The world used to abide by the saying “when America sneezes the world catches a cold”.  But after a lost decade in the USA that saying has come under fire and rightfully so.   But an interesting thing is occurring as Europe catches a cold.  America isn’t even sniffling.  Some economists claim there is no way the USA can escape the downturn now being seen across Europe.  I’m not so sure this is correct.

There has been one very clear difference in Europe and the USA over the last few years.  Although both regions have suffered from balance sheet recessions and sizable real estate bubbles (some parts of Europe more than others) the response has been entirely different.  Europe, as a result of the flawed single currency and lack of political unity has imposed austerity on itself for the better part of the last few years.  In many countries this has resulted in an environment that never even remotely resembled the recovery seen in other parts of the developed world.  In fact, many of these countries are in full blown depressions.

The United States, on the other hand, has been running steady 10% budget deficits throughout the last 3 years – there has been no real austerity.  This has helped the private sector de-leverage without crushing economic growth.  I’ve maintained an unpopular position over the last few quarters that the USA would “muddle through” as opposed to falling into recession.  This position has been based on my idea of a continuing balance sheet recession in the USA combined with a government that, despite its inability to agree on most things, has not torpedoed the economy via austerity.

The latest PMI and industrial new orders data shows the divergence that has appeared in these two regions over the last few quarters:

Based on the PMI data, the Eurozone has been contracting for two quarters while the USA continues to muddle through:

I think it’s too early to break out the victory cigars and proclaim that the United States has avoided a double dip.  As I’ve long maintained, trying to forecast the double dip misses the bigger point that the USA is still very much in one long recession – a balance sheet recession (no victory cigars for that).  It’s just been offset by continuing government spending.  The difference in Europe is that austerity has exposed the balance sheet recession for what it really is.

So, while the USA isn’t out of the woods in terms of a double dip I do think it’s safe to say that, given the 2012 budget projection of 10% deficits, any downturn in the USA is likely to be meager compared to the disaster that is Europe.  One thing is for certain – despite continual bickering in Congress, the lack of austerity during a balance sheet recession makes American politicians appear infinitely more capable than the political mess now unfolding across the pond….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Very Serious Sam

    “given the 2012 budget projection of 10% deficits, any downturn in the USA is likely to be meager compared to the disaster that is Europe”

    If I may ask, what is the aggregate Eurozone deficit projection for 2012?

  • Amused

    Most of Europe is not in a recession as I write this. Be careful with boastful articles like this. I hope you’re right, but if we see a meltdown in Europe, America will most likely follow since American banks are still very exposed, even if they’ve been working hard to reduce to exposure it’s very strong nontheless.

    That’s why the Fed went in with many other banks and helped to stabilized the situation.

    Austerity in America will most likely bite hard if a Republican wins in 2012, and even if one doesn’t, Congress will likely be even more conservative.

    Europe’s policies will truly start to bite next year and in 2013 after that. This self-congratulatory post is 2 years too early. If the situation remains the same in 2014, I’ll be happy to grant you the bragging rights.

    Until then, it looks like a rushed hatchet job with poor grounding and frequent guessing.

    In any case, I’m much more worried about what happens in China visavi the World economy.

  • Cullen Roche

    I love it when people claim an article is something that it specifically states it is not. You call it “self congratulatory” when I specifically state that it’s “too early to break out the victory cigars”. Rather than get angry about something you didn’t read, try sticking to the actual facts laid out in the piece. The fact is, austerity is hurting Europe and not the USA. If you have a bone to pick with someone it is with your ignorant politicians who insist on driving the entire EMU into a brick wall.

  • Jay

    “This has helped the private sector de-leverage without crushing economic growth.” – Cullen

    The private sector’s de-leveraging efforts have thus far been anemic.

