fear that the United States is headed toward another recession and that, while Europe is tackling its fiscal problems, U.S. policy makers are ignoring the risks posed by soaring deficits. That threatens to undermine the U.S. dollar even further.
Gold neared $1,300 (U.S.) an ounce Wednesday and the dollar fell to its lowest level since March against the currencies of its major trading partners.
The flight comes as investors fret in growing numbers over the likelihood of another round of quantitative easing in the United States, which already has the world's loosest monetary policy, analysts said. On Tuesday, as it held interest rates steady near zero, the U.S. central bank said it stood ready to take further measures.
"Financial markets are unhappy to see that not only are we doing nothing at all to reduce federal deficits, but there's an increasing likelihood that the Fed will actually monetize the government's debt by maybe buying another $1-trillion worth of Treasuries," economist Ed Yardeni of Yardeni Research Inc. said in New York.
"The Fed is just an enabler here, facilitating the fiscal excesses of Washington. Seen in that perspective, it's obvious why gold is at record levels and the dollar is taking a dive."
Adding to the uncertainty was the resignation of Mr. Summers as director of the White House's National Economic Council. Mr. Summers, who will leave by the end of the year to return to his teaching post at Harvard, was a driving force behind the unprecedented fiscal stimulus spending. He said he had been planning to return to Harvard for some time.
Mr. Summers is the third of U.S. President Barack Obama's four most senior economic advisers to quit in recent months.
The forceful Mr. Summers has been a lightning rod for criticism of the administration, as he has argued strongly against extending the Bush tax cuts and in favour of more stimulus spending, including costly investment credits.
Mr. Summers' proposals will not help struggling small businesses, considered one of the keys to economic recovery, said Robert Brusca, chief economist with FAO Economics in New York.
Trial balloons have been floated that indicate a successor to Mr. Summers is likely to have close ties to business, to help repair rifts with the administration over a range of policy moves.
But Mr. Brusca said the changing of the guard is less important than finding policies that will lift the United States out of its deepening economic funk. "If we're going to be stuck in a mire, it really doesn't matter who's going to be there," Mr. Brusca said.
Meanwhile, uncertainty is likely to remain the prevailing market sentiment for some time, particularly if Washington remains in gridlock after the mid-term elections in November.
"There's a negative bias [in the markets]" said Joseph Hooley, president of State Street Corp. in Boston. "There are some pretty overwhelming economic headwinds that feel like they're going to take some time to work through, particularly the unemployment and growth rates."
White House economic adviser Larry Summers is stepping down from his job at the end of the year to return to his position as a professor at Harvard University, the administration said on Tuesday.
Following are economists that have been mentioned as potential replacements for Mr. Summers as director of the White House National Economic Council.
A member of the President's Economic Recovery Advisory Board, an outside panel of economic experts advising Barack Obama. Ms. Tyson is a former top economic adviser to former president Bill Clinton. She is also a professor at the University of California's Haas School of Business in Berkeley.
A deputy to Mr. Summers on the National Economic Council. She also sits on Mr. Obama's Auto Task Force. From 2002 to 2009, Ms. Farrell was director of the McKinsey Global Institute, the economics research arm of McKinsey & Co. Prior to joining McKinsey, she worked at Goldman Sachs as a financial analyst.
Also a deputy to Mr. Summers. Mr. Furman served as economic policy director of Mr. Obama's presidential campaign. He served in the Clinton administration as a staff economist at the Council of Economic Advisers and later worked for the National Economic Council. In addition, he was a senior adviser to a top World Bank official.
A member of the bipartisan deficit commission Mr. Obama formed early this year to tackle the deficit. Ms. Fudge was chairman and chief executive officer of Young & Rubicam Brands. She also held senior executive positions at General Mills and Kraft.
Chairman of the Commodities Futures Trading Commission. Mr. Gensler is a former Treasury official and Goldman Sachs employee. He was also a senior adviser to former Senate Banking Committee chairman Paul Sarbanes, on the Sarbanes-Oxley Act.
Counsellor to Treasury Secretary Timothy Geithner. Mr. Sperling headed the National Economic Council in the Clinton administration. He served as an economic policy adviser to the Clinton-Gore presidential campaign and was also an economic adviser to former New York governor Mario Cuomo.
Chief economist at Moody's Analytics. Mr. Zandi was an economic adviser to John McCain's presidential campaign, but has also advised the White House and congressional Democrats and Republicans.
Chairman and CEO of General Electric since 2001. Mr. Immelt is also a member of the Business Council and is on the board of the New York Federal Reserve Bank.
Chairman of Citigroup and a former chairman and CEO of Time Warner, Mr. Parsons was on the Obama transition team's economic advisory board before being named Citigroup chairman. He also served on a task force under former president George W. Bush that examined Social Security changes.
Former Xerox Corp. CEO. She serves on the President's Economic Advisory Board.