The world used to abide by the saying â??when America sneezes the world catches a coldâ?. But after a lost decade in the USA that saying has come under fire and rightfully so. But an interesting thing is occurring as Europe catches a cold. America isnâ??t even sniffling. Some economists claim there is no way the USA can escape the downturn now being seen across Europe. Iâ??m not so sure this is correct.
There has been one very clear difference in Europe and the USA over the last few years. Although both regions have suffered from balance sheet recessions and sizable real estate bubbles (some parts of Europe more than others) the response has been entirely different. Europe, as a result of the flawed single currency and lack of political unity has imposed austerity on itself for the better part of the last few years. In many countries this has resulted in an environment that never even remotely resembled the recovery seen in other parts of the developed world. In fact, many of these countries are in full blown depressions.
The United States, on the other hand, has been running steady 10% budget deficits throughout the last 3 years â?? there has been no real austerity. This has helped the private sector de-leverage without crushing economic growth. Iâ??ve maintained an unpopular position over the last few quarters that the USA would â??muddle throughâ? as opposed to falling into recession. This position has been based on my idea of a continuing balance sheet recession in the USA combined with a government that, despite its inability to agree on most things, has not torpedoed the economy via austerity.
The latest PMI and industrial new orders data shows the divergence that has appeared in these two regions over the last few quarters:
Based on the PMI data, the Eurozone has been contracting for two quarters while the USA continues to muddle through:
I think itâ??s too early to break out the victory cigars and proclaim that the United States has avoided a double dip. As Iâ??ve long maintained, trying to forecast the double dip misses the bigger point that the USA is still very much in one long recession â?? a balance sheet recession (no victory cigars for that). Itâ??s just been offset by continuing government spending. The difference in Europe is that austerity has exposed the balance sheet recession for what it really is.
So, while the USA isnâ??t out of the woods in terms of a double dip I do think itâ??s safe to say that, given the 2012 budget projection of 10% deficits, any downturn in the USA is likely to be meager compared to the disaster that is Europe. One thing is for certain â?? despite continual bickering in Congress, the lack of austerity during a balance sheet recession makes American politicians appear infinitely more capable than the political mess now unfolding across the pondâ?¦.
â??given the 2012 budget projection of 10% deficits, any downturn in the USA is likely to be meager compared to the disaster that is Europeâ?
If I may ask, what is the aggregate Eurozone deficit projection for 2012?
Most of Europe is not in a recession as I write this. Be careful with boastful articles like this. I hope youâ??re right, but if we see a meltdown in Europe, America will most likely follow since American banks are still very exposed, even if theyâ??ve been working hard to reduce to exposure itâ??s very strong nontheless.
Thatâ??s why the Fed went in with many other banks and helped to stabilized the situation.
Austerity in America will most likely bite hard if a Republican wins in 2012, and even if one doesnâ??t, Congress will likely be even more conservative.
Europeâ??s policies will truly start to bite next year and in 2013 after that. This self-congratulatory post is 2 years too early. If the situation remains the same in 2014, Iâ??ll be happy to grant you the bragging rights.
Until then, it looks like a rushed hatchet job with poor grounding and frequent guessing.
In any case, Iâ??m much more worried about what happens in China visavi the World economy.
I love it when people claim an article is something that it specifically states it is not. You call it â??self congratulatoryâ? when I specifically state that itâ??s â??too early to break out the victory cigarsâ?. Rather than get angry about something you didnâ??t read, try sticking to the actual facts laid out in the piece. The fact is, austerity is hurting Europe and not the USA. If you have a bone to pick with someone it is with your ignorant politicians who insist on driving the entire EMU into a brick wall.
The current divergence is in itself interesting and significant, as this posting points out.
I might be inclined to agree with Amusedâ??s caveats, but the only point I can see to the tone of such comments, is that it has probably encouraged you to maintain the measured one that is only sensible in the face of uncertainty.
Reality will prevail one way or the other, which is a comfort (and a learning opportunity) for those more interested in understanding it than having all the answers.
Another possibility to consider: US stats are manipulated by the White House and Fed with the justification of bringing the confidence back into the markets, which is allegedely the sole yardstick of the countryâ??s economic performance.
thoughtful and evenly balanced analysis, as usual. but one question:
when will you believe (if ever) that the US should reduce its deficit. US debt now is 100% of gdpâ?¦which some think is a point of no return tipping point.
in other words, donâ??t you think this statement is a tad too rich: â??And public sector debt isn't really debt in the sense that it has to pay it back.â?