  • Cullen Roche

    This is a myth. Household debt has grown at an avg rate of 9% per year since 1950. In the last 3 years it has averaged -0.3%. This is not an interesting statistic. It is mind blowing. Consumer debt hasn’t been interrupted at all over the last 60 years. But what occurred in 2008 is a statistical anomaly. It’s not supposed to happen. If debt had continued to grow at its usual pace we’d be somewhere in the range of 18T in outstanding household debt. But we’re at 13.2T. Claiming that the de-leveraging hasn’t occurred just because total debt has dropped from 14T to 13.2T misses the entire point. Debts relative to incomes are improving substantially. This is the metric we should be focused on rather than the headline household debt figure. The de-leveraging most certainly is occurring. And its been massive.

  • Ben Wolf

    Don’t we annually sell Europe some $300 billion in goods and services? If this takes a substantial hit how can it not reflect in our economy? There’s no way Congress will authorize additional deficit spending to counteract it.

  • VII

    You once again remain fairly pragmatic in the middle..muddling through Cullen.

    Everytime my bearish torticollis tilts me to far over to one side and I have mostly slept in that camp with the occasional short term bullish trades in various assets…I know enough to let your pragmatic investing help bring me back to center. I don’t fight what I know helps me.

    Well done CR.

  • BT

    Nice post. Cullen has previously made the suggestion that the USA’s lost decade may be a lot shorter than Japan’s has been (or the UK’s presumably will be). Certainly US house prices have come down a long way, as has household debt.

    It would be interesting to compare graphs of household debt:income ratios and house prices for the three countries.

  • Wantingtoretire

    Yep, a reduction in debt from a projected 18T to 13.2T is a massive reduction. Particularly compared to a diaper wearing congress that cannot even get to 1.2T.

    I’m afraid I expect republicans to win hands-down in 2012. Why? Two things. 1) Republicans are rigging voting rights so that republicans win and 2) The negative affects of Europe will be felt in the USA before election time and Obama will take the blame.

    The stated goal of the republicans is too trash GDP as soon as they get in to office. Ergo, the US economy will be dead in 2013.

  • Very Serious Sam

    “Consumer debt hasn’t been interrupted at all over the last 60 years”

    Unfortunately so. Maybe this was 59 years to long?

    “Debts relative to incomes are improving substantially”

    Very good. Even better if they would improve as well in absolute numbers, not just in relative ones.

    Because, as even the economist guild should understand by now, it is NOT just the relative debt to income (in macro speak: debt to GDP) ratio that matters. Especially if the income (GDP) shrinks. Which is the case from time to time, currently for instance in Greece.

    You know, the (macro) economists bunch would start to impress the real world if it finally came up with a model that would -sustainably- work in a constant or even better a shrinking econonmy environment.

    But no, always the old growth growth growth blabla, from fresh- and saltwater gurus. However, neverending economic growth, in this universe, can’t be sustainable at all. Because it just can’t exist.

  • Jay

    “The household balance sheet is in worse condition than at any other point in history since the Great Depression. From 2001 to 2007, debt for U.S. households increased to $14 trillion from $7 trillion, and the ratio of household debt to gross domestic product was higher in 2007 than at any time since 1929″

    Shifting private sector debt onto the public balance sheet, doesn’t make the debt go away. And the amount of consumer borrowing in the past decade has been unprecedented.

  • BT

    Sam. Zero real GDP growth, with 2% inflation = 2% nominal GDP growth. 2% NGDP growth means exponential growth forever. Do you have a problem with that?

    And if you want to accommodate population growth, you’ll need real GDP growth too, so your NGDP will have to be something like 4% or 6% at least – without any new goods and services at all.

    If you’re worried about the environment, focus on sustainable harvesting of resources and efficient use of them.

  • adsanalytics

    If the US suffers a double-dip it will not be because of the stumble in the EU – instead, if will be caused by the unwinding of government transfers (see chart), low jobs growth, and a faltering stock and housing market. So, correlation rather than causation.

    ADS Analytics

  • BT

    @Jay “Shifting private sector debt onto the public balance sheet, doesn’t make the debt go away.”

    It does make the debt serviceable though, doesn’t it? Government deficits supply the private sector with the money needed to pay the taxes to service the debt.

