Euro Zone back in Mild Recession

     While in the early hours the futures jumped higher on reports that "Germany and France were exploring radical actions of securing deeper and more rapid fiscal integration among euro zone countries" there was further bad news that the Euro zone is now back in recession. This is the fault of the debt crisis pure and simple.

     http://www.cnbc.com/id/45460062
    
    While it would certainly be great news if the reports of "radical actions" are true at this point anyone who has observed this crisis for any length of time at all knows that only seeing is believing, not talking.

     However today the markets believe and the Dow is currently up 320 points. But the equity markets are not the place to judge-the reality check is the bond markets. Again, seeing is believing.

      With the OECD's report that the Euro zone is in a mild recession came a warning that the U.S. might follow suit next year.

       "The threat of even more devastating downturns looms if the euro zone does not get to grips with its debt crisis and U.S. lawmakers fail to agree a spending-reduction plan, the Organization for Economic Cooperation and Development warned."

        http://www.cnbc.com/id/45459979

        This canard about the U.S. needing a "spending-reduction plan" is specious, certainly. The U.S. budget deficit is not a concern as is shown by the fact that our bonds are the most desired in the world. In any case even if we needed a budget reduction plan why is it necessarily about a "spending-reduction plan?"
      

       If anything based upon the numbers we have been seeing from the U.S. during the second half of this year, the economy is already expanding. If it does fail this continue this will be due to Euro contagion.

       On most of the rest of the narrative the OECD report is accurate. For example:

       "What we see now is contagion rising and hitting probably Germany as well," OECD chief economist Pier Carlo Padoan told Reuters in an interview.

        "So the first thing, the absolute priority, is to stop that and in the immediate the only actor that can do that is the ECB," he added, urging the central bank to commit to a creating a cap on government bond yields as a way of calming the crisis.

        This is absolutely right that it is the ECB's role to do something not as Europe has recently hopped China or the Federal Reserve; as for the IMF it is like the EFSF, a cap gun for big Euro countries like Italy. For more on the EFSF's inadequacy please see here

        http://diaryofarepublicanhater.blogspot.com/2011/11/efsf-eus-cap-gun.html

        As Dean Baker shows time and again the best way to reduce the budget deficit is to get the economy out of the recession. Yet deep spending cuts will actually lower growth. And the OECD itself admits this:

        "The resulting fiscal tightening, which would come automatically, would in our view likely generate a recession in the United States," Padoan said:

        Today is a good day for equities, but until we get some good days for bonds optimism is rash to say the least.