Postcards from Old Europe – Setting the Stage

Dear readers,

Angry Bear and Kash have invited me to guest blog here on a regular basis. AB and Kash are both economists – I’m not. I work in discretionary portfolio management for high net worth clients in a rather large European financial services company. You can find my regular home on the web here. Please do visit!

My column here is entitled “Postcards from Old Europe” and aims to comment on US-issues from a European perspective with the added bonus of my being able to offer a window into the goings on in the “old world”. My perspective is truly local to Europe – I’m German and based in Germany (this should also go far in explaining my mangled syntax and innovative grammar). Economic bloggers can never really complain about a lack of subject matter – every working day will yield at least one little figment of data which can serve as a launchpad for commentary and ranting. I’d like to set the stage for my future columns by looking at (some aspects of) the big picture.

Physics was always one of my worst subjects – I could only grasp most concepts when they were explained to me in the most simple terms. The theory of relativity was especially troublesome in this regard. A friend of mine shed light on the subject by explaining the subject matter in a way even I could understand:

Imagine that you have to sit on a hotplate for 10 minutes – time will stretch into infinity. Now imagine that you have a pretty girl sitting on your lap – time will fly.

The message: everything is relative. This applies to economics as well.

A quick comparison of US and the Eurozone yields the following picture: While US pundits fret over the employment rate hovering around 5.6% Europeans have become used to seeing rates in the double digits. Economists are forecasting that GDP will increase by 4.6% this year in the US while the Eurozone is creeping along with an estimated economic growth of 1.8%. Could there be any more poignant evidence that the US is (relatively speaking) way ahead of old Europe?

The problem is that the US economic powerhouse is founded upon an ever rising pile of debt and a burgeoning trade deficit. The most visible sign of the underlying strain in the US economy is the recent reversal of the formerly espoused strong dollar policy and the subsequent decline in the currency’s external value. The peace dividend is being eroded by the ongoing financial strain that the war on terror is placing on the economy while the economy is itself staggering under the load of debt that private and public households have amassed. While consumers are trying to borrow themselves out of debt, politicians are rushing to implement higher barriers to the free movement of goods and labor. The backdrop to this grim situation is provided by a central bank which is pumping raw, unadulterated credit into the system at a frantic pace.

The rest of the world is standing by and running what James Grant of Grants Interest Rate Observer is calling the biggest vendor finance scheme in history. I am referring to the Asian central bank’s regime of buttressing the dollar so that the man on the street can afford to buy a new (imported) SUV every two years. Am I being too pessimistic? I might be – but I’ve learned that it pays to play the devil’s advocate and anyway, have you ever positively surprised an optimist?

This view of the US economy is a rough outline of the subjects I’d like to explore in more detail in the following weeks. I hope that you continue to watch this space and I invite you to use the comments to your heart’s content.