Few Americans realized that the Great Depression started in Europe.
Now as then, the global economy is fragile.
The economy is clearly vulnerable to a debilitating wave of debt deflation. The threat is approaching quickly from an important source: Europe. The same sequence of events occurred in 1929, when deflation started overseas before lapping onto U.S. shores. In Germany, for instance, real GDP fell 1% in 1929 after growing 8.2% in 1927 and 2.8% in 1928. Other economic indicators peaked as early as 1927. At the time, economically-weak Germany was the equivalent of today's so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Financial Forecast , January 2012
Lending in France also began to decline as early as 1927-28. And about a year before the October 1929 crash, net capital inflows fell in several European countries. In other words: European economies began to deteriorate before the Great Depression began in the U.S.
In Q4 of 2011, the eurozone was already nearing zero economic growth, vs. the U.S. and Asia:
Also, a chart from our May 2012 Financial Forecast (data through May 3) shows European stock markets headed south before the S&P 500:
We know that deflation started in Europe just prior to the Great Depression; today the risk is "contagion." With this in mind, consider the evidence that a deflationary trend may already be unfolding in the U.S. Here are some recent headlines:
- Illinois Faces 25% Cost Increase to Borrow $1.8 Billion -- Bloomberg (4/30)
- States Scaling Back Worker Pensions to Save Money -- Associated Press (5/1)
- Cash-Strapped NY Town Cancels July 4 Fireworks -- WNBC-TV (5/9)
- Half of Detroit's Streetlights May Go Out as City Shrinks -- Bloomberg (5/24)
- CBO: Fiscal cliff likely to cause recession -- CNNMoney (5/22)
- No 'Barn Burner' for Job Growth -- CNBC (5/4)
- Student debt clock strikes $1 trillion -- CBS Moneywatch (5/8)
- Shortfall in California's Budget Swells to $16 Billion -- New York Times (5/12)
- [Senator] Coburn: U.S. "going to get another downgrade" -- CBS News (5/23)
- Home Prices Hint at Slow Housing Recovery -- Wall Street Journal (5/29)
Here are recent headlines about Asia:
- Japan's jobless rise stokes slowdown fear -- Marketwatch (5/29)
- Hedge Funds Circle as Japan's Asset Bubble Grows -- Bloomberg (5/21)
- World Bank warns of China slowdown -- CNNMoney (5/23)
Mounting evidence notwithstanding, most economists still say nothing about deflation. Then again, most economic observers were equally mute about deflation before the Great Depression.
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