Sunday, March 6, 2011

Middle East, European Central Bank (ECB), and Double Dip Recession

I love it when differing minds converge towards the same questions and possible conclusions.

In my last two posts, I have discussed (Europe and Libyan Oil) the Middle East conflicts, the possible price shock of oil, particularly in Europe, and the probability that the result would be more deflationary and contractionary.  Now Richard Bootle, of Capitol Economics, has published a piece in The Telegraph reaching very similar observations and the possible risk of a double dip recession.  In the last post (Oil Prices, Oil Supply, and Financial Crisis), I discussed the overreaction of the ECB to headline inflation and commodity price shock, including oil, as well as the continuing Middle East conflicts and the financial risks of economic disruption in the Middle East , particularly, with Bahrain having largest concentrations of financial service companies and banks in the Middle East.  In the post, I said the ECB's actions are likely to cause growing unemployment and contraction in the economy.  (Note that the Egyptian stock market has been closed for three weeks and its most recent 2 year bond auction resulted in a yield of 11.49% and the Tunisian stock market may open on the March 7th and both of these countries have continuing demonstrations because the Egyptian army is not giving up any real power and the Tunisian government continues to have the same old people in authority.)  Now Rebecca Wilder, an economist who now works in the financial industry, has a post at Angry Bear that provides a detailed discussion of the ECB's interest rate hike pre-announcement and the different inflationary conditions and expectations in the eurozone in which she sees a liquidity squeeze coming and a possible stagflationary scenario evolving if investment does not pick up.

The Middle East and the eurozone are serious deflationary and contractionary threats to the fragile economic recovery which has enriched the financial giants while leaving their financial frauds unpunished.  These are all possible seeds of the next financial crisis.

Meanwhile , the ECB and the eurozone dither over defeating and self-serving policies (which are destined to fail, as Wolfgang Munchau argues in "Say no to Germany's Competiveness Pact", because they do not address the real problems) benefiting the trade surplus euro countries and delay helping Portugal before it is too late because the eurozone did not act sufficiently or quickly or timely enough to help.

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