Yesterday, the bank of the Europeans, led by Jean-Claude Trichet, decided to fight inflation, albeit in a modest way. The ECB raised rates a quarter of a point, just as it had threatened to do, bringing its key rate to 2.25% higher than its U.S. equivalent.
This puts the Anglo-Saxon economies in a tighter bind. Their economies are weakening rapidly. But higher interest rates in Europe make it tough for them to cut rates further in the United States and Britain.
The U.K. stock market is down nearly 20% over the last 12 months. Consumer confidence is at its lowest point in 18 years. And Charlie Bean, deputy governor of the Bank of England says Britain faces “the most challenging set of circumstances since at least the early 1990s and possibly earlier.”
Houses are falling in price in Britain. Banks are tottering. Building companies are being written down.
This report from the Sovereign Society provides more details:
“Residential mortgage debt as a percentage of the economy is at a record 51% in the U.K. In Denmark and even in famously ‘conservative’ Switzerland, it is near or just above 100%.
“And you can bet this housing mania spread into other parts of the European economies. In Britain, consumer debt now totals $1.4 trillion pounds, more than in any other country in the world – including the U.S., with five times the population. At the same time, British home owners now owe 164% of disposable income, compared to only 138% for the U.S.
“The European housing boom has also dug deep into the financial markets. Even at the real estate peak, for instance, Residential Mortgage Backed Securities totalled less than 1% of GDP in the U.S. Yet in Portugal, Spain, the Netherlands, Ireland, and Britain they range between 3% and 7.5%.
“And yet Denmark, Spain, the U.K. and Ireland have begun to register falling housing prices, with projections of as much as 9% losses this year. No wonder Denmark became the first European economy yesterday to announce that it has officially fallen into recession. More may soon follow suit – especially Ireland, Britain and Spain.”
Meanwhile, over on the western shore of the Atlantic, the Dow rallied slightly yesterday…up 72 points. The dollar managed a little bounce too (it’s fallen 41% since George W. Bush came to the White House). And gold trading left the yellow metal down $11 at $935.
“US jobs disappear and wages stagnate,” is another headline in today’s IHT.
Job losses have continued for 6 months straight. For those still working, salaries are going down, says the IHT, “just as workers face record-high prices for gasoline and food.”
Barack Obama said the problem illustrated the “failed economic policies of the past eight years.” He should have gone back further. The problem began 25 years ago – or even further back. Americans got the idea that if they called themselves ‘free,’ they would be free…and if they called their economy a ‘free enterprise economy’ it would make them rich – no matter what they did.
What makes people rich is not free enterprise, but what you do with it. And here, we let you in on the secret. If you want to get wealthy, work hard…and make sure your expenses are LESS than your income. Yes, less. That’s the way it works.
Markets and Money