  • Colin, S.Toe

    The current divergence is in itself interesting and significant, as this posting points out.

    I might be inclined to agree with Amused’s caveats, but the only point I can see to the tone of such comments, is that it has probably encouraged you to maintain the measured one that is only sensible in the face of uncertainty.

    Reality will prevail one way or the other, which is a comfort (and a learning opportunity) for those more interested in understanding it than having all the answers.

  • Octavio Richetta
  • Very Serious Sam

    “Zero real GDP growth, with 2% inflation = 2% nominal GDP growth. 2% NGDP growth means exponential growth forever. Do you have a problem with that?2

    As far as I am concerned, the long term GDFP growth should be, all else being equal, about 1 percent below inflation.

    BTW, I don’t want to accommodate population growth for very much longer. Because I don’t need to – (especially) this particular growth is limited, very soon.

    And yes, I am concerned about efficient and sustainable use of resources of all sorts. Do you have a problem with that?

  • Very Serious Sam

    “Government deficits supply the private sector with the money needed to pay the taxes to service the debt”

    Would you mind to bolster this claim with reliable sources?

  • kman

    There is Europe and there is Europe. The US has been in a recession for a while but Europe has been better off on a count of China and Asia. Hence the growth by US multi nationals ( Caterpillar among others) that kept the US (mainly large caps) alive while it’s domestic market was under water. Don’t forget a lot of US retail chains expanded their overseas presence as the US consumer welted.

    Seems like as everyone is bending under the pressure (post China stimulus etc), it’s a matter of time bfore it hits the US.

  • Cullen Roche

    So you’re confusing pvt sector debt with public sector debt. That’s the crucial mistake that most people are making these days. The govt doesn’t compete with the pvt sector for debt. And public sector debt isn’t really debt in the sense that it has to pay it back. The pvt sector is always revenue constrained while the public sector is not. So, in a sense, if the govt wanted to buy pvt sector debt denominated in USD’s there is no such thing as it not having the money to buy the debt. And there is no such thing as the public sector going bankrupt in a currency it is sovereign in.

    Besides, the de-leveraging hasn’t been the result of the public sector buying the debt, but the pvt sector refusing to take on more debt. That’s why lending has been so weak…..There’s no demand for debt….

  • Cullen Roche

    If the govt never spent any USD’s into existence, where would the dollars come from in the first place?

  • LostCentury

    Another possibility to consider: US stats are manipulated by the White House and Fed with the justification of bringing the confidence back into the markets, which is allegedely the sole yardstick of the country’s economic performance.

  • Clearly_Irrational

    That’s not really true, however unending economic growth does require increasing energy use and larger supplies of raw materials, both of which are starting to be constraining factors since we’ve failed to deploy the technology to solve those issues.

  • Clearly_Irrational

    Give me access to the 0.25% rate unlimited borrowing capacity lines like the banks have and I’ll show you some debt demand pronto.

  • Very Serious Sam

    “If the govt never spent any USD’s into existence, where would the dollars come from in the first place?”

    This was then and now is now. There is by now certainly enough (fiat) money of all sorts (USD, Euro, Remninbi…) existing, no?

    The major problem, to me, seems to be the increasingly dangerous distribution (or rather concentration) of what money exists already, not the lack of new.

  • chris

    thoughtful and evenly balanced analysis, as usual. but one question:

    when will you believe (if ever) that the US should reduce its deficit. US debt now is 100% of gdp…which some think is a point of no return tipping point.

    in other words, don’t you think this statement is a tad too rich: “And public sector debt isn’t really debt in the sense that it has to pay it back.”

  • rhp

    “seems to be the increasingly dangerous distribution (or rather concentration) of what money exists already, not the lack of new.”

    Cullen, there’s another way to read this rather than private sector versus public sector “distribution”. He could easily be referring to distribution among various PRIVATE sector. If Sanford Weil and Blankfein and the upper 1/4 of 1% hold 40% of the wealth (this is example, you probably know the stats better than I do), then the remaining private sector may be deficient in funds to sustain the economy. While total public sector spending into the private sector may help us muddle, to the extent it is mal-distributed and ends up being concentrated, means theres not enough oil for the public sector to function efficiently.

