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August 04, 2011

Stock Market Cliff Diving on Euro Fears

Posted in: Uncategorized

Cliff Dive Acapulco

Cliff Dive Acapulco by rosswebsdale

Stocks are down sharply today, as the reality of the global economic predicament begins to dawn on the investor class. But the bond market looks even worse, writes Paul Krugman:

The US 10-year bond rate is now down to 2.5%. So much for those bond vigilantes. What this rate is saying is that markets are pricing in terrible economic performance, quite possibly a double dip. And it also says that Washington’s deficit obsession has been utterly, totally wrong-headed.

Meanwhile, Italy’s spread against German bonds is soaring even further. What are markets pricing in here? Default as a real possibility; maybe even euro breakup. The latter certainly sounds a lot more plausible now than it did a few months ago.

As Krugman writes, European stocks are falling as the chances of default increase, so this is a story about weak economic performance, translating into rising spreads in Europe and falling ones in the US.

The debt crisis in Europe is really appalling, and Silvio Berlusconi’s assurances that “the fundamentals of the economy are strong is not helping matters. Italy and Spain are too big to fail, unlike some of the smaller countries in the Eurozone. But the bailout offered to Greece has given the markets no confidence that the larger countries would be spared from contagion. What’s more, Europe doesn’t have the resources to bail out an Italy. And austerity fever along with being chained to a currency has sapped the ability for these countries to grow out of their problems.

This would be a much bigger problem for the world than a manufactured debt limit crisis. European banks are barely keeping themselves alive.

The European Central Bank is now buying bonds to try and relieve the crisis, but let’s be clear: Europe has been sick for years now, and nothing their elites have done to arrest the crisis has worked. It’s hard to see how a resumption of an old program will do the trick. Especially when the leaders in Europe say pig-ignorant things like this:

Jean-Claude Trichet, the president of the E.C.B., said the bank had acted in response to “renewed tensions in some financial markets in the euro area.”

He said that uncertainty created by the debate in the United States to raise the debt ceiling had unnerved European markets. “It’s clear the entire world is intertwined,” he said. “What happens in the U.S. influences the rest of the world.”

Really, what happens in the US influences the world? How wise!

I won’t discount the probability that Republicans are working hard to sink the economy. But this is bigger than that. All signs point to a weak economy globally for the foreseeable future. Austerity in the midst of this fragility is just damn stupid.

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