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Jon Talton

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

November 8, 2012 at 9:48 AM

The myth of decoupling in the world economy

During and immediately after the Great Recession, economic pundits talked about “decoupling,” where China would keep growing no matter what happened in the United States and the European Union would chart its own, separate course. Russia and Canada would decouple thanks to their energy resources. It hasn’t turned out that way. The world’s major economies continue to move in sync, and that’s as much a danger for America as the “fiscal cliff.”

The eurozone was brought low by something as American as a real-estate bubble gone bad and a dodgy banking system. Its situation was made worse by the lack of a real central bank and political autonomy retained, for better and worse, by individual members. Some 22 percent of U.S. exports go to the EU. American banks are big lenders to institutions on the continent, as well as being involved in risky “counterparty relationships.”

Not surprisingly, the eurozone recession is getting worse and America is feeling it, right down to the pullback on Wall Street. Whatever Greece does about the new round of austerity, it can never repay its debts with a contracting economy. It is very similar to the debt trap experienced during the Great Depression. With Germany facing recession, hope for a European recovery have faded.

As a nation heavily dependent on exports, China would naturally feel the slow demand in the United States and the collapsing demand in the EU. It is further constrained by the once-a-decade communist leadership change, this one marred by scandal, and limits on the ability to put a firehose of stimulus into state-owned companies. The energy states are highly coupled to demand worldwide.

As a result, the fiscal cliff may well be averted, or somehow worked around. But we remain connected to the world, as people in Washington state know better than anybody. And for all our problems, we are one of the dwindling safe havens, as investors seek out dollars and Treasuries.

And Don’t Miss: Manipulating the market on Election Day || Economist’s View

Today’s Econ Haiku:

The market for pot

If this is a stimulus

It will be mellow

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