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Fletcher: Hang on, we may be in for a bumpy economic ride

July 31, 2012
Stephen Fletcher , The Alpena News

There was an error in last week's column I need to correct. It's the Long Lake Festival Committee that gets the credit, not the Improvement Association, which does good work in other ways.

This week is about the fact that the PIIGS (Portugal, Ireland, Italy, Greece, and Spain ) have the Euro currency countries in a virtual free-fall into recession. The concern about this isn't played up too much in the news media as the Olympics are on and the media paid a bunch of millions for the coverage rights so economic news is at a low ebb. The manifestation of this meltdown can be seen in interest rates on governmental bonds for the above mentioned countries which are about four to six times higher than the rates which Germany has to pay for borrowed money. All of these countries plus Great Britain are in recession.

This isn't solely about bailing out their banks as some of the governments are asking for direct "sovereign" loans from the ECB which acts like a Federal Reserve Bank, without the teeth, in Europe. Our Fed has much more money and power than the European Central Bank.

The whole borrowing scheme in Europe depends on the economic might of Germany. Moody's published "concerns" about Germany's fiscal strength just this week. The concerns are about an assessment as to whether or not Germany is strong enough to hold up the European Union.

I mentioned in the fall of 2011 that North Africa and the Middle East would be on fire by spring 2012 due to food shortages caused in part by U.S. energy policies converting foodstuffs to energy. The Euro dropped in buying power against the dollar making all imports to Europe and the Middle East more expensive at the same time as we reduced the supply of corn due to ethanol projects. Both moves raised the price of food in Europe, Middle East and North Africa. What's happening in Syria, Egypt, Libya, Afghanistan, Pakistan, Iran, and Iraq sure looks like the place is on fire to me.

I'm parochial enough to worry about what the effect of the unrest around the Mediterranean Sea and the Middle East coupled with the fiscal crisis and recession in Europe will have on the United States of America. The economic condition of all of the countries mentioned sure doesn't help our four-year attempt at any recovery from our own recession. After all, Europe is one of our largest trading partners so our exports will drop due to Europe's incipient double dip recession (already there in the UK and the PIIGS) and the higher prices for U.S. product because the Euro's value has dropped against the dollar.

I've covered this before, but I believe there will be little or no help from anyone in Washington until after the election. The Republican Majority in the House passes bills that are defeated in the Democrat-controlled Senate and vice versa. The president blames everyone except himself for the economic woes of our country.

OK, so this shapes up like we are possibly going to drop into a double-dip recession by the first part of 2013. We can't announce that we are back into recession until then because of the rules. A recession is defined as two consecutive quarters of negative GNP growth. Those quarters will probably be the third and fourth quarters of 2012 so it will be after the election and after the inauguration before we find out if we actually slipped back down to that level.

All of the indicators seem to point in the direction of really slow growth if not recession. Housing starts and sales have dropped, capital spending is very weak, confidence levels are sliding down, and manufacturing never fully recovered from the first recession.



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