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Joined at the HIP --Europe Sneezes, America catches the Cold.

Posted by: pjeanty

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While America still struggles with high unemployment and declining housing prices, the financial world is being threatened with another slowdown. The Fed Chairman this week said that the U.S. is close to “faltering”.  Lawmakers are working on spending cuts that were agreed to for raising the debt ceiling. Fed is concerned that imposing too many spending cuts will accelerate economic decline.

The impending Greece default has already been the cause of concern for the global financial markets for quite some time. The bailouts will stop sooner or later since the larger economies like Germany are facing internal opposition to bailing out other countries.  The conditions imposed by IMF for bailout are raising protests internally in Greece since they dictate that Greece should cut down on a large segment of its public employees.

Public service constitutes 20% of employment in the U.S. So connected are the financial markets globally that while Europe Sneezes, America is catching the cold. Earlier when America sneezed, the world markets used to catch the cold, but currently all action is deriving from Europe.

The only concern is that Fed might use the only monetary tools at its disposal- printing more money. While this is a positive for the stock markets, this will steadily decline the value of the dollar though the decline of the Euro has still the global investors scurrying to investing in U.S. Bonds. Interest rates have been hence falling despite the AAA downgrade rating. If the Euro crisis had not been there, the American Dollar might have declined against the Euro due to the internal fiscal situation. So for the Dollar, the Euro crisis has in fact been a blessing. 

Consumer Spending, which is the lifeline of the Economy, has fallen because incomes have fallen in the U.S.  More and more consumers are moving towards discount stores and this has resulted in declining revenues for luxury market chains. 

Another crisis that Americans face with Europe is that many American Money market funds have nearly 40% of their investments in Europe. They are slowly scaling back their investments into Europe. The move towards safer Asset Classes has accelerated due to a uncertain Global Macro Environment.