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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.

– Lee Adler

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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