December 20, 2011

2012 Approaches, But U.S., German Consumers Still Spending

A variety of important economic news of the last 2 months shows some hopeful possibilities and some increasing dangers to the world economy.

As the holidays approach, let's quickly lay out the dangers and move on to the hopeful.


The Chinese land price bubble looks like it is beginning to burst, and much Chinese investment and economic activity has relied on this bubble. Investment has been necessarily huge (and unprecedented) as China only consumes about 35% of it's output (compare to 70% for the U.S. (Paul Krugman offers an accessible summary) As Europe tightens and reduces consumption, China faces a likely hard landing. But, since Chinese imports from the globe are modest, an internal Chinese downturn is less important than bigger factors like US consumer spending.  China continues to need a powerful social safety net, so that private households will feel it is safe to spend more and save less.

Much European debt is due to rollover in 2012, so that European debt stability will be strongly tested.

The U.S. may or may not renew such powerful economic boosts as the payroll tax cut for 2012; and worse, we could always see a renewed push to cut governmental spending more now, when our consumer-debt-paydown-slowed recovery is still sluggish, not yet self-sustaining. Shades of 1937, when the U.S. tried to reduce it's federal deficit and a sharp new downturn hit the U.S. economy in response, are possible in such a push. (The real solution is debt-reduction, and here's what we need to do exactly.)

Ok, that's enough to worry about. Let's consider some better-than-expected news:

U.S. consumers have continued to spend and the U.S. recovery has continued, with some signs of improvement from very slow to just-slow. While not yet in full swing, this recovery is doing much to keep the global economy afloat.

And helpfully, German consumers also have been confident and open with their wallets. This is significant, even a hopeful sign, exactly because Germany has a large trade surplus. Much trade earnings flow into Germany, therefore Germans must spend to keep the European economy going. If German consumers cut back, Europe would sink -- just like that. But, they are spending!

Also, a dramatic aid in the European debt crises has arrived via the ECB, which has at least temporarily given Europe breathing room on sovereign debts by allowing a means for European banks to purchase governmental bonds. (AEP provides a competent summary, again).

Now, if China will be ready to respond to the Chinese economy with new efforts as needed and in sufficient scope, and Chinese consumers would pick it up a couple more notches....

A lot of ifs, but if...then we could see signs of a more pleasant way through this stormy-looking 2012.

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