Europe vs USA Economic Divergence Continues

Late last year I discussed the likely decoupling of the US and European economies in 2012.  I said the primary cause of this divergence was vastly differing economic approaches.  Europe has implemented harsh austerity while the USA has implemented a persistent stimulative policy approach led by high government budget deficits.  Since both regions are in a balance sheet recession in which the private sector is unable to sustain growth on its own, it’s imperative that the government step in to keep the patient from dying.

Unfortunately, the patient is nearly dead in many Euro nations where unemployment is 25%+ and growth has stagnated for years.  The result of these diverging policy approaches has been the continued decoupling of the US and European economies.  In a recent note Moody’s put this into visual form:

In addition to the slower growth of expenditures in many of the world’s once dynamic emerging market economies, a contraction of eurozone business activity weighs heavily on the global economy. Unlike the rise by the ISM’s composite index of US activity from August’s 53.2 to September’s 54.5, the eurozone’s composite PMI dipped from an already contractive 46.3 to 46.1. In terms of these diffusion indices, the US outperformed the eurozone by a record amount in September. (Figure 2.)

USA vs Euro Decoupling – Source: Moodys

Much of this was avoidable.  But a vast misunderstanding of our disease and the monetary system has led to deeply misguided policy.  Unfortunately, there are few signs that policymakers have learned their lesson yet….


Got a comment or question about this post? Feel free to use the Ask Cullen section or leave a comment in the forum.

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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  1. “learned their lesson yet….”

    To learn much about anything in ‘Real’ life you have to be willing not to cloud the issues under investigation with your own self interest ,or preconceived ideas. When you can analyse dispassionately then the possibility of understanding becomes more of a probability. In Europe the aforementioned situation to date has been absent.They bring so much crap to the table with them it is surprising they can even find the table nevermind reach conclusions as to the best options available to them.

  2. But isn’t is so that we never ever have to experience a recession anymore? All the politicians and central banks need to do is “print more money” (increasing the monetary base) and stimulate like never before? What could possibly be the downside? Is there a downside at all? Take Spain as an example, they are very dependent on construction. During the good years, they built three times more than there was demand for. Now, you say that they should continue to build and that the state should pay for it?

  3. I think that the keywords that you might’ve missed here are “balance sheet recession”.

    Quoted from above “Since both regions are in a balance sheet recession in which the private sector is unable to sustain growth on its own, it’s imperative that the government step in to keep the patient from dying.”

  4. JL poses a great question:”Is there a downside at all?”
    The difference between the economies of the U.S. and Europe has to be more complicated than our ability to print money out of thin air versus their inability to do so.
    I was under the impression the ECB is committed to doing just that.
    And, really, folks, is our economy far ahead of that of Europe’s?
    Or, is our economy so skewed with propaganda that we think:
    1. We are different from the rest of the world
    2. Thus, with our distinct advantages, we are relatively immune to the downside, if there is even a downside!
    Don Levit

  5. “But a vast misunderstanding of our disease and the monetary system has led to deeply misguided policy. Unfortunately, there are few signs that policymakers have learned their lesson yet….”

    Precisely…in fact, in the first Presidential debate the deficit was framed as an unquestionable negative…not as something that prevented a severe recession becoming a depression…

    If GDP=C+I+G+(X-M)…take a hatchet to “G”, and tell me how C+I+(X-M) will make up for it….”G” puts money into the economy (and is irrespective of taxes too, by the way).

    If our next President (and congress, they’re the real players in all this) really focus on reducing the deficit (while our economy is still healing), then watch the the US become the Eurozone too.

  6. You must be an Ivy League socialist Many countries have spent themselves to destruction, the US is just another one if spending more than a country takes in is so successful, please tell me, what happened to the ussr? commrade?

