Balance Sheet Crisis Grips America and Europe

The Lehmann Letter (SM)

America and Europe find themselves in a balance-sheet crisis.

Here at home households have too little cash, too much debt and too little net worth. They can't do the borrowing and spending required to adequately stimulate national economic recovery.

Today's Census Bureau report on May residential construction provides evidence:

http://www.census.gov/construction/nrc/pdf/newresconst.pdf

New building permits were up but starts were down. Either way recovery has been sluggish: Insufficient to provide oomph for the rest of the economy.

Some of Europe's households also find themselves with too little cash, too much debt and too little net worth. They, too, can't do the borrowing and spending required to adequately stimulate recovery.

But it’s southern Europe's nations and banks, in addition to its households, that grab the headlines. They can't do the borrowing and spending required to adequately stimulate recovery because they also have too little cash, too much debt and too little net worth.

Southern Europe requires a balance-sheet infusion, but northern Europe remains reluctant. Southern Europe needs cash, but Northern Europe wants strings attached. Southern Europe says, "Trust us." Northern Europe says, "Not any more."

See, for instance, this article in today's New York Times.

“Greek Voting Past, Europe Returns to Fiscal Rescue”

http://www.nytimes.com/2012/06/19/world/europe/greek-vote-past-europe-returns-to-fiscal-rescue.html?_r=1&ref=todayspaper

“German hard-liners were emboldened by the victory, viewing it as an endorsement of the drive for structural adjustment in Greece and elsewhere in Southern Europe through further austerity. As a result, the vote may delay concerted pro-growth steps by central banks and governments around the world, as well as the hard choices within Europe over deeper integration that are likely to prove necessary in the long run….

“Ms. Merkel has called for deeper fiscal and political integration to improve the functioning of the currency union. While leaders in Paris, Rome and elsewhere would like to tap Germany’s top credit rating through jointly issued debt, they are not as ready to give up more powers to central authorities in Brussels.”

These difficulties - as well as the underlying balance-sheet issue - are examined in another article in today's Times.

“Investors in Search of Bigger Fix to Euro Crisis”

http://www.nytimes.com/2012/06/19/business/daily-stock-market-activity.html?ref=todayspaper

“The most pressing problem is the bad loans that are sitting on the books of European banks, particularly in Spain, where rising real estate losses have called into question the viability of the country’s largest banks. Two weeks ago the European Union provided Spain with up to 100 billion euros to prop up its banks, but investors have so far judged that to be yet another partial solution, because they fear banks in other countries may eventually need help as well.

“More recently, several European financial leaders have said that when they meet next week they will unveil a road map for a so-called banking union. This is expected to include a form of deposit insurance for European banks to ensure that banks maintain responsible lending standards.

“But support for Europe’s banks is viewed by many investors as insufficient, given the rising borrowing costs facing a growing number of European governments. If any of the Continent’s larger economies find themselves unable to borrow money through the bond markets, they will have trouble paying their bills and could be forced to leave the euro.

“Douglas Elliott, a fellow at the Brookings Institution, said that at some point Europe’s stronger economies, most of all Germany, would need to provide some form of shared guarantee for the bonds issued by its weaker neighbors. One approach would involve issuing so-called euro bonds that are backed by the entire Continent. Germany’s opposition to this has generated discussion of shorter-dated euro bills that would involve less long-term commitment. Even that would be unlikely to win support from Germany unless other European nations agree to give up some of their sovereignty.”

In Europe question is: Will the North rescue the South? Here the question is: Who will restore households' balance sheet?

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann