Europe’s Financial Fiasco: Migrating to the United States?

History may repeat itself

By Elliott Wave International

Few Americans realize that the Great Depression started in Europe.

Now as then, the global economy is fragile.

The economy is clearly vulnerable to a debilitating wave of debt deflation. The threat is approaching quickly from an important source: Europe. The same sequence of events occurred in 1929, when deflation started overseas before lapping onto U.S. shores. In Germany, for instance, real GDP fell 1% in 1929 after growing 8.2% in 1927 and 2.8% in 1928. Other economic indicators peaked as early as 1927. At the time, economically-weak Germany was the equivalent of today’s so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain).

Financial Forecast , January 2012

Lending in France also began to decline as early as 1927-28. And about a year before the October 1929 crash, net capital inflows fell in several European countries. In other words: European economies began to deteriorate before the Great Depression began in the U.S.

In Q4 of 2011, the eurozone was already nearing zero economic growth, vs. the U.S. and Asia:

Also, a chart from our May 2012 Financial Forecast (data through May 3) shows European stock markets headed south before the S&P 500:

We know that deflation started in Europe just prior to the Great Depression; today the risk is “contagion.” With this in mind, consider the evidence that a deflationary trend may already be unfolding in the U.S. Here are some recent headlines:

• Illinois Faces 25% Cost Increase to Borrow $1.8 Billion — Bloomberg (4/30)
• States Scaling Back Worker Pensions to Save Money — Associated Press (5/1)
• Cash-Strapped NY Town Cancels July 4 Fireworks — WNBC-TV (5/9)
• Half of Detroit’s Streetlights May Go Out as City Shrinks — Bloomberg (5/24)
• CBO: Fiscal cliff likely to cause recession — CNNMoney (5/22)
• No ‘Barn Burner’ for Job Growth — CNBC (5/4)
• Student debt clock strikes $1 trillion — CBS Moneywatch (5/8)
• Shortfall in California’s Budget Swells to $16 Billion — New York Times (5/12)
• [Senator] Coburn: U.S. “going to get another downgrade” — CBS News (5/23)
• Home Prices Hint at Slow Housing Recovery — Wall Street Journal (5/29)

Here are recent headlines about Asia:

• Japan’s jobless rise stokes slowdown fear — Marketwatch (5/29)
• Hedge Funds Circle as Japan’s Asset Bubble Grows — Bloomberg (5/21)
• World Bank warns of China slowdown — CNNMoney (5/23)

Mounting evidence notwithstanding, most economists still say nothing about deflation. Then again, most economic observers were equally mute about deflation before the Great Depression.

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