Sigh of relief in Europe
Nicolas Sarkozy threatened to take the shine off a day of jubilation in financial markets at a deal to rescue the Eurozone when he said it had been an “error” to allow Greece to join the euro a decade ago. Fears mounted Wednesday that Europe’s debt crisis is reaching a critical tipping point, spreading from Greece, Ireland and Portugal to the larger economies of Italy and Spain. In 2008, the market struggled to value an almost unfathomable $15-trillion (U.S.) of real estate loans while property prices were collapsing.The leaders of France and Germany said Sunday that they had made progress in bridging their differences over a wide-ranging strategy to combat Europe’s debt crisis but that the “mind-boggling technical complexity” of the task meant they needed until midweek to finish preparing their plans.
It’s been about 18 months since the sovereign debt crisis in Europe began attracting attention in global financial circles. A US downturn will not be avoided. US households cannot continue to spend more than their income as they have in recent years, even if the credit crunch eases. As the economic world now turns its worried eye to the “traditional” financial experts, commentators, and reporters, those of us who saw this coming from a financial mile away feel the need to take you all to task. The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow. And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis.
Government of a country is the key player to stop recession and to divert the economy to the path of growth. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.In the US data suggest that the economy entered into a recession in the first quarter of this year as the five indicators used to define a recession (GDP, employment, production, income and sales) all peaked and then contracted between October 2007 and February 2008.
Finally, there is scope for expansionary fiscal policy in the US and Europe, despite large budget deficits. The US expansion should focus on infrastructure and transfers to cash-strapped state governments, not tax cuts.The USA has fixed this problem before, and it is not hard to do again.
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Simply wondering where Sarkozy and Merkel will be getting their trillion to ‘fix’ the situation. India and Brazil already told them to look elsewhere. Stick around. This show’s only going to get better.