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Thursday, August 4, 2011

A Rough Stretch, No End in Sight

With the Euro contagion spreading to Italy and even Belgium (its spread over German bonds is nearly 200 bps), the financial crisis in Europe is deepening at the same time U.S. growth seems to have hit a firm wall. What's worse is that policymakers around the world are doing all of the wrong things. In the face of a private sector unwilling to unleash spending and investment, governments are retrenching. Some have to, others don't.  Worse yet, when they are retrenching they are making foolish choices that seem to maximize the negative impact of their actions.

Little wonder, then, that the markets are utterly spasming at the moment. The situation seems to call for it. Some measure of bounce may occur for a brief period in the next week or so, but I expect a renewed sell-off before things bottom out in a more sustained way.

I almost forgot some very depressing news, which is that Jean Claude Trichet, head of the European Central Bank and one of the most powerful policymakers in the world, thinks that our primary concern is inflation.

As far as the debt ceiling debate in this country, the markets no doubt were spooked that it even occurred and were probably even less happy about the fact that the outcome was so pathetic and wrongheaded. I endorse the views of this Bloomberg link in very nearly their entirety: http://www.bloomberg.com/news/2011-08-05/world-market-rout-is-a-loud-no-confidence-vote-in-leaders-view.html

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