The simple thinking would run this way — Europe’s austerity measures shows down eurozone growth, hurting global growth, as well as US growth, driving down commodity prices and with it goes inflation.
For example, oil overnight went below $US70 to $69.41 a barrel and that’s a seven-month low.
Now I’m not on board with the view that we’ll have a Lehman Brothers-style re-run on stock markets but I know we’re going to need time to turn around market sentiment.
And this raises question marks over the wisdom of our central bank driving up interest rates so quickly before we were certain that the global economic recovery was solidly on track.
This puts my focus on the US recovery and hopefully the global economy will get along okay with a strong Asia and non-European world. However, it will miss Europe’s demand and that’s why the Shanghai Composite dropped 5.1 per cent in one day earlier in the week.
US and Europe concerns
Right now Yank analysts are not ruling out a deflationary threat, which makes high-yielding fixed deposits look good value compared to shares, especially here in Australia.
The Americans are a little worried about the producer prices report, which found they had fallen 0.1 per cent. Also building permits fell pretty significantly and that’s not good for the US recovery.
This comes as Europe is cracking down on big spending governments, which will also hurt global demand.
The mantra of investment experts is that fixed income performs well in slower economies because there’s no inflation to KO the returns.
I reckon we’re in for a long pause as the world sorts out its debt issues but from what we’re seeing now, the rapid rate rises and the Rudd Government plan to slug our best industry — the miners — now have represented short-sighted policy options based on an ever-improving global economy that could take some time to work out whether it’s strong enough to beat the double dip recession scenario.
Dumb government regulation and policy options got us into this mess and the same dopes are not making a great job of getting us out of it.
To be fair, our guys — the RBA and Federal Government — did well before this year but they are now dropping the ball with some plays based on hubris and economic short-sightedness.
Like in most Simpsons episodes, after Homer has his “D'oh!” moment, he usually makes amends by the end of the program. Let’s hope Mr Rudd and Governor Stevens do the same by the end of this year.
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