Decoupling May Help World Economy Survive US Consumer Bankruptcy
BY THE DAILY RECKONING - 06/12/2007
There is more sniping and backbiting in the financial world. For example, some doubt has emerged over whether the world's economy can decouple from the US.
European Central Bank official Christian Noyce said earlier this week, "We are currently seeing deterioration in business and consumer surveys in the euro area, although from very high levels. This may put a question mark over our hopes that Europe could ‘decouple' its cyclical evolution from the evolution of financial markets and uncertainties in the US outlook."
He's not saying that Europe needs American customers, although that's probably true. He is saying Europe's financial markets are tied to the American markets. This shouldn't come as too much of a surprise. After all, it was the European banks who bought all the subprime garbage sold by Goldman Sachs (NYSE:GS).
Still, the "decoupling" explanation says the world's economy can survive the stumble, recover, decline, fall, and bankruptcy of the American consumer. But Damien Boey of Credit Suisse says that, "If US consumption were to really come off, we could see world growth go through a sub-trend rate and that would be consistent with lower commodity prices."
"We don't think overall that China can completely de-couple from the US but we don't think the US is going to send China down into a major downward spiral at this stage," he added. "In the long term, we're looking at a world where growth will be a little bit slower than what we've seen in the past - and that's something that people need to start pricing in."
What about the longer long term? Steve Pearlstein writes in the Washington Post that the world reminds him of 1929, but not quite as dire, or with as many flappers and gin martinis.
"We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon."
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