Recession Spreads in Europe, Threatens the USA

The recession in Europe has spread into every large nation. Still, price are rising.

The European Central Bank is powerless. It has officially set lending rates at 0.75%. Still, the economies are crashing. Greece has a 27% unemployment rate. So does Spain.

Now there is talk of a rate cut by the ECB. To which I respond: So what? If a business will not borrow at 0.75%, why would it borrow at 0.5%? Why would a one-third cut encourage businesses to change their policies? With rates this low, there is nothing the ECB can do about it.

It can buy more IOUs from governments. But banks in Europe are imitating banks in the USA. They are adding to excess reserves. This reduces the money multiplier, i.e., fractional reserves. The economy does not recover as expected. Prices do not rise much, but neither does official economic growth.

The Keynesians are stuck. They recommend larger government deficits. They decry “austerity,” meaning reductions in government spending. But the governments are facing huge deficits: falling revenues and rising welfare expenditures. They have to find ways to cut spending.

Keynesianism rests on a theory: “Government deficits overcome recession.” But this time, it’s clearly not working. So, they call for even larger deficits.

Keynesians call for a larger ECB stimulus. The ECB may respond, but Europe’s economy will remain in a slump.

Europe appears to have reached what David Stockman has called peak private debt. So has the USA. But growth in both regions relies on increased private debt to fund economic growth.

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