Why the Eurozone Matters: The German Butterfly
Many eyes are trained on the Dow and the various algorithms to forecast where the economy is going. But we should lift our perspective across the ocean to get a better view.
You might surmise that I am referring to China. And having reported its slowest growing quarter in five years, China would be a good guess.
But even Peter Navarro, the author of Death by China, believes the Eurozone is where we should be looking. That was one of the main points Navarro, an economist at the University of California-Irvine, made during a presentation at the National Association for Fixed Annuities annual meeting last week.
In an instant poll that Navarro took of the audience, a majority thought that government spending was the biggest drag on the U.S. economy. But it is the trade deficit, Navarro said. The majority thought that was with China. And there is definitely a deficit in that partnership, but that’s a situation in which the U.S. is buying cheap stuff from China.
It’s the European relationship that matters more, because those folks buy higher ticket items and services from the United States. That seemed to surprise people in the audience. Also surprising was the dynamic created by The Federal Reserve’s quantitative easing program, or QE.
On the surface, QE is a program in which The Fed buys bonds to increase the money supply – because it could no longer lower the interest rate to stimulate the economy. So, where does that money go? Among other places, to Europe in the form of investment. But when The Fed started pulling back a little on its mammoth program, that money stopped going to Europe, which jabbed that economy. The German economy, for example, is stumbling because its neighbor are not buying as much German products. Then Germany and other Europeans stop buying pricier American stuff. Then we start wondering why we’re not selling so much. And maybe companies stop investing and hiring.
So, it’s quite a circle. Like everything else on this planet, the economy is an interdependent system where the flap of a butterfly’s wings in Africa causes a hurricane in the Caribbean.
His illustration was a reminder that we are no longer in a world where we can huddle securely in our own economy and let the rest of the world go to Hell. That’s a ride that we would all take together.
Peter Navarro, UC-Davis