  7. 1. Does stimulus really stimulate the economy? At what point when you turn it off does the economy have momentum to continue growing? Or, if your stimulus is a transfer payment to somebody who is no longer producing, doesn’t the stimulus effect end as soon as the check stops? Not making a value judgement here; I understand that more people are not productive and must be carried by the rest of us. Well, most of them.
    2. What do we do when our resources (the tax base) can no longer pay for our expenses? Our assumption is that we should not compromize, ever. How long can we live beyond our means?
    3. Why is the economy struggling? If it’s a balance sheet recession, then don’t we need to solve that. Who is broke and how can we make them whole?

  8. Depends Don. It’s about managing both sides of the boom and the bust. You need policy and people in charge who know how to stop a situation like the housing bubble in the USA from forming. After all, the money printing isn’t necessary if we don’t have the housing bust. To me, the fix to that is some simple regulations. Like making people put down a reasonable payment to make the largest purchase of their lives. Instead, we let the banks run rogue making no down no doc loans based on the justification that further regulations will constrain their ability to make loans and expand the economy. YEAH, THAT’S THE POINT! So it’s about stopping the boom before the bust can happen. And that means keeping capitalists from blowing themselves up, which they’ll inevitably do if they just run around wild.

  9. Right Rich. So, what happened in this recession was C & I got creamed. When that happens the only sector that can spend is G. If we think of the economy like the human body then the economy is just a system of flows. When the flow stops the body dies. When payments stop in the economy the economy dies. The govt can act like an artificial heart because it can always take money from some people and give it to others. Ie, it can always increase the flow. It’s exactly like an artificial heart. And we just had a massive heart attack. Thank the Lord for that artificial heart. Otherwise, we’d look like Spain and the unemployment rate would be soaring.

  10. When a governments spend, they put money into the economy just as any other entity would. They consume goods and services from the private sector, and when they invest in R&D (NASA, NIH, NIST, NOAA…) the private sector benefits from that investment as well. It is not the case that every dollar of government spending is well spent, just as it is not that case that every dollar of government spending is wasted. Some spending has greater economic benefits than others.

    With regard to transfer payments (SS, SNAP,…)99% of that money is spent…it goes right back into the economy purchasing goods and services from the private sector. But, the real rational behind transfer payments isn’t the economic impact, it’s the providing of some level of economic security to those who are less fortunate during difficult times.

    Not all “stimulas” spending is well spent, nor is it wasted….but, this country desprately needs major investemnt in its basic infrastructure. And that’s not an economic argument, that’s the opinion of civil engineers/city managers across the US.

    I do not see how we are “living beyond our means”…as is so often proclaimed…the real strength of the US can be evaluated by its GDP/person. If we are a $16T economy, and we have a population of 330 million…that’s about $47,000/person….that’s pretty damn good !

    The Chinese, which are now speciously perceived as being the economic leviathans of the world look more like this…$3.2T economy divieded by a population of 1.3 Billion equals…about $2500 /person. Definitely, not in the same ball park. This is also why the Chinese still consider themselves an emerging economy.

    The US needs to recover from its balance sheet recession (in the private sector)….we need sound, prudent financial safeguards to help temper asset/credit boom/busts…and we need to continue to invest in our present, and our future.

  11. I don’t think we’re so much living beyond our means but maybe spending too much money in the wrong places — health care, consumer goods, interest payments. … No doubt we need to spend more on infrastructure.
    Government redistributes national income. Ideally, it does this fairly and in such a way that national income is not impeded.
    When government cannot meet its obligations from the tax base, it must borrow or print.
    I’ve learned in here that government debt is not going to be repaid in the traditonal sense, so in that way deficit spending is money added to the economy. Whether that’s inflationary or not is a matter for debate. Right now it appears not, but if it continues? How that deficit spending should be allocated should also be open to debate. For example, maybe we should deficit spend to pay down all student loan debt? Could be good public policy and pay off down the road as young people freed from debt are able to spend and save constructively.

  12. Rich:
    Our GDP is around $15 trillion.
    Up until 1970, GDP and Total Credit Market Debt Owed (TCMDO) were about equal.

