Anon, good point. But Spain, Italy, France and Ireland had booms. From Charles Gottlieb of the Center for European policy studies in Brussels (posted at Brad's blog) The booms in Spanish and Irish real estate make the US real estate boom look timid
My feeling about the dollar is that it will continue to decline as the US economy is first in line to falter. But I think other countries (notably the UK) are in denial about the possible consequences of their own property bubbles as well as their dependence on the US consumer. I think the UK, AU, and emerging markets have really benefited from commodity and finance booms generated by the US housing bubble and resulting consumption, as well as excess global liquidity.
So I buy Roubini's argument that they will not decouple, but I think there'll be a delay in which the dollar will continue to decline as those overseas economies look to the US with perfuntory concern and say "Shame, about your economic troubles... have a great weekend!" Followed by a "Wile E. Coyote" moment (just read Krugman's paper) where they realize the effect is propogating to their economies too. At that point the dollar could rebound partly.
Not being formally trained in economics (opted for the exciting world of engineering), it would be interesting to know if this idea of economic contagion has held true in the past during a global economic crisis. I seem to recall reading somewhere that there was something similar to this contagion effect during the Great Depression and that this occured even though there was not as much economic linkage, actively managed central banks, or currencies that were fully floating as we have now. Then you throw in the tariffs and other protectionism reactions that stifled trade and economic activity while purporting to firewall an economy against the outside world.
"A major cause of the international financial instability, which preceded and accompanied the Great Depression, was the debt which many European countries had accumulated to pay for their involvement in the war. This debt destabilised many European economies as they tried to rebuild during the 1920s."
My understanding is Europe is FAR more dependent on exports than the US. While I don't think the shift in competitive advantage in the direct US-Europe trade as a huge deal... I do think the third party competition (US & EU competing in Asia, Latin America & Africa) will be a huge factor pressuring Europe. I expect they will see both reduced trade & reduced margins IF the world CBs continue to allow the dollar to slide - with or with out a US recession.
But if you read the Setser post CR linked to, he says he sees the CBs getting fed up with US dollar accumulation but maybe not so fed up that they allow their currencies to continue to slide:
Back to the $5 trillion question. Are the worlds central banks tiring of holding depreciating dollars?
The answer is clearly yes.
[...]
So why am I cautious?
There is a second question are central banks so tired of holding dollars that they are no longer willing to add to their dollar reserves, especially when the dollar is under pressure.
And on this point, the evidence is mixed.
Bingo. If the CBs defend the dollar for us, this unraveling, decoupling & rebalancing might take a lot longer than we imagine.
Lack of decoupling may be beneficial if greater growth abroad leads to greater exports here, supporting the economy in the face of consumer retrenchment.
I think the drop in the dollar is reasonable -- rates in the us are 5.25 (funds) whereas in europe they are 3.25. so rates here have farther to fall --- also Trichet is still tightening. thus the dollar should fall as rates between europe and US converge.
Also remember -- Europe cant let the dollar fall too much because it makes Chinese imports (to Europe) too cheap. It also makes Euro exports to the US too expensive. There are other reasons as well.
En 2006, la Chine détrônera le Japon en matière de dépenses de R & D
LE MONDE | 04.12.06 | 13h32
L'empire du Milieu devrait se hisser cette année au second rang mondial en matière de dépenses de recherche et développement (R & D), derrière les Etats-Unis, mais devant le Japon...
I realize that Europe will decouple. The depression will be worse in Europe. Much worse.
The future is deflationary. Everyone wants to be a banker (lots of liquidity). When everyone wants to be a banker, we get a depression.
Will Europe decopule? The answer is in between. The answer is probably "somewhat". The country that is the cause of the worldwide recession always suffers worse. Europe could probably have a small recession while the US has a big one.
European economic growth will be helped this quarter by buying in anticipation of the Jan 1 German 3% VAT increase. However, this will weaken 1st quarter growth. The combination of the increasing interest rates, strong EURO, weak US growth and the VAT increase could cause a serious slowdown or even recession in Europe.
