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High anxiety about Europe’s economy

Jeff Thredgold //May 20, 2010//

High anxiety about Europe’s economy

Jeff Thredgold //May 20, 2010//

Three major developments of the past few weeks have “built in” offsets that will ultimately reduce their individual, and collective, impact upon the U.S., European, and global economies. Such offsets or stabilizers are critical to (hopefully) counteracting economic volatility in coming months and years.

High anxiety about the massive level of Greek sovereign (national) debt has led to expanded worry about the debt-laden European economy in general. The nearly $1 trillion euro support package announced by European leaders and the International Monetary Fund that received a hero’s welcome on Monday, May 10 soon gave way to fears that it provides merely a bandaid for the debt situation, as opposed to the necessity of real change. European economic growth is likely to remain just slightly above zero.

The euro currency? It has dropped sharply, falling from a value of roughly $1.50 to roughly $1.22 today, a decline of almost 19 percent. It is also at a four-year low.

How does this sharp decline “help” the European economy? Manufactured goods from Germany and other European nations will soon be substantially cheaper on global markets (ceteris paribus, which means other factors unchanged…with the phrase being the only thing I remember from graduate school), helping to boost European exports, while reducing export opportunities in China, Japan, and the U.S.

For those thinking of visiting Greece, Italy, Ireland, Spain, France, etc? It is now 19 percent less costly to visit these nations (ceteris paribus) than six months ago, providing more incentive for people from around the world to visit these and other euro nations, also helping the European economy, and reducing tourism opportunities in other nations, including the U.S.

Global Oil

More news of European economic challenges, combined with efforts by the Chinese leadership to slow their economy, have supported a view that overall global performance is likely to slow.
The counter balance? Much lower oil and other commodity prices. Global oil prices are down 20 percent from just two weeks ago! Such lower prices provide more energy value for consuming nations and companies around the globe, while hurting oil producing nations. Lower gasoline prices will follow.

A plunge in oil and gasoline prices has the same impact as a tax cut for American and global consumers — good news for billions of consumers — bad news for OPEC

Lower Mortgage Rate

We have talked in recent weeks about the fact that scared money globally goes in search of the most stable, most risk-free, and most marketable investments. In recent weeks, European anxiety has pushed global investors into gold and U.S. Treasury securities.

The rush for safety has pushed U.S. Treasury bond prices higher, thereby resulting in lower returns (yields). The investment return on a 10-year U.S. Treasury note has fallen from 3.85 percent on December 31, 2009 to close at 3.37 percent today, a decline of almost 1/2 percent.

Much of the decline-to-date has now filtered into mortgage rates, with 30-year fixed-rate mortgages for conventional loans averaging 4.93 percent last week, according to Freddie Mac. The 4.93 percent level was the lowest this year.

Lower mortgage rates — good for consumers looking to purchase or refinance a home, good for potential sellers — and good for consumers hoping to stretch their dollars
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