Monday, May 24, 2010

One false move in Europe could set off global chain reaction - Will Congress Ever Learn?

The European crisis is a danger to the whole world's economy and the fixes put in place are fragile. If you look at the underlying cause, you can point directly to the "nanny state" economic beliefs of those countries in the most trouble, Greece, Spain, Portugal and Ireland.

In the face of this evidence, the Democrats in Congress and the Obama administration, continue on their merry way to create more and more government agencies, union and corporate bailouts, health and welfare programs, and continue to spend billions on useless "politically motivated" pork. You would think they would learn.

But wait; maybe they have learned a little too well in the Saul Alinsky school of "Rules for Radicals", the organization and control of the people.

If the trouble starts -- and it remains an "if" -- the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland's economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

The risk of a worst-case scenario is still considered remote. European countries have pledged hundreds of billions of dollars to aid indebted neighbors that run into trouble, and they say they are committed to fixing the continent's larger economic problems.

There are some positive impacts in all this for the United States.

For one, uncertainty about European government debt has driven global investors toward U.S. government bonds, which in turn is pushing down long-term interest rates. The 10-year Treasury bond had a rate of 3.2 percent Friday compared with nearly 4 percent last month. Those lower rates should flow through to private borrowing, helping Americans getting mortgages or businesses looking to grow.

The European panic is also lowering the price of oil and other commodities on global markets, potentially making it cheaper for Americans to fuel their cars and heat their homes. A barrel of oil went for about $70 on Friday, down from almost $87 on April 6.

A final positive for the U.S. economy is that the stronger dollar will help keep inflation in check by reducing the cost of imports. That, combined with renewed worry about the strength of the recovery, is likely to give the Fed some leeway to delay raising interest rates above their current extremely low levels longer than it would have otherwise.
One false move in Europe could set off global chain reaction

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