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Thanks for your reply. I agree with your arguments that the US consumer (may be barring UK) is in worse shape than Europe. But there is an issue of demographics that has not been considered. The population of Europe is declining so it will be hard to increase consumption. Also even though America is more impacted by the problem with CDO's and CDS's (actually I wrote a code to model CDS!!!), Europe has exposure to Central and European counties. Austian banks have huge exposures to Central Europe and Spanish banks to Latin America and presently the credit spread for Hungary, Ukraine, and Argentina are huge. With the flight to quality (presently is the time to worry about "return of capital" rather than "return on capital") there is a large possibility of emerging market crisis and we could see default of some countries. Spanish banks are suffering from a domestic loan crisis, how will they deal with a crisis in Latin America.
I am not so confident regarding the Euro. If the present economic crisis is long and severe than it could put severe strain on the Euro. May be it will last due to the political and economic capital invested in the project.
Anyway these are interesting times. I thank you again for taking the time to read my comments.
Regards
Deepankar F.R.M.
Your agument is well made. I always thought the UK would be in worst shape than US and Eurozone. As matter of fact, in December of last year, I wrote a piece called "Sterling will be the Dollar of 2008", the same title was then used by a columnists in the FT. As for the Eurozone, the issues among the economies you mentined have always been there and will not derail the euro. My underlying thesis states that the spreading virus of CDOs and CDs is far greater and deeper in the US than in Eurozone. Yes, some Eurozone banks were hurt, but EU households werent as badly hit as their US counterpart because 1) they didnt suffer the same kind of negative home equity 2) their involvement in the stock market isnt as deep as US investors. All of these allow for better prospects for a recovery in consumer demand.
Greece and Spain have their own problems of govt debt and spain is saddled with bad home loans. But the combination of surging US budget deficit as % of GDP outpacing 7% (not 6% as many say) and reduced prospects of foreign financing that debt (especially with foreign purchases of US agencies sinking low) the is a long term negative for the USD and the US economy.
Ashraf
Your website is really informative. I disagree with you on one of the articles where you had said that Europe's economy is in a better shape than USA. I still believe that USA in the long run will grow at a faster rate than Europe as a whole. Yes Europe has a capital surplus but that is mostly due to Germany not others like Italy, Spain, and Greece. I personally do not see how euro can be sustained for long due to the tensions that will develop among the different countries. Also the subprime crisis started in USA but it will have a big impact on European banks especially UBS and UK's economy which is predominantely dominated by finance industry.
That however does not mean that US economy is going to have smooth sailing. The private demand is collapsing along with investment. The government needs to engage in fiscal stimulus, government spending on infrastructure is the need of the hour instead of tax cuts which will be saved.
Please keep up the good work