    Since then, TCMDO is $53 trillion, while GDP is $15 trillion.
    Why has debt grown so much faster than GDP?
    Why is GDP so dependent on debt to help it grow, when in 1970, that was not the case?
    Google “In Q2 America Added $2.33 In Debt For Every $1.00 in GDP.”
    Look at on 7-27-12.
    Don Levit

  13. There are four modes of production per John Stuart Mill: Land, Capital, Labor, Public Commons.

    Land should be taxed according to Georgist principles. Land’s rent value is increased by roads and other public spending, so private people should not benefit at the expense of others. Also, monopoly rents from mineral extaction should be taxed, as these are free gifts (energy inputs) from the Sun…gifts from the planet.

    Capital.., that can come into being debt free, and leave productivity in its wake. Unwarranted monopoly rents and aggregation of capital should be taxed.

    Labor should be untaxed (tax land and finance instead to capture the rents). Tax finacialization games as they don’t produce wealth. For example, financialization games caused asset inflation and now debt deflation as people pay off debts, instead of on the real economy. Hence, no jobs.

    Public Commons, such as infrastructure, benefit everybody. It is a good place to spend, and it leaves wealth in its wake.

    We produce tons of wealth, we just put the industrial revolution into hyperdrive for crying out loud. It is just that most wealth is siphoned away as rents (example: debt payments/usury) and vectors to a growing financial oligarchy.

  14. Is a treasury bond necessarily and always debt ? Or is it a finanical asset ? If I hold one of your bonds, it’s a debt to you, and a financial asset to me….look at that on a nationwide scale for the US.

  15. Deficit spending is definitely inflationary on the margin. So, if the economy is deleveraging or deflating more than the deficit spending, it can still net out to overall deflation. That’s what we saw in’08-’09, for instance.

  16. If you look at last 4 qtrs. of Obama, spending is DECREASING, all this Qe…… is asset purchases which for most part are held as excess reserves and not entering (spent) into the economy. U.S. economy is pretty much standing on it’s own, thus somewhat tepid growth.

  17. Well said. And especially with Treasury debt ( its (almost entirely) risk free financial asset. Those who talk about reducing or eventually removing the national debt as a necessity rarely look at the benefit to the private sector of having a savings vehicle with that quality.

  18. Bonds take the money supply and convert it. They take velocity money and make it stop. When money stops, it is no longer available to buy goods and services. When money stops, the holder looks at it lovingly, “my precious…” and wants it to suck in usury. They then take their “capital” and convert it to a bond.

    Allowing money to be veil/counter/marker (whatever you want to call it) during a goods exchange runs against the notion of money as an asset.

    In other words, we humans are caught in the grip of a total collapse of logic when it comes to money. Money’s veil aspect, and its aspect as an asset are at odds. Money should be divorced from being an asset. Do asset holders have the right to drain the money supply during conversion? The money supply is used by all to price goods and services. Money serves a public purpose, and all this talk of asset conversion obscures that very salient fact.

    A real money supply should return said money so it can cycle in money supply forever. Money should only convert to real assets not fake financial instruments. Money by its nature is sterile. How about better homes, educations, more time, better roads, space travel.. there are things we can do with real assets. Conversion to a debt instrument demands mathmatical usury against an organic economy that inherently cannot comply.

  19. Ren, please clarify your point. Are you saying that when a private corporation issues a bond to finance a new venture, this is pulling money out of the economy ??? Because, I see just the opposite.

    Or, I have a $100 bill sitting in my sock drawer for a year, how much economic activity does THAT generate…???

    Better, to buy that bond and put that money to work !

  20. A treasury bond is a financial asset, not a debt. It will never be paid back as would be a typical bond. It will be rolled over or the Fed will buy it from you. Or another person will buy it from you.
    Basically, it’s a promise from the U.S. government to give you back the face value.
    At least, that’s what I’ve learned in here.

