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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

June 29, 2010 at 10:00 AM

The G-20 gets its ‘austerity’ as investors hit the exits

Today’s market tumble started overnight in Shanghai with news that the Conference Board had an error in its index of the health of the Chinese economy and revised it down. “Growth was not likely to accelerate in China, and in fact, a moderation is possible,” William Adams, the board’s Beijing economist told Bloomberg. “This correction also supports the same view.”

Oops. This is no small thing considering the world’s best hope for even a modest recovery would be led by China. Now the question of overvalued equities in that country re-emerges. In Europe: Nervousness about the Thursday expiration of a European Central Bank lending facility. Sentiment wasn’t helped by a 10-point drop in consumer confidence here. Only the experts were surprised. With close to 17 percent real unemployment and weakening personal consumption, spending on imported doo-dads isn’t going to save the economy.

Now, surface explanations about end-of-the-quarter market moves should always be taken with some skepticism. Everybody is rebalancing portfolios and other holdings to put the best face on the next earnings statement.

Still, the pessimism today probably also reflects the G-20’s zany endorsement of “austerity,” to cut stimulus spending and balance their budgets. This in the face of extremely high unemployment, the ongoing threat of deflation and the lingering aftermath of the worst downturn since the Great Depression. As is well known, when Franklin Roosevelt tried this in the late 1930s, the result was the severe recession of 1937 as growth collapsed.

And FDR was just a traditional balanced-budget thinker: He wasn’t trying to please a shadow banking system that now holds entire nations hostage. In reality, the finance boyz who have assorted plays against sovereign debt are a much bigger danger themselves, with their interconnected and hidden risks, all of which could drag the world into a double-dip recession and nations into bankruptcy.

The immediate danger of the U.S. deficit was on full display today. Investors moved into Treasuries and dollars. The real problem is lack of effective stimulus spending, that which would create jobs, productive industries, research and infrastructure. We’ve shot most of our wad propping up the finance boyz. Now they want “austerity.” Or they say they do. They really just want a nice overnight trading profit.

Today’s Econ Haiku:

Made in Italy

Foul-up caught in Everett

Global supply chain

Comments | More in China economy and business, Eurozone, Global economy, Stock market

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