    You comment on the financialization of the country, and serious sam’s comment may be nothing more than an agreement with you………


  • Big H

    As you metnion, I do think its way early to talk about de-coupling here… the US is very close to falling into recession, but has so far been able to ‘just’ stay afloat whereas Europe is alreadfy heading lower. Adding to this the slowdown witnessed in China, India etc… then I really wonder how the US is gonna be able to stay afloat if the rest of the world slips. I don’t buy it at all.

    In fact, as you mention, the US is running a 10% deficit this year and next – but also the US has been shielded in a way from this crisis because weaker nations in the European periphery have become the major battleground in this crisis. I think it’s way too early to say that the US has acted comparatively well and escaped the crisis here. For all I know, the US could be on the line as well in the near future, and even though they may have the option to print money and inflate out of the problem, this would be a VERY serious de-facto default by the US, and the US would lose its status as ‘risk free’ completely, with all kinds of knock-on consequences.

    Let’s watch this unfold next year, but in my opinion, way too early to say that US or Japan have escaped here… The de-copupling thing comes up every time there is a shift in the cycle, but I think it’s wishful thinking.

  • OntheMoney

    Kyle Bass points out that this is mostly forced deleveraging, through foreclosures. Would you disagree?

  • Cullen Roche
  • Andrew P

    Yes, the USA is running 10% deficits, but global oil production has been flat since 2005. It looks like the oil producers are trying to milk their assets for all they are worth and stretch the production over as long a time as possible. Once the big oilfields go into inexorable decline, global production should permanently drop like a stone in the ocean. Since global GDP is energy constrained, that should cause oil prices to spike and global GDP to nosedive. There is no way the USA can escape the effect of that, no matter how much money Congress prints.

  • Andrew P

    Shouldn’t State and Local public sector debt be considered identical to household and corporate debt? Only Federal debt is different.

  • Andrew P

    “Rigging voting rights”? – Where do you get such nonsense.

    There is no guarantee that the GOP will win the Presidency. Every sober analysis shows the projected count in the Electoral College to be extremely close. Odds based on actual cash bets tend to be around 50:50, which is probably about right. Random events and little decisions (like the identity of the GOP nominee) could push it one way or the other.

    And you should not expect the Republicans to actually implement austerity in the event they get full control of the government. The current Congress wants to cut the budget because they don’t want Obama to be able to give bennies to his favored groups. History shows the Republicans to be big spenders too, although not necessarily as big as some Dems.

    One wild card is Peak Oil. If global production (currently plateaued) suddenly goes off a cliff, the USA will have severe austerity no matter who is in the White House and no matter how much money Congress prints.

  • The Dork of Cork

    Europe is merely giving the US a oil surplus – the oil which we now don’t burn must go somewhere.
    Given the lack of technological energy capital creation over the last few decades we are now living in a zero sum world.

  • The Dork of Cork

    Interesting developments with the Marco Polo programme which I think is EU commission central funded.
    They are using the channel tunnel for freight movements for the first time.
    With a weekly service to Southern Spain & Poland now.…/europorte-channel-runs-new-european-service-from-s

  • Explorer

    John Hussman says that the recession predicting metrics that he monitors suggest that recession in the US is highly likely. ECRI has not withdrawn its recession call. A European austerity will have outlook/confidence effects on US consumers and businesses. If US federal deficit starts to fall then that austerity will reduce GDP unless exports or the private sector spending increase. As it appears that EUR economy (about the size of the US) will be in recession through austerity US exports are unlikely to increase. That leaves the private sector. If they are spooked by rising international turmoil and increase savings there is a potential US recession. I understand that GM Dealer inventories are at a recent historical high ratio to sales. If this is a common position reduced production to prevent further inventory growth will also be a constraint on growth.

    On the plus side total employment continues to grow (anaemically).

  • Brad Alvarez

    hahaha I would also show some serious debt demand!

