December 29, 2011 Patrick Oliver-Kelley

As sure as spring follows winter, prosperity and economic growth follows recession.

Recession Globe

Despite glimmers of improvement, the US economy remains lackluster. Things are worse in Europe; Japan still struggles; even highflying China and Brasil are experiencing slowing economies; The Euro does not make sense for economically tiny Greece. The core challenge for the US as well as Europe is how to grow while households and governments are basically in retrenchment mode – tempering their spending after years of fast-rising debt.


No signs of life

Existing-home sales rose again in November and remain above a year ago. A new wave of real estate investors may be starting to snap up deals and holding them for the long term. However, the housing market may still be uncomfortably, as much as 25%, over valued. There is no evidence of an imminent bounce. Unemployment rate fell to 8.6% but much of the decline is accounted for by people just giving up trying to find employment. US factory orders fell for the second straight month. The nonmanufacturing sector grew slower than hoped.

Headlines are filled with the oinks of those who are occupying Wall Street at a time when the world and our nation are being severely economically tested. Are we acting out of wisdom and knowledge or are we acting out of fear? Risk taking is indispensable to capitalism. Economies seize up when we shrink from taking risks. Where is our self-reliance? Where are our John Gaults? Our shoulders need to be against the wheel, not slumped in a corner feeling sorry for ourselves.


Mission Impossible

The good news is that the ECB is cutting interest rates. It even eased reserve requirements to help free up cash to combat the banking crisis which reduces the pressure on euro area banks to shed assets to rebuild capital. The ECB also broadened collateral acceptances, a backdoor way for banks to potentially recapitalize. Financial markets remain unconvinced that the latest grand plan to fight the debt crisis will work. The agreement also fails to resolve the question for the rest of the world: Could the challenges in Europe result in a global recession later this year. Only the ECB can rescue the single currency. In the short run, one key result of the deal is simply to keep hope alive that the debt problems can be addressed in an orderly way. The deal also provides for an expanded bailout fund for member nations that have faced investor doubts of their solvency. It suggests that the ECB will provide a backstop to prevent a panic over whether high-debt nations like Italy, Portugal and Greece might have to default, which would be a catastrophe for the private-sector banks that hold their debts. Panic must be avoided, especially from the periphery states. There are signs that euro economies are heading for recession, These intensifying financial pressures raise the chances of a disorderly default. The recipe for recession is present: a credit crunch, tighter fiscal policy and a lack of confidence.

The global expansion will continue, but at a below average pace. This hinges on no deepening of troubles in the Eurozone, pledged to work toward a new EU treaty to demand greater fiscal discipline. Optimism is not high. If you remove the market pressure, nothing will happen in some of these countries.

Europe needs an all-encompassing deal to save itself. The crisis now is about the survival of the Euro. No one will be spared if the euro collapses. The introduction of a euro, Eurobond is needed.

Time is running short. The ECB must be free enough to intervene without limit. It needs to signal to investors that the euro’s problems are being fixed for good.

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