So everybody else going to hell in a hand basket is good for us? What happened to the global interconnected economies? What's really puzzling, the middle east wants to do us in. If they were to succeed, what would they do for money? Who would they sell their oil to? And why do they have to try and do us in? We seem to be already doing a good enough job of succumbing with out their help. One strange planet this is. There's more than enough to go around for everybody, and yet there are a few greedy whackos they want to try and hoard it all for themselves. What's that they say about bulls ...., bears ......, but pigs get ......
U.S. has lead in economic recovery
Commentary: Europe and Japan facing more troubles
By Paul Erdman, CBS.MarketWatch.com
Last Update: 3:14 PM ET Dec. 5, 2002
SAN FRANCISCO (CBS.MW) -- The global financial news this week is dominated by two events: the financial collapse of United Airlines and the European Central Bank's decision to finally lower interest rates by a half percent.
The pending bankruptcy of American's second largest airline is part of a beneficial process that this country periodically goes through in the wake of recession -- one that Joseph Schumpeter termed "creative destruction."
The amazingly high increases in American worker productivity, which continued at the annual rate of 5.1 percent in the third quarter reflect this.
To be sure, we pay a cost in terms of job losses but it is a necessary cost that cannot be avoided if the desired goal of economic renewal is to be achieved. The good news is that we seem to be nearing the end of this process as indicated by this week's fall in the number of new jobless claims to the lowest level in two years.
Contrast this with Europe. The fact that the central bank in Frankfurt lowered short-term interest rates also reflects a bankruptcy -- a bankruptcy of both monetary and fiscal policy.
As is well-known, downward shifts in interest rates take a long time to work their way through the system -- probably a half year at least. So what the not-so-wise old men in Frankfurt finally did, after sitting on their hands for a full year, cannot prevent Europe from sinking into recession during the first half of next year. Even the Commission of the EU is now forecasting that output in the 12 countries that have adopted the euro may shrink 0.2 percent in the first quarter of 2003. You can be sure that this will turn out to be way too optimistic.
As to fiscal policy in Europe, the situation is even worse. At the insistence of Germany, it put itself into a policy straightjacket called a "stability pact" by "mandating" that no EU country could run a deficit exceeding 3 percent of GDP. It is proving to be just a bad joke.
Next year, Germany's deficit will approach 4 percent. Despite that, the number of unemployed workers there, 4 million at present, seems headed for the 4.5 million mark, meaning an unemployment rate of well over 10 percent. So what is the Red/Green coalition going to do? Raise taxes!
Not only does it intend to introduce a capital gains tax, it is increasing the payroll tax paid by all German workers to over 19 percent. So they are going from dumb to dumber.
Add it all up, and you cannot help but conclude that the worst definitely lies ahead where Europe is concerned, in contrast to the U.S. where the worst is definitely behind us.
As to the third largest economy on earth, Japan, it is even sadder shape than Europe as it heads into yet another recession next year.
Hopes have been raised that it will finally follow the American example of biting the bullet by forcing its banks to clean up their balance sheets even though it would require forcing many Japanese corporations into bankruptcy.
Such a plan for enforced creative destruction exists, but whether it will be really implemented next year remains in doubt. As usual, the Japanese government is seeking a less painful way out. The newest bright idea floated by its finance minister is to allow the yen to float down to 150 - 160 yen per dollar. That would allow the country to export its economic woes at the cost of the other nations it competes against in the global market. In the wake of his remarks, the yen has already fallen to almost 126 to the dollar. Japan's export surplus, which is already the world's largest, is bound to continue to balloon. If this continues, how do you think China and Korea will react, since most of Japan's gains will come at their expense? What could ensue is an intra-Asian trade war that would hurt everybody in the region.
So no matter how you slice it, the gap between the economic performance of the United States and it traditional rivals for leadership of the world economy -- the EU and Japan -- is once again in the process of widening. Near-term, this bodes well for the dollar: long-term it will lead to relatively higher returns on investments in the dollar zone once the process of creative destruction here has runs its course.
