Monday, November 28, 2011

Not Over By A Long Shot

Some good news came out of Europe overnight:

Europe markets were in a broad rally, with the Stoxx Europe 600 soaring 3.1%, after news reports over the weekend suggested euro-zone leaders were planning a new stability pact to contain the sovereign debt crisis. A new agreement, including measures to curb excessive debt by making budget discipline legally binding, could persuade the European Central Bank to take more action to halt the selloff in debt markets.

Investors' sentiment was also boosted after a report indicated the International Monetary Fund could provide between EUR400 billion and EUR600 billion in financial assistance to Italy.

"With a recession in Europe virtually certain, any movement in a positive direction, [anything] that stems the risks, is going to be interpreted very favorably by the markets," said Oliver Pursche, president of Gary Goldberg Financial Services. 

The reason this is good news is the bad news if it doesn't happen:

PARIS, Nov 28 (Reuters) - The euro zone's debt crisis has become the biggest threat to the global economy and a break up of the currency zone can no longer be ruled out, the OECD said on Monday, slashing its forecasts and urging the ECB to play a bigger role in defusing the crisis.

The euro zone has already entered a mild recession but much worse could follow unless policy makers take decisive action to get ahead of the market, the Organisation for Economic Cooperation and Development said in a stark warning[...]

A worst case scenario of continued inaction in the euro zone and the failure of U.S. lawmakers to agree a spending-reduction plan would usher in a devastating downturn for the world economy, the Paris-based OECD said.

Since the US debt deal is a dormant matter (get to that in a minute), the Euro crisis is front and center on world markets.

Here's the heart of the matter: right now, there are two European Union economies that could survive on their own. Germany, which has been gloating over that fact for a few years now, and France.

And France itself faces some very severe problems if things go sour. (paywall, sorry)

As bad as the American economy looks right now, and make no mistake about it, it's bad, the European economy could collapse at any minute. In geopolitical terms, it is dead but just doesn't know it yet.

Still, the framework of a bailout of Europe seems to be in place, which means that it's possible, a small possible, that Europe could avert a worldwide debt crisis. If the US Congress can find their way to a framework to drop our national debt, the world could recover within a decade.

And there's the nub of the American problem: the smartest solution would be to let the Bush tax cuts expire. That would immediately add $4 trillion in revenue to the pot, bring our national debt back to the $10 trillion range, and would make enormous inroads into our budget deficits.

By. Doing. Nothing. For every dollar cut after that, it's one dollar more to the budget surpluses we'd begin to run in the next few years. This isn't rocket science, but it's not going to be sufficient logic for the low-normals of the right.

So it'll be on us when the world economy falls flat into a Dark Age. And blood will flow.