June 30, 2010 Patrick Oliver-Kelley


World economic healing continues as a work in progress. The US economic stimulus plan is working, slowly. Job creation continues weak, only net 40,000 jobs were created last month and the jobless rate continues at 9.7%.

There are huge debts internationally producing a drag on the recovery. Many feel more stimulus is needed. The Financial Reform Bill being hammered out in Congress and among the G20 countries in Toronto, are a further drag on national and international recovery. This crisis period proves how inextricably linked our national economies are. Fedex, a noted economic bell whether company, produced earnings and revenues of plus 20% for their last quarter, being the only gleam of light.

America’s debt weakens national security and makes the world a riskier place. Entitlement programs and unfunded liabilities are growing in all Western economies. The solution: Vigorous economic growth in America and in Europe. In the 1920’s President Harding cut taxes and cut the federal budget sharply, though politically less likely these days, especially with the government being run by the Obama administration, but there is no other way out of our current malaise.

The EU agreed to publish the results of the stress test being conducted on its 25 largest banks. As for the Euro, the crisis is overblown. All of the most vulnerable economies- Greece, Ireland, Portugal and Spain, together, account for less than 20% of Euro area GDP. All the austerity programs underway come to less than one percent GDP next year, hardly a belt tightening. But the Euro area rescue package has only bought time, maybe three years, it has not solved any structural problems in the area.

But economic pain is likely to get worse in Europe. Libor is increasing, the overnight indexed swaps-OIS- is widening and credit default swaps-CDS- spreads are widening: All point to continued fear of a risk default or of a contagion.

China said it was going to allow a more flexible Yuan rate, implying an appreciation, but China’s current account surplus fell from 11% to 6% since 2007. Do not expect a surge. Germany’s current account surplus exceeds that of China. Germany would best assist the economic environment by doing something to boost its domestic demand.

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