The Dollar would fall relative to most of the Currencies worldwide given the heavy debt burden of the U.S. as well as being the "Consumers of the Last Resort" so that needless to say, USD must devalue so as to make its export competitive and that is the crux of the whole thing and it could also be the only way out for the U.S. particularly when the Dollar inflates, it helps reduce the USD denominated debt burden of the U.S......and it is the only reason for the U.S. to push for the revaluation of the Chinese Yuan ( going pass the 7.84 mark ) as China is the major trading partner of the U.S......
Steve, check out Japan's debt burden. Much much larger. And no, the dollar dropping is not the only way out. The slowing of US consumption is another way. Dropping MEW is a signal that this might happen.
I like arbogast despite having basic reservations about decoupling anything anymore. This bit (from the excellent 12.04.06 - 11:03 pm) esp So, anyone who expects consumption to lead Europe out of the economic doldrums is barking up the wrong tree.
hits a note against BB's savings glut being anywhere in Europe. But the fact that Europe does have a respectable positive savings rate only means that this is a relative glut compared to the US position and to my nose makes the Bernanke 'Savings Glut' smell like the rotten fish it is: decadent US consumption. [You figure that's harsh? Harsher than 'savings glut' fatso?]
My inflationmobile is stuck in a muddy savings glut. Come on everybody, toss some more wealth into the tank of my freedom combustion engine. vrmmmmvrmmmm
Someone explain to me why the Western economies are not poised on the brink of a deflationary death spiral.
I look at Renault. The French should protect Renault. But if the Workers of the World are competing against the Chinese worker, they can't afford a Renault.
The Chinese are not going to become as rich as the French. The French are going to become as poor as the Chinese.
Yeah, the question is that some parts of Europe have been enjoying a house boom, while other parts of Euroland have "specialized" in exports. Kind of having a bubble in California while the East Coast saves and exports a lot. So in macro-keynesian "magnitudes" euroland economy is more "balanced" than those of the US, but that masks also serious imbalances, like half of the population weighting 240 pounds and the other half starving at 100 pounds.
I don't see the dollar falling that much - we still have too many things that the world wants to buy - from food to infrastructure. I think our consumption will crash but the dollar will hold (relatively - maybe all currencies will inflate). Based on purchasing power, the dollar is already undervalued vs. most of the advanced world economies. The euro is 20% overvalued vs the dollar.
My understanding is Europe is FAR more dependent on exports than the US
The whole damn world is more dependent on exports than the US. The US economy runs on borrowing, not exports. Which is why the US has been immune to downturns in other countries (e.g. Japan), but the world is vulnerable to a downturn in the US.
yeah, neither did Detroit.
Evidence is now appearing that Detroit and the Rustbelt in fact were in a bubble, albeit disguised. Nominal prices were not rising but fundamentals were deteriorating. Now nominal prices are declining as they are in the more obvious bubble markets.
Germany really didn't have a bubble - prices vs. incomes and rents didn't change.
Ok, maybe Detroit wasn't the best example. My point is that some people pick and choose their predictions on which places will experience hardship with a decision making process that has this subtext of meting out justice. "those guys behave badly, we didn't. they'll get a recession, we won't." The world is more interconnected than that.
arbogast: I'd generalize your "banker" to "middleman"/"rent collector". The basic idea being, don't be at the bottom of the supply (food) chain, but closer to the top. The problem is that this doesn't work in the aggregate.
It's entirely possible. Yes much of Europe had/has a bubble and that is likely to be influenced by the US, but they don't have the trade imbalance. Housing isn't the only thing in the economy. Much of Roubini's comentary relates to what a housing crash will trigger, considering other economic factors in the US economy, etc..
The point made is that Europe may be unable to decouple from the US because of housing booms in Europe. My question is, what mechanism links US housing to European housing? Interest rates, corporate earnings, trade and the like are all linkages between economies, but do we depend on them to pull down European housing? A US slowdown seems as likely to cause the ECB to ease as to hike (depends on how much anti-inflationary importance the ECB attaches to Eur/Usd).
