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Businessweek’s “How Europe’s Contagion May Hit the U.S. Economy” Ignores its Benefits to US Economy

Businessweek argues that the European crisis is hurting the US economy. It ignores ignores the fact that European capital flight is driving US interest rates through the floor, and more importantly, directly funding US government deficit spending. Even a small reduction in that spending would result in a stall in the US economy. The US government borrows 45 cents of every dollar it spends into the economic stream. Without those flows of European “fright capital,” US borrowing costs would rise, mortgage rates would rise, and ultimately, the US might be forced to spend less, fiscal cliff or not.

Therefore, a strong argument can be made that the forces of chaos in Europe are at least offsetting any potential negative effects  on the US economy. They may even be helping the US economy to have the appearance of growth.

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From Businessweek:

Parsing out the exact impact of the European crisis on the U.S. economy can be difficult. There’s a strong chance that Europe can wound the U.S., and the cumulative effect could be drastic…

…as the economy has recovered over the last three years, increased exports have accounted for about 45 percent of GDP growth, says RBC Capital Markets (RY) chief U.S. economist Tom Porcelli. “That’s an enormous number for something that accounts for such a small part of overall activity,” says Porcelli.

Porcelli believes Europe’s troubles may hit U.S. exports in a more roundabout way. Emerging markets such as Brazil, Mexico, and China have accounted for the bulk of U.S. export growth over the last few years… Emerging market countries get the majority of their lending from European banks. So if Europe continues to deteriorate and its financial system tightens, some emerging markets could lose a key source of financing, which in turn could squeeze their ability to keep buying U.S. goods. “That’s a very important aspect that can’t be overlooked,” says Porcelli.

Europe’s mess also poses significant supply-chain risk to U.S. manufacturers…

Another potential point of contagion is the U.S. financial system’s exposure to Europe’s souring debt, particularly that of Spain and Greece.

via How Europe’s Contagion May Hit the U.S. Economy – Businessweek.

All that may be true, but the beneficial effects to the US are at least offsetting.

 

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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