  • joey

    Cullen one day you’ll be introduced on Bloomberg as the guy who predicted the Muddle through…

  • Ben Wolf

    As money is used to repay debts to the banking system that money is destroyed. Without continued deficits the supply will steadily drop, pushing the country toward deflation.

  • Octavio Richetta

    I think the term was coined by Maulding circa 2008. Lots of people have been forecasting a muddle through economy for quite a while now, e.g., PIMCO.

    CR is a great analyst, runs one of the top macro/finance blogs in the world (that is why I post here) and I am sure some of the stupid idolatric remarks some posters make here make him feel uneasy.

  • Jim G

    Question: I’ve seen statistics that manufacturing is up in the US, which seems to bolster your idea that the US is “decoupling” from Europe. In order for this to continue would not the US have to accomplish a significant turnaround in manufacturing in order to sustain growth? It could be where we’re heading.

    If the US turned back to a manufacturing based economy we’d see a significant and prolonged uptick in GDP, drop in unemployment, and a recreation of “internal markets” based less on international trade. The big “if” is governmental regulations which can, and have, killed manufacturing in the US. The “austerity” measures you talk about could only be a “quantitative easing” on regulations to allow this to take place.

    Just a thought.

  • Octavio Richetta

    …”Long time readers know I coined the term The Muddle Through Economy early this decade to describe an economy that was growing, but doing so below the long term trend. The first time I used the term was in January of 2002, and it was an apt description of the economic landscape for the next two years, before the economy began to grow around the long term trend of 3%.
    Last year, I suggested we would see a return to The Muddle Through Economy for 2008 and probably through 2009. If the Bush tax cuts are not kept largely intact, 2010 could be challenging as well. I still think we are in a recession and that absent large policy mistakes it will not be a deep recession, but it will be longer than the last two we have been through. And the recovery will be slower than is usual.”
    Source: (

  • WellRed


    I didn’t have time to read all of the comments, so maybe someone else brought this up, but what concerns me (and other macro modellers I have spoken to) is the divergence between US consumer spending and personal income. In short, the former has moved up considerably while the latter has been stagnant. US households have not finished their deleveraging, indicating that a sizable portion of the recent growth we have seen is unsustainable – without personal income growth, consumers can’t keep ramping spending. That doesn’t necessarily mean a recession is on the horizon (depends on govt), but the growth we are seeing in Q3/Q4 is quite illusory as a result.


  • Wantingtoretire

    “Peak Oil” – where do you such nonsense from…….?

    I am pretty confident that the GOP will get in. I heard it yet again this morning, that the road to increasing jobs and prosperity is to cut spending. This is what is happening in Europe. Many believe that is what should be here in the USA. That is what the GOP will do. I know what history gives us.

  • geerussell

    Thanks. I was going to comment with that question and the piece you linked to shed a lot of light.

  • Roger Ingalls

    That was an excellent read!

    As a “Senior Loan Originator :)”, their conclusions agree with my observations and experiences. Most refinances are either rate term or cash IN refis, if you include in those definitions the payoff or paydown of 2nd mortgage balances.

  • Dunce Cap Aficionado

    I’m not touching most of this conversation with a 10 ft pole.

    But I do think similarly to Andrew P with regards to what the GOP will do if they get ‘full’ control.

  • Dismayed

    “Give me access to the 0.25% rate unlimited borrowing capacity lines like the banks have and I’ll show you some debt demand pronto.”

    The goal is to issue loans that are eventually paid back.

  • Mike Sax

    Hello Cullen! I am new to this whole MMT approach but find it intriguing as a framework for seeing the monetary system in a different way. It never occured to me that with the rise of a world wide fiat money system it requires a wholly different approach to the system.

    I’ve also been reading about Sumner’s NGDP and am interested on your idea about him-more his idea than him. I did see something you did about Richard Koo that suggested it wont be as efficacious as is hoped. Does MMT generally have a low opinon of the Fed and what it can do?

    I have felt as you have that the U.S. may well “muddle through”

    Please see my analysis on this