24 August 2010

The EU and the US Economy

Developed economies manufacture and they provide services. The EU consists of companies which provide services and one real manufacturing economy (Germany). The UK provides financial services.

The economy of the EU is sunk because services need manufacturing economies to service, they need a source of money flow and are biased towards creating a system based on money flow. They made a lot of money servicing the US, that was the source of the economic growth which deflated in Europe.

What I mean is they took some of that flow created by housing related asset inflation, sometimes directly by having banks selling mortgages, which then got into a huge amount of trouble, when those assets collapsed to their true values.

That has gone, but Europe still get support from the US by Fed fund rates being kept under ECB target rates (it makes euro assets more attractive and directs money flow to them). By doing this they are supporting as well an economic structure which disappeared and won't resurrect. This is a money flow economy predicated on house prices, which connected the US and the EU.

However the US is a special kind of economy. It does manufacture durable goods (how well it does this is unclear right now, but it has regenerated itself in the past), but it has an unparalleled command of information technology. Is this manufacturing. Not really. But it is not a service either. Now the question is, is there any kind of recovery in the US. The US needs to look not at home sales figures, which are the actual cause of this present recession.

It needs to look at its companies and in particular its information engineering companies (this includes facebook, google, myspace, microsoft, apple). Are they experiencing any serious problems. Not really. Even YHOO was showing some positive signs. Does the US have any competition in this ares. Nope.

Is there any area which generates such revenue. Well oil companies. Is there a more important industry for both the present and future ? It is in the economic interests of the US not to resurrect asset inflation, they fundamentally do not need to. They need to raise interest rates. Not a huge amount, so they hurt those with loans, but enough so they are slightly above ECB rates.

As I write this I am keeping an eye of USD/JPY 30 min. The price is alarmingly close to that low in 1995. Money flow economics. The pricing of the dollar is probably not inherently correct. It is artificially correct, to the extent that it can be, it needs to be re-priced by the Fed. EUR/USD has been falling since around 8/08. And USD/JPY has accompanied this, gradually.

It is not about risk at all, it is now about a sea of unstructured cash without anywhere to go (the EUR/USD conduit unwinds). Flow needs a direction to work properly and it worked for months after the crash, pumping up asset values and the stock market. There is a lack of clarity now about what is and is not risk, if there ever was clarity.

The conduit exists but, like the BP well, it just pumps cash into the sea. Manufacturing companies are not so affected by this, and least affected seem to be those predicated on creative action, like the software technology companies. This is because they generate cash from large numbers of sales or ad clicks. Now the success of the conduit, is the crisis did not destroy the system which supports money flowing in smaller amounts to things which add value to the economy. That is all it needed to do. It did it.

What is the difference between providing services and durable goods. Well services are pretty value neutral, financial services could be provided to structure mortgage pools for example and generate revenue, even thought the assets were themselves debts. But isn't selling a smart phone to somebody using social networking putting it on their credit card like that.

That argument would be one which said the credit economy is itself a problem. That is the belief that a lot of credit is as ill founded as those mortgage pools. But it is positive if it is going to advanced technology companies. Credit does create structured liquidity in an economy as long as there is real wealth creation (from an investing economy) to back it up, that implicit insurance I talked about yesterday.

The systemic argument is that such systems are not biased towards money flow in the same way as pure service providing is. One could even conjecture that such a system is more natural to and more supportive of the nature of the US economy.

© 2010 Guy Barry - All Rights Reserved.