[Video: Paul Krugman in UK interview, discusses austerity effects and theories.]
I can’t believe that anyone tried to trot out as conventional wisdom the idea that Europe’s troubles would cause no economic turmoil in the US. We don’t export much to Europe, the story went. The financial channel is more dangerous, but US banks have insulated themselves from the problems over there.
Wrong and wrong. In fact, US companies report slowing sales in Europe, which is having a direct effect on their bottom lines. This is particularly true in the tech sector, as Europeans being driven by austerity into poverty aren’t loading up on the latest gadgets at the moment. And you cannot separate this from a genuine slowdown in emerging markets like China, India and Brazil, part of a global slowdown. But the EU as a unit is bigger than the US or China, and if they’re in recession, that has an impact on sales everywhere. That’s especially true because a crash in the euro’s exchange rate has made US products relatively more expensive. A “strong” dollar hurts our trade position.
This is true of the financial channel as well, particularly when you look at global lending statistics:
International lending by global banks in the fourth quarter last year fell by the largest amount since the collapse of Lehman Brothers in 2008, according to the Bank for International Settlements, an association of the world’s central banks […]
“Optimism has evaporated,” said Stephen G. Cecchetti, head of the monetary and economic department at the Bank for International Settlements. “Markets have become highly volatile, and investors are having doubts about everything, about growth and the financial health of sovereigns and banks.”
As the ripple effects of the European debt crisis have been felt across the United States and emerging economies in Asia and Latin America, banks in both developed and emerging economies have been looking to pull back on credit to risky borrowers.
A lot of this is due to reductions in interbank lending, but it reduces capital across the board, and harms the ability to access credit for businesses. And while I’ve had it with banks whining about higher capital rules, coming at this time in an economic slowdown, that does constrain credit.
There are options to all of this, in fiscal and monetary policy. Unfortunately the Fed has artificially limited their own options, and the ECB is even worse. Certainly nobody on the monetary policy side is considering measures like entering the Spanish bond markets (though with Spain increasingly locked out of the markets, anything is possible, I guess).
Maybe the silver lining here is that commodity prices are naturally edging down in the midst of a global economic slowdown, so we’ll all be able to fill up our carbon-emitting vehicles for a bit longer and contribute to catastrophic climate change. Thank the Lord for small favors.