  21. Can you elaborate on what you mean by “money’s veil aspect”? (Try to put it as simply as possible.)

  22. Yes, I didn’t explain well earlier: GM issues a corporate bond, pulls money from supply, and then uses it, putting said money back in supply. Good…it creates wealth. Former money holder turned to bond is paid from GM’s increased productivity.

    Veil is a term ecnonomist use for accounting function of money. When money settles a debt/credit contract, it stands in as a good. During the transaction, money divides itself to match the is a veil, also sometimes called a counter. This is the main function of money, and why we use it.

    The usury error is asking money to be an asset. We want our saved money to grow with mathematical perfection of the exponential. But, the added cost of the usury error, means that the cost of money makes it a poor “veil”. That cost is considerable, about 45% as determined by Margrit Kenneday, and verified by German economists.

    A house that costs 100K may be 300K over time. That is a lot of usury for keystrokes to make something from nothing. Industry also borrows credit and passes on the costs. We all pay for it through a costly money supply.

    So, I struggle with it – veil vs asset. I know that all of these debt instruments cum assets add costs to the money supply, which in turn makes us all slaves.

    Ideally we should change our money out for a real asset in the organic economy. It bothers me that some bonds are not necessarily creating wealth. Greek Bonds for example were used to create new EUROs, and we know how that worked out.

    In the Shadow Banking case, the debt instruments destroyed wealth.

  23. Dunce Cap:
    Let’s take the Treasuries in the SS trust fund, for example.
    One can make the case it is an asset to the trust fund and a liability to the Treasury, so ,for accounting purposes, it is a “wash.”
    From the cash perspective, however, it is a non funded asset, for to redeem the Treasury , it takes new general revenues, increasing our debt held by the public.
    If the “wash,” from an accounting perspective really had some “teeth” to it, the asset part would be pre-funded, so it can just be redeemed without increasing debt.
    The SS trust fund is no more funded with cash than any pay-as-you-go expense that is not part of a trust fund, like Medicaid. It takes new general revenues to fund that, too.
    Don Levit

  24. Financial securities like bonds and stocks are just claims on underlying assets. They aren’t a “veil” for anything. They’re clearly defined constructs that represent some underlying asset. When a company raises capital by issuing a stock or a bond they’re obtaining real funds with the hope of creating real wealth. When the govt issues a bond they’re doing the same thing. The govt just happens to be worse at creating wealth than most private entities. But this claim you keep making that there is some veil of secrecy here is wrong. These assets and liabilities are very clearly defined constructs.

  25. But does it matter where the money goes? As in the tart remark last Wednesday regarding the government putting itself in the role of picking “winners and losers” and finding itself “picking only losers”?

    If the Federal government during the Great Depression was Socialism, it was engaged in a kind of hard-industrial socialism of the TVA building massive hydroelectric plants. Today, it seems we have a kind of soft magical-thinking socialism where a major infrastructure program is blocked (cough, Keystone Pipeline, cough) and the money goes into solar cells and windmills, with their characteristic ineffectiveness of meeting demand when it occurs.

    Instead of a government crash program in the wake of the Macando Prospect/Deepwater Horizons human and environmental disaster, developing a government program to better police the safety of deep water rigs, to develop better technology to prevent disasters, and to come up with a more effective “rapid response” to skim spilled oil, instead, the largest skimmer ships were not allowed to operate, you have the ignoring of court orders to allow continued drilling.

    You would think that if the water discharged by the skimmers had less oil in it than the water scooped in, that such would be progress, but the impression I had was that the strict EPA rules for ship discharges had to be observed, a totally inflexible approach.

    The “fracking” tech which has produced the one true bright spot in the economy, of drastically lower natural gas prices and the prospect of increased domestic oil production, that process is under attack for threatening the environment, and there is a political faction that would severely restrict this if they could. Mind you that fracking is the outcome of a public/private partnership involving Federal sponsorship of research.

    On one hand, you have the Obama people, who are politically and ideologically constrained from practicing an effective Socialism — think of the recent admission regarding “shovel ready” not being “shovel ready” on account of the very kind of bureaucratic red tape that this political faction embraces.