How likely is Europe to get through a US slowdown wtih its housing bubble unburst, only to have it burst later?
Actually, the city of Detroit did have a boom, it just ended a lot sooner and faster than in the rest of the country. And I agree with Yogurt and Tanta, the lending was just as sloppy in many parts of the country and home prices were artificially high regardless of how much they had lept. In the first quarter of 2006, 51% of mortgages in West Virginia were Option ARMs.
Ireland had huge increases in incomes and emplyment, Spain to a lesser extent. The big question is how sloppy was their lending? It sounds like it got pretty bad in Britain, they have some of their own versions of "exotic" mortgages.
I am in the South of France right now and I am witnessing more real estate agencies. As someone remarked earlier, this country already had its boom. The difference now is that no one is using real estate as quick turn over as we witnessed the last two years home.
I don't think Europe's real estate will flatlinbe, at leastr not any time soon. It is more balanced and there isn't that crazy speculation that drowned our industry.
Germany didn't have a housing boom
Anon, good point. But Spain, Italy, France and Ireland had booms. From Charles Gottlieb of the Center for European policy studies in Brussels (posted at Brad's blog) The booms in Spanish and Irish real estate make the US real estate boom look timid
Best Wishes.
My feeling about the dollar is that it will continue to decline as the US economy is first in line to falter. But I think other countries (notably the UK) are in denial about the possible consequences of their own property bubbles as well as their dependence on the US consumer. I think the UK, AU, and emerging markets have really benefited from commodity and finance booms generated by the US housing bubble and resulting consumption, as well as excess global liquidity.
So I buy Roubini's argument that they will not decouple, but I think there'll be a delay in which the dollar will continue to decline as those overseas economies look to the US with perfuntory concern and say "Shame, about your economic troubles... have a great weekend!" Followed by a "Wile E. Coyote" moment (just read Krugman's paper) where they realize the effect is propogating to their economies too. At that point the dollar could rebound partly.
Ever seen a 10 year chart of some emergin market indices? Yikes. Crash city.
I cooked up a nice one just for this topic:
Arriba! Arriba! - Daniel L Charts's MySpace Blog |
Not being formally trained in economics (opted for the exciting world of engineering), it would be interesting to know if this idea of economic contagion has held true in the past during a global economic crisis. I seem to recall reading somewhere that there was something similar to this contagion effect during the Great Depression and that this occured even though there was not as much economic linkage, actively managed central banks, or currencies that were fully floating as we have now. Then you throw in the tariffs and other protectionism reactions that stifled trade and economic activity while purporting to firewall an economy against the outside world.
Not the most authorative economic reference, but as an example, from:
Great Depression in the United Kingdom - Wikipedia, the free encyclopedia
"A major cause of the international financial instability, which preceded and accompanied the Great Depression, was the debt which many European countries had accumulated to pay for their involvement in the war. This debt destabilised many European economies as they tried to rebuild during the 1920s."
This could get real interesting.
My understanding is Europe is FAR more dependent on exports than the US. While I don't think the shift in competitive advantage in the direct US-Europe trade as a huge deal... I do think the third party competition (US & EU competing in Asia, Latin America & Africa) will be a huge factor pressuring Europe. I expect they will see both reduced trade & reduced margins IF the world CBs continue to allow the dollar to slide - with or with out a US recession.
But if you read the Setser post CR linked to, he says he sees the CBs getting fed up with US dollar accumulation but maybe not so fed up that they allow their currencies to continue to slide:
Back to the $5 trillion question. Are the worlds central banks tiring of holding depreciating dollars?
The answer is clearly yes.
[...]
So why am I cautious?
There is a second question are central banks so tired of holding dollars that they are no longer willing to add to their dollar reserves, especially when the dollar is under pressure.
And on this point, the evidence is mixed.
