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Will the US gain from Europe’s crisis?

Economist Tim Duy thinks so. Duy says the Eurozone's problems will be a "net positive" for the US:

Bottom Line: The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it. In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge - namely, a rising external imbalance. Arguably, this simply shifts the ultimate adjustment to sometime in the future. Again.

I think Duy underestimates the US economy's vulnerability. It is very questionable whether his two main "positive implications" - lower oil prices and lower US interest rates - are the result of the European crisis. It is also not certain they will continue. Low interest rates are unlikely to provide a great boost, given that rates have already been rock-bottom for some time. As Felix Salmon notes: "Interest rates can hardly be any lower than they are, so for the time being they're exactly where they would be even if there wasn't a European crisis." Lower oil prices and interest rates could assist an economy that is already in the process of recovery, but they are not strong enough factors to create that recovery. And right now, it doesn't appear as if there is a solid upturn happening (and Duy's evidence is not compelling).

As I noted in my spiked article, I believe the main risk to the US economy (and world economy generally) from the Eurozone crisis comes from the potential impact of so-called "contagion" - that is, the implications of private and public deleveraging in Europe flowing to the US due to financial interconnections. It is the underlying weakness of the US economy (which is still deleveraging itself), and its continued reliance on private and public credit, that renders it vulnerable to this possibility. Duy downplays the contagion threat from Europe, calling it a "bogeyman". If the US banking system comes under attack, he says, "we can pull out the 'too big to fail' card". Policymakers "would likely swamp the financial system with cash if the crisis threatened to spread to the US, quickly pulling out all of the tools they just put back on the shelf."

This is too glib. The US government does not have endless money at its disposal. Taking on more bailouts would strain the coffers: US government debt is already high. Easing monetary policy, via an increase in the money supply or other methods, would increase inflation.

At some point, there needs to be a reckoning: to sort out the underlying real economy, and put it on a path to growth. Throwing good money to prop up the bad might delay that day, but it will only make it worse when it does eventually arrive.

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