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VodkaPundit

Mo’ Money

August 29th, 2002 - 11:42 am

As expected, the EU economic recovery is in the toilet. Why was that the expected result? Because on the Continent, risk-taking rarely pays and strict labor laws prevent corporations from capitalizing on even the good times.

What does that mean for us?

First, the ECB (European Central Bank) will have to cut interest rates. That should weaken the euro against the dollar.

Weak corporate profits have already weakened European stock markets, which could (should?) lead to an influx of capital to US equities. That will do two things: Weaken the euro further, and prop up the Dow and NASDAQ.

Stronger share prices could help reduce those deflationary risks we spoke of yesterday.

But the news isn’t all good. The US economy exports a lot more goods than it ever used to, and that makes a big part of our economy more subject to fluctuations overseas. A weaker euro plus weaker European demand could mean stalled job creation in a sector that’s already hurting.

Unemployed workers buy less, hurting aggregate demand. Profitless companies depress equity valuations. Both could increase deflationary pressure.

I don’t mean to be a scare-mongerer here. Truth is, the stock market is still, by historical standards, overpriced, not undervalued. Unemployment is higher than we’d like, but still very low for a recessionary or slow-growth economy. Interest rates are low enough to allow the government to deficit spend for a while to prop up aggregate demand.

But we are facing unsusual risks. Keep a sharp eye on housing prices.

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