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More Doom and Gloom From Overseas

 Wolfgang Munchau, writing in the Finanical Times, is particularly pessimistic about the economic outlook.  He writes:

Instead of solving the problems to generate a recovery, the political strategies have consisted of waiting for a recovery to solve the problem. The Europeans are relying on the Americans to generate growth. The Americans are relying on the Chinese, who in turn are waiting for the rest of the world.

Even if the US were to generate some growth, as is likely after this summer, it would not benefit global exporters; China may be one of the fastest growing economies in the world, but it is only about half as large as the eurozone in dollar terms. And as Brad Setser** has pointed out in his blog, there is absolutely no evidence that China contributes to a global recovery. While Chinese investments are up by more than 30 per cent from last year alone, imports are down 25 per cent. All this hype about decoupling and China pulling the world out of recession is baloney. The data tell us that China’s exports and imports are both falling, and that imports are falling faster.

Munchau definitely sees the cup as way more than half empty.  He quotes a study by economists Barry Eichengreen and Kevin O'Rourke,  which presents evidence and opinion that the current economic condition and direction closely parallels the situation in 1930.  This study is focussed on the world economy and world equity markets, not the comparisons that we Americans keep making to our own economy and stock market.  After reviewing extensive data, Eichengreen and O'Rourke conclude:

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

Back to Munchau:

Central banks and governments therefore risk moving too swiftly out of a recession-mode strategy. When Axel Weber, president of the Bundesbank, publicly talks at this time about how to communicate a rise in interest rates, it tells me that the danger of a premature exit, at least in Europe, is clear and present. 

Munchau writes that it is possible to avoid continuing on the parallel path from 1930 to 1931 and 1932, but only under specific conditions:

We can avoid calamity if monetary and fiscal policies remain supportive throughout the duration of this crisis, if we fix the banking system and if we impose regulations to constrain a resurgent financial sector. We also have to be lucky to avoid another round of market turbulence in the near future.

I recommend you read both the Munchau opinion piece and the longer research paper by Eichengreen and O'Rourke.  Food for thought, whether you are ready to sign on to any of the opinions and extrapolations, or not.

By the way, Edward Harrison has a good article discussing Munchau's article and Eichengreen and O'Rourke's work at

 Update on June 16, comes from the Financial Times:

”Japan’s economic conditions, after deteriorating significantly, have begun to stop worsening,” the BoJ said following a meeting of its policy board. ”In the coming months, Japan’s economy is likely to show clearer evidence of levelling out over time.”

In other words, the Bank of Japan projects that soon things will stop getting bad as quickly as they have been.