Wednesday, December 14, 2011

Greek Economy Worse Than Expected. Next Up - Europe Economy Is Worse Than Expected

The IMF announced yesterday that the Greek economy was worse than expected.  The budget deficit is now projected to be 9% of gross domestic product as the recession is constricting tax revenues and increasing spending on social welfare.

Readers of this blog will wonder why the decline in the Greek economy was "unexpected". As pointed out in the post "Greeks In Despair Over State of Economy", the suicide rate in Greece is up over 40% due to hopelessness about the future. It's patently obvious that imposing further austerity measures upon the Greek economy will lead to further declines. The Greek economy will not recover until actions are taken that stimulate increases in productivity and growth in the economy. The focus on preventing a default and austerity measures is self defeating.  The current strategy of "extend and pretend" is simply delaying the inevitable default by Greece.

It is surprising to me that so many economists are delusional about the likelihood of an easy solution being found to moderate the European debt crisis. It is only a matter of time before a country or a major bank defaults. Add in the reduced lending by banks and the high cost of oil and a Europe wide recession in virtually a certain outcome.

The "unexpected" headlines during the first quarter are going to state that the economies in Europe are declining more than projected.

The next set of "unexpected" headlines will be about the collateral damage caused to the U.S. economy by the problems in Europe.

It is only a matter of time before something blows up in Europe. The situation in Greece is becoming increasingly desperate, but additional problems exist all over the continent. The likelihood of runs on banks is also growing.

Here are a couple of predictions:

  1. The best case for the Euro during the next 6 months is that it only drops to 1.25 versus the dollar. A drop to 1.20 or below is not out of the question 
  2. The U,S. stock market is being propped up by the expectation of a Santa Claus rally, which may or may not occur. However, 2012 seems bleak. The S & P is very likely to dip down to 900 or below by the end of the second quarter due to contagion to the U.S. economy from Europe..  
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