Yes, the USA is running 10% deficits, but global oil production has been flat since 2005. It looks like the oil producers are trying to milk their assets for all they are worth and stretch the production over as long a time as possible. Once the big oilfields go into inexorable decline, global production should permanently drop like a stone in the ocean. Since global GDP is energy constrained, that should cause oil prices to spike and global GDP to nosedive. There is no way the USA can escape the effect of that, no matter how much money Congress prints.
â??This has helped the private sector de-leverage without crushing economic growth.â? â?? Cullen
The private sectorâ??s de-leveraging efforts have thus far been anemic.
This is a myth. Household debt has grown at an avg rate of 9% per year since 1950. In the last 3 years it has averaged -0.3%. This is not an interesting statistic. It is mind blowing. Consumer debt hasnâ??t been interrupted at all over the last 60 years. But what occurred in 2008 is a statistical anomaly. Itâ??s not supposed to happen. If debt had continued to grow at its usual pace weâ??d be somewhere in the range of 18T in outstanding household debt. But weâ??re at 13.2T. Claiming that the de-leveraging hasnâ??t occurred just because total debt has dropped from 14T to 13.2T misses the entire point. Debts relative to incomes are improving substantially. This is the metric we should be focused on rather than the headline household debt figure. The de-leveraging most certainly is occurring. And its been massive.
â??Consumer debt hasn't been interrupted at all over the last 60 yearsâ?
Unfortunately so. Maybe this was 59 years to long?
â??Debts relative to incomes are improving substantiallyâ?
Very good. Even better if they would improve as well in absolute numbers, not just in relative ones.
Because, as even the economist guild should understand by now, it is NOT just the relative debt to income (in macro speak: debt to GDP) ratio that matters. Especially if the income (GDP) shrinks. Which is the case from time to time, currently for instance in Greece.
You know, the (macro) economists bunch would start to impress the real world if it finally came up with a model that would -sustainably- work in a constant or even better a shrinking econonmy environment.
But no, always the old growth growth growth blabla, from fresh- and saltwater gurus. However, neverending economic growth, in this universe, canâ??t be sustainable at all. Because it just canâ??t exist.
Sam. Zero real GDP growth, with 2% inflation = 2% nominal GDP growth. 2% NGDP growth means exponential growth forever. Do you have a problem with that?
And if you want to accommodate population growth, youâ??ll need real GDP growth too, so your NGDP will have to be something like 4% or 6% at least â?? without any new goods and services at all.
If youâ??re worried about the environment, focus on sustainable harvesting of resources and efficient use of them.
â??Zero real GDP growth, with 2% inflation = 2% nominal GDP growth. 2% NGDP growth means exponential growth forever. Do you have a problem with that?2
As far as I am concerned, the long term GDFP growth should be, all else being equal, about 1 percent below inflation.
BTW, I donâ??t want to accommodate population growth for very much longer. Because I donâ??t need to â?? (especially) this particular growth is limited, very soon.
And yes, I am concerned about efficient and sustainable use of resources of all sorts. Do you have a problem with that?
Thatâ??s not really true, however unending economic growth does require increasing energy use and larger supplies of raw materials, both of which are starting to be constraining factors since weâ??ve failed to deploy the technology to solve those issues.
â??The household balance sheet is in worse condition than at any other point in history since the Great Depression. From 2001 to 2007, debt for U.S. households increased to $14 trillion from $7 trillion, and the ratio of household debt to gross domestic product was higher in 2007 than at any time since 1929â?³
Shifting private sector debt onto the public balance sheet, doesnâ??t make the debt go away. And the amount of consumer borrowing in the past decade has been unprecedented.
@Jay â??Shifting private sector debt onto the public balance sheet, doesn't make the debt go away.â?
It does make the debt serviceable though, doesnâ??t it? Government deficits supply the private sector with the money needed to pay the taxes to service the debt.
â??Government deficits supply the private sector with the money needed to pay the taxes to service the debtâ?
Would you mind to bolster this claim with reliable sources?
If the govt never spent any USDâ??s into existence, where would the dollars come from in the first place?
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