    One would think that President Obama would used the power of being President “to take charge.” Especially with an election coming up, that with a flourish of his Executive Order signing pen, he would waive some rather silly environmental regs on “boutique gasoline” to alleviate gas shortages in California. With pending shortages of feed grain that resulted from the summer drought, shortages that threaten to make meat prices shoot up, he could unholster is pen and loosen the regs on the ethanol content of gasoline. I am not talking about ending the project to have a viable bio-fuel industry, I am talking about just a smidgen of executive flexibility to avoid a crisis at next year’s dinner table. But none of this will happen.

    On the other hand, you have Mr. Romney, based on his government and private-sector experience and idealogical disposition being the best person to implement a kind of Daddy Warbucks, late-stage of the Great Depression where the government finally got serious about get ‘er done Socialism. But just as the Obama faction is constrained from the Environmental Lobby from doing this, the Romney Corps is constrained by the Ayn Randians in the TEA Party faction from doing this as well.

    The other thing in defense of the “Libertarian trolls” frequenting your site is that by its political nature, the private sector indeed does a much better job of picking winners and losers than the government ever can. I think you hinted at this as much by suggesting that your druthers would be for tax cut fiscal stimulus over massive public works fiscal stimulus. Not that you would rule out direct government spending, but you had suggested that tax stimulus is an attractive alternative.

    In fact, a jolt of tax-policy stimulus is in the Romney program, but the Romney campaign has to run defensive TV commercials complaining about “the deficit burden placed on the shoulders of the forlorn little girl, who was born in 2009 when Obama came to office”, commercials meant more to fend of the TEA Party wing. As to the President, he is clueless as well as stuck-on-stupid of “um, we need to get economic recovery by seeing that ‘rich people’ pay more taxes”, and he is unable to say in the debate, “Massive deficits, Mr. Romney, are you serious? Those deficits are the only thing standing between your personal fortune and the fortunes of every other American and catastrophe!”

    I see what you are hinting at, that if what Mr. Romney “is really about” is “austerity”, things will go from bad to worse, but I also feel that there is much that Mr. Obama does not understand and will never understand, and that reelection of Mr. Obama is locking in the current bad.

  26. Of course it matters how money is spent. I railed against Obama for the inefficiency behind the homebuyers tax credit and the cash for clunkers.

  27. Agree with some of your points but take on Obama vs Romney seems unbalanced.

    The Obama administration pushed through about the largest stimulus that was politically doable, thereby according to the perspective you appear to share with MR, preventing what could have become a major depression.

    Cutting payroll taxes was also pretty good targeting in terms both of meeting real need and stimulating the economy – and a trade-off between making these permanent and raising capital gains rates or ending the Bush cuts for the wealthy would look pretty good too.

    Romney may be a closet deficit dove, but that is rather at odds with his embrace of Paul Ryan as his running mate.

  28. I live in a country that pretty much neighbours the USSR. I laugh myself silly when the “left” in the USA is called socialist.

    The truth is that the liberal democrats are actually somewhat right-of-the-center of the rest of the world. The republicans of 30+ years ago was on par with the global right wing. It’s a matter of perspective.

    Raise your head and look outside the borders of your home country sometimes. It’s educational. (I’ve certainly learned a lot about the world by doing the same!)

  29. Oh and by the way we’re one of those horrible left leaning countries with socialized health care and the works. We pay 40% of what the US does for the same results. Our Debt-to-GDP is 30something% and shrinking and has been since the mid 90s.

    We also have differentiated wages contrary to what some would like you to believe. Oh, and companies moving their factories to China.

    Germany is “pretty socialist”, too. As is Japan. And Canada.

