There is a fascinating game of 3-cornered chicken being played by the political classes of Europe, the UK and the US, which will probably end with all three of our economies going off the cliff, James Dean style at some point in early 2012.
Europe will be the first to go. It’s already driving a car with no brakes. Germany is the only country with a plausible credit rating, which it will lose if it comes to the rescue of Greece, Italy, Spain, Ireland and — eventually — France in a serious way. It won’t do that, and niether will it allow the European Central Bank (in name only) to put enough dough behind the Euro to prop it up over the longer haul. It pretends that if the GISI countries make enough sacrifices they can put things right, even as they know by so doing they will fall deeper into recession and drag Germany with them. As a result, you have a situation where only the “shorts” benefit: Every time the bonds of the GISIs exceed the “default threshold” (7%), the ECB does a timid intervention to push them down a bit, at which point the short selling goes on until they pop back up again. And again, and again….
Meanwhile, in the UK, Cameron and co. have realized that they went too far on deficit cutting, and unemployment is growing and will get worse once the Eurozone goes into deep recession. In the U.S., the Republicans desperately hope Obama will fall into this same deficit reduction trap and do all cost cutting and no further stimulus. They call Obama’s stimulus thus far a “failure”, ignoring the fact that, unlike in the UK and Europe, the economy is beginning to create jobs here and might actually avoid recession if we play our cards right.
To ensure that doesn’t happen, and confidence isn’t restored, the Republicans are torpedoeing the deficit talks as we speak, and praying for a second downgrade — for which they will blame Obama.
Is this a great country or what?