A few questions on my mind
- Exposure of US institutions to Euro credit risk
- Willingness of the Fed to lend against what seem to be strong US balance sheets
- The effect of a soaring dollar
The first two require more digging to understand. The third we can speculate more about. On the one hand a collapsing Europe and a soaring dollar will squash the manufacturing renaissance. Net exports will plunge and that will be a drag on the economy.
At the same time, however, we should expect oil price to gain some double relief. First a slower Europe means a slower China and that means lower real oil prices. Second, a higher dollar means cheaper oil in dollar terms. Both of those will drive down gasoline prices.
Lower gas prices will ease pressure on US consumers and spur US auto sales – both of which could support recovery.
Lets say the Euro goes all to hell in 2012. However, lets also suppose that we have apartment vacancies approaching 2-3% and gasoline at 2.50 a gallon. Does that sound like a prescription for expansion or contraction. Right now it still reads like expansion to me.
Obviously the markets think I am wrong and so do most economists. I look forward to finding out why.