    Were you talking about PIIGS? If you study the facts I think you will find that their current bind has everything to do with Euro effects and very little to do with political leanings. Actually several of them were lead by right wing parties when the house came crumbling down. (Not that it makes a difference – like I said: it was due to the Euro experiment)

  30. QE4ever has very little stimulative effect on the everyday economy. It’s pumping up a nice equities bubble though it seems. If it hadn’t been for the burst housing bubble it might have transmitted better into the everyday economy via rising house prices, but that is not the case right now. (New, bigger loan = new money ending up in the hands of the seller)

    You are asking very pertinent questions. How do you stimulate an economy where people are having an increasingly hard time to find jobs? Where real wages have been dropping since the 60s?

    Our industries are hugely efficient thanks to all the automation that has happened. Big software companies make something like 95% profit per unit sold when they’ve covered the R&D cost. Only the services sector is immune to these technological optimizations.

    Frankly, we could get by with working 20 hour weeks and we’d have food, housing, transport, education, healthcare, and a bit of entertainment on top of that covered. Want proof? Look at the size of the financial sector – it’s mostly unproductive (but oh so profitable for the smart operators).

    I think Japan hit the point of no growth in the late 80s due to being early with automation. We were slightly behind and got carried by the IT boom and credit expansion and a couple of bubbles, but now we’ve found the same place.

    The only sane growth at this point is more leisure time. But does our economic system support it? In free-for-all global competition? I’m not so sure.

  31. I’ll tell you exactly where the money is being “spent” in the wrong places:

    1. $5tn in corporate coffers
    2. $21tn in offshore accounts
    3. $10/15/20tn in the shadow banking sector

    Notice that we haven’t started counting “ordinary rich people” yet.

    That’s $31tn doing exceedingly unproductive things. Do you want to know why the economy is moving so slowly? Look no further. These are profits that have been lifted out of the everyday circulation and not put back into it.

    This is TWO FULL YEARS of production (of everything from cars to childcare) that simply never happened.

    And people are afraid that a bit of honest-to-god money printing will send the US into hyperinflation… pfah.

    Yes, I’m annoyed. Bloody irresponsible money hoarders that don’t understand how economy works on a bigger scale and their own role in it. Grr.

  32. Oh and feel free to ask yourself why the US has needed to pump $16tn into the economy via state debt. Put $16tn in relation to $31tn and you might have an eureka! moment.

  33. Or put another way: I’m pretty damn sure that’s exactly what he means ;)

  34. Money as an asset is just plain … bad. I’m sorry everyone, but it is.

    How long can I keep yanking money out of circulation without hurting the economy? How many years of GDP should I be able to save up? There isn’t even a guarantee that the productivity will be there when I want to use that money in the future!

    In an ideal world, I’d like to see something like Gesell’s “stamped money” (sans the physical stamping process please). Until then, I wouldn’t mind higher inflation. Like twice of what we have today perhaps?

  35. If you are going to point to Australia, perhaps it better to look at the second Rudd stimulus:
    “A second economic stimulus package worth $42 billion was announced in February 2009. It comprised an infrastructure program worth $26 billion, $2.7 billion in small business tax breaks, and $12.7 billion for cash bonuses, including $950 for every Australian taxpayer who earned less than $80,000 during the 2007-8 financial year. At the same time the Reserve Bank cut official interest rates by 1 percent to 3.25 percent, the lowest since 1964.”

  36. The Fed needs to get control the amount of credit that is given out. Way too much 2006-7 to little 2010-11. Deficit spending is a drop in the bucket actually when you look at the numbers. How can they do that?

    The big “money center” banks that are “too big to fail” need to be Nationalized. What I mean by that is that Uncle Sam should hold 50% or more of the shares of these zombie banks and assign 50% or more of the folks on the board. The banks running the place (e.g. our country!), would then need to at least explain to the Uncle Sam’s board what they are up to. The Zombie banks need to have the general population in mind as customers rather than suckers.

  37. Thanks, I missed that one. So: TWO rounds of lump payments of about $1000 AUD per person.

    5…4…3… HYPERINFLA … what, it didn’t happen?

  38. What happened to velocity in late 2011 / early 2012? (Pardon, I wasn’t paying a lot of attention to US economy at the time)