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Can anyone decipher this hosepipe of contradictory information?

If one was to look at the world from the perspective of the average person, then the current economic situation looks extremely scary. Of course, many economists feel that they fully understand what is going on and can easily prescribe a solution to help us get out of the current economic malaise. But, I think that most have learned to ignore such confident statements. Those who remember my comments about Larry Summers at the time he become President Obama’s chief economic advisor might be familiar with my perspectives on such matters.

Each week we receive data that suggest that the world is both slowly getting back on track and moving ever closer to another recession. On one hand we hear that the services sector in the U.S. is growing faster than expected, and on the other that the high unemployment and a number of other economic factors suggest that we might be faced with another recession. The Federal Reserve is certainly ready and willing to react if the economy does slow down, as many expect. What the FED is certainly not going to do is to reduce the deficits while the recovery is still fragile.

In Europe, the ECB seems to believe that the worst is behind us, and German and French economic data certainly seem to suggest that. But, consumer confidence across Europe is still highly fragile, and the entire southern Europe is getting ready for a period that will probably force economists to devise new terms to describe it, since a recession will not be doing it any justice. The ECB is once again acting in the best interest of France and Germany and hoping that rest will find a way to get themselves out of trouble. Previously, it kept interest rates across Europe far too low in order to help the German and French economies grow. The result was that Spain and Ireland, and a few other countries that experienced tremendous growth, were bursting at the seams. Now, the situation is the exact opposite. It is reducing the overall deficit and withdrawing some of the liquidity in Europe just when the southern European countries are in desperate need of that liquidity. Sometimes the ECB’s actions make me think that they are just as concerned about Greek, Spanish, Irish, Portuguese, and Italian economies as the FED is about countries that peg their currencies to the dollar. The ECB seems to be just as concerned about the implications of its monetary policy on the Portuguese economy as the U.S. is about the implications of its monetary policy on the UAE.

And, then there is the IMF. The same organization that used to advise countries that got into trouble to dramatically cut spending and raise taxes is now telling the ECB that it is being overly optimistic and that it should not be so aggressive in withdrawing liquidity from the system. Perhaps, the IMF believes that the cure for the same ailment is very different depending on where you are born. If you are European then the cure for an economic crisis is more liquidity. If you are born in Asia, Africa, or Latin America, then austerity measures are the name of the game.

Irrespective of which policy might actually work in practice, and no one really has any clue at this stage, certainly not the IMF, the fact remains that your average individual has no idea how safe his or her job really is, assuming they still have one. And, when people are concerned about their jobs, they are much less likely to spend on anything but the necessities. Add to this the fact that banks are not going to be lending as generously as they used to, and it becomes clear that this recovery will take quite a bit longer than many expect.

Looking at the economic prognostications that are published all over the Internet, one gets the feeling that few, if any, actually realize that macro-economics is simply an aggregation of micro-economics. If one ignores the latter, it would be hard to understand what is going on in the former.

Right now, the data that are being published are telling people that the recovery can be seen, but that it is fragile. It is all far too contradictory. We experience a fall in unemployment in one quarter but it rises again in the following quarter. House prices rise for 6 months, but they suddenly start going on a downward spiral, probably because those who have been unemployed for a period that was longer than they anticipated are now forced to sell their homes, or the bank is doing it for them. On top of all of these, you are being told that it’s probably going to take your country a couple of generations to pay off the huge national debt that resulted from the recent crisis, which means that a number of support mechanisms that were put in place to help you might be withdrawn. How safe would you feel about splashing money on nonessential items in such circumstances? And, while it might give us hope to see that Chinese consumers are splashing money on Ferraris and other expensive Western products on BBC news, it doesn’t make you feel any better about your own situation.

It is time that we stop looking at the world from the perspective of economists, and start realizing that while it is impossible to decipher the hosepipe of contradictory data, we might have a better chance of understanding what is really going on in our economies by looking at the people that are living there and the actions that they are taking.


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