Bingo. If the CBs defend the dollar for us, this unraveling, decoupling & rebalancing might take a lot longer than we imagine.
The more I think about it, the more Orwellian it is all becoming.
"Eastasia", "Eurasia" and "Oceania".
Huge political and economic blocs. My!
The "Thought Police" are already operating...aren't they?
Lack of decoupling may be beneficial if greater growth abroad leads to greater exports here, supporting the economy in the face of consumer retrenchment.
There is a housing bubble in Europe.
European economies are just as fragile in the face of extra-cheap labor in China, Vietnam, etc.
But Europeans are savers. That is a difference between Europe and the US. The savings rate.
Another is the consumption tax. Compared to Europe, there basically is no consumption tax in the US (gasoline is a fair example).
So, anyone who expects consumption to lead Europe out of the economic doldrums is barking up the wrong tree.
I would say that more banks will fail in the US than in Europe.
I think the drop in the dollar is reasonable -- rates in the us are 5.25 (funds) whereas in europe they are 3.25. so rates here have farther to fall --- also Trichet is still tightening. thus the dollar should fall as rates between europe and US converge.
Also remember -- Europe cant let the dollar fall too much because it makes Chinese imports (to Europe) too cheap. It also makes Euro exports to the US too expensive. There are other reasons as well.
Can they decouple? Of course not -- but they would like us to believe they can so we buy their stocks.
Frankly, when I read something like this:
En 2006, la Chine détrônera le Japon en matière de dépenses de R & D
LE MONDE | 04.12.06 | 13h32
L'empire du Milieu devrait se hisser cette année au second rang mondial en matière de dépenses de recherche et développement (R & D), derrière les Etats-Unis, mais devant le Japon...
I realize that Europe will decouple. The depression will be worse in Europe. Much worse.
The future is deflationary. Everyone wants to be a banker (lots of liquidity). When everyone wants to be a banker, we get a depression.
Will Europe decopule? The answer is in between. The answer is probably "somewhat". The country that is the cause of the worldwide recession always suffers worse. Europe could probably have a small recession while the US has a big one.
"Germany didn't have a housing boom"
yeah, neither did Detroit.
European economic growth will be helped this quarter by buying in anticipation of the Jan 1 German 3% VAT increase. However, this will weaken 1st quarter growth. The combination of the increasing interest rates, strong EURO, weak US growth and the VAT increase could cause a serious slowdown or even recession in Europe.
The Dollar would fall relative to most of the Currencies worldwide given the heavy debt burden of the U.S. as well as being the "Consumers of the Last Resort" so that needless to say, USD must devalue so as to make its export competitive and that is the crux of the whole thing and it could also be the only way out for the U.S. particularly when the Dollar inflates, it helps reduce the USD denominated debt burden of the U.S......and it is the only reason for the U.S. to push for the revaluation of the Chinese Yuan ( going pass the 7.84 mark ) as China is the major trading partner of the U.S......
Steve, check out Japan's debt burden. Much much larger. And no, the dollar dropping is not the only way out. The slowing of US consumption is another way. Dropping MEW is a signal that this might happen.
I like arbogast despite having basic reservations about decoupling anything anymore. This bit (from the excellent 12.04.06 - 11:03 pm) esp
So, anyone who expects consumption to lead Europe out of the economic doldrums is barking up the wrong tree.
hits a note against BB's savings glut being anywhere in Europe. But the fact that Europe does have a respectable positive savings rate only means that this is a relative glut compared to the US position and to my nose makes the Bernanke 'Savings Glut' smell like the rotten fish it is: decadent US consumption. [You figure that's harsh? Harsher than 'savings glut' fatso?]
My inflationmobile is stuck in a muddy savings glut. Come on everybody, toss some more wealth into the tank of my freedom combustion engine. vrmmmm vrmmmm
Someone explain to me why the Western economies are not poised on the brink of a deflationary death spiral.
I look at Renault. The French should protect Renault. But if the Workers of the World are competing against the Chinese worker, they can't afford a Renault.
