Thursday, February 5, 2009

It just gets worse (Feb 5 '09 edition)

More signs of just how much trouble the world is in right now.

The European Central Bank kept the interest rates in the 16 (+3) nation Eurozone at 2% today, but bank president Jean-Claude Trichet indicated that he may cut the rate next month if the economy doesn't show signs of bouncing back. He did say, however, a zero rate which is what The Fed is working on right now in the States is "not considered appropriate" -- yet. Nor is there any sign that the ECB is considering the radical steps that both Fed and the Bank of England (the latter which cut its rate today to 1%) are trying to get banks to pump money back into the system, although Frankfurt has printed billions of Euros in the last few months to try to get things moving.

The Eurozone is not as burdened by debt as is the UK or the US which is why the Euro has been doing relatively well on the 4X market (it hit a high of $1.45 a couple months back but has since settled around $1.27 and will probably go to $1.15 as more ex-Soviet bloc countries announce their readiness to join the common currency in the next couple of years -- but still higher than the 83 cents it bottomed out at in 2001).

But clearly Frankfurt doesn't want EU citizens (both inside and outside Euroland) to get complacent. There is definitely a risk that as people around stop buying stuff, prices may decrease so much we get into a deflationary spiral. It happened during the Great Depression and it could happen again unless the hemmoraging stops real quickly. And with 19 countries tied together so tightly (a good thing in many ways, but a time bomb in others) people are going to get restless real quick. The protests in Greece in December and January are just the start.

Meanwhile, initial employment claims in the United States last week hit a breathtaking 626,000 (the worst since October 1982), and the number of people collecting UI on a continuing basis is now 4,788,000 -- a record high. A "good" week is only 325,000 and 2.5 million, respectively.

I don't need to comment much more there. I guess even with the switch to DTV in the States off till about June 12 (it was going to be on February 17), people aren't going to buy LCD or plasma TVs unless the price is cut to about $400. That is, if they have a job so they have the money to spend.

It's heartening to see President Obama taking the approach that "beggering thy neighbour" will make the recession only worse (understanding a strong central and western Europe is vital to American security interests) but I still would like to see what his approach actually is and what level he thinks the greenback should be against the euro. Remember on his goodwill tour of Europe last year during the election campaign, he snubbed EU officials in Brussels.

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