The Chinese are not going to become as rich as the French. The French are going to become as poor as the Chinese.
Yeah, the question is that some parts of Europe have been enjoying a house boom, while other parts of Euroland have "specialized" in exports. Kind of having a bubble in California while the East Coast saves and exports a lot. So in macro-keynesian "magnitudes" euroland economy is more "balanced" than those of the US, but that masks also serious imbalances, like half of the population weighting 240 pounds and the other half starving at 100 pounds.
I don't see the dollar falling that much - we still have too many things that the world wants to buy - from food to infrastructure. I think our consumption will crash but the dollar will hold (relatively - maybe all currencies will inflate). Based on purchasing power, the dollar is already undervalued vs. most of the advanced world economies. The euro is 20% overvalued vs the dollar.
My understanding is Europe is FAR more dependent on exports than the US
The whole damn world is more dependent on exports than the US. The US economy runs on borrowing, not exports. Which is why the US has been immune to downturns in other countries (e.g. Japan), but the world is vulnerable to a downturn in the US.
yeah, neither did Detroit.
Evidence is now appearing that Detroit and the Rustbelt in fact were in a bubble, albeit disguised. Nominal prices were not rising but fundamentals were deteriorating. Now nominal prices are declining as they are in the more obvious bubble markets.
Germany really didn't have a bubble - prices vs. incomes and rents didn't change.
"Germany didn't have a housing boom"
yeah, neither did Detroit.
Detroit still got a whole lot of high LTV mortgage loans. Housing booms may need credit booms, but perhaps credit booms don't need housing booms.
Ok, maybe Detroit wasn't the best example. My point is that some people pick and choose their predictions on which places will experience hardship with a decision making process that has this subtext of meting out justice. "those guys behave badly, we didn't. they'll get a recession, we won't." The world is more interconnected than that.
arbogast: I'd generalize your "banker" to "middleman"/"rent collector". The basic idea being, don't be at the bottom of the supply (food) chain, but closer to the top. The problem is that this doesn't work in the aggregate.
It's entirely possible. Yes much of Europe had/has a bubble and that is likely to be influenced by the US, but they don't have the trade imbalance. Housing isn't the only thing in the economy. Much of Roubini's comentary relates to what a housing crash will trigger, considering other economic factors in the US economy, etc..
The point made is that Europe may be unable to decouple from the US because of housing booms in Europe. My question is, what mechanism links US housing to European housing? Interest rates, corporate earnings, trade and the like are all linkages between economies, but do we depend on them to pull down European housing? A US slowdown seems as likely to cause the ECB to ease as to hike (depends on how much anti-inflationary importance the ECB attaches to Eur/Usd).
How likely is Europe to get through a US slowdown wtih its housing bubble unburst, only to have it burst later?
Actually, the city of Detroit did have a boom, it just ended a lot sooner and faster than in the rest of the country. And I agree with Yogurt and Tanta, the lending was just as sloppy in many parts of the country and home prices were artificially high regardless of how much they had lept. In the first quarter of 2006, 51% of mortgages in West Virginia were Option ARMs.
Ireland had huge increases in incomes and emplyment, Spain to a lesser extent. The big question is how sloppy was their lending? It sounds like it got pretty bad in Britain, they have some of their own versions of "exotic" mortgages.
The first question I asked myself: are Europe's and America's housing problems of equal magnitude?
The Boston-Washington corridor, Californa and Florida together account for 33% of US population and probably a lot more of US GDP.
Ireland, Spain, France and Italy account for 36% of Europe's population and 41% of GDP.
So the numbers are probably in the same ballpark.
I am in the South of France right now and I am witnessing more real estate agencies. As someone remarked earlier, this country already had its boom. The difference now is that no one is using real estate as quick turn over as we witnessed the last two years home.
I don't think Europe's real estate will flatlinbe, at leastr not any time soon. It is more balanced and there isn't that crazy speculation that drowned our industry.