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A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 30th, 2005 at 10:58:14 AM EST
[ Parent ]
Let me preface this by saying that I apologize if I'm not wording this correctly, because it's 11:35 AM in Florida, and I'm still not quite awake (my fiancee also didn't warn me that it was 35 degrees outside this morning, so throw a bit of shock on top of the sleepiness):  

You're right about the Eurozone.  Not good.  And, apparently too, about the US.  Britain's interest rates are still substantially higher than the inflation rate, being the good, though perhaps pompous, little inflation-targeters that they are.  Still, I'm not terribly concerned.  (Concerned?  Yes.  Terribly so?  No.)  Note that a substantial part of the upward trend in inflation comes in the last few months of the report's time period -- meaning, during the most powerful period of the energy-price surge.  (As Jerome has pointed out, in a previous diary on home-heating costs, that problem may well continue for Europe heading into the winter, but more on that in a moment.)

You all are in a better position to tell me about this, but:  How have corporate profits looked over the past few months?  I suspect they have been less than spectacular in Europe, as businesses should tend to allow some profit to be eaten away before raising prices, so as not to hurt demand.  (Profits were far from wonderful in the US, unless your store happened to sell those damned iPods.)  Wal-Mart, for example, had a weak quarter, which of course (since it's "Always-Low-Prices" Wal-Mart) sent Wall Street into a near-panic for a bit.

Here's my concern about the Eurozone, and why I bring up this concept of falling corporate profits prior to rising prices:  With the price of energy increasing, profits are eaten away.  Then, prices rise, and interest rates will also rise.  (Not all businesses are created equal, so there's no reason to expect the process to occur in the neat, clean stages I'm talking about.)  So you've got a couple of factors taking shots at the Continental European economy, and a recovery that should (hopefully) be rather robust might be severely dampened.

I don't intend for that to sound like "doom and gloom".  But, obviously, energy prices are critical to the economy and can help swing the economy dramatically in one direction or another.

Also, after the dot-com bust, with the American economy not responding very well to ever-lower rates at the Fed, it seems like we've been willing to put up with a bit more inflation, if it means getting the economy back on solid ground.  (There's a contradiction there, I know.  You can't find solid ground without stable prices, but bear with me.)  I'm not sure how much of that may apply to the Eurozone.  Your governments tend to keep a tighter money supply than we do, though probably not for long now that Ben Bernanke, "Mr. Inflation-Target," is headed for the Fed Chair.

As always, I could be wrong about all of this.  So feel free to correct me or disagree.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Nov 30th, 2005 at 11:46:22 AM EST
[ Parent ]

Thanks for those links - I was surprized by the data, which I have summarized below:











COUNTRY       CPI   INTEREST_RATE
Australia      3.0    5.6
Canada         2.6    2.7
Denmark        2.0    2.1
Euro Zone      2.4    2.1
Japan          -.7    0.0
New Zealand    3.4    7.0
UK             2.5    4.5
US             4.3    4.0

So short term interest rates are less than inflation in the US and Eurozone, and roughly equal in Canada and Denmark.  Meanwhile, the UK, Australia and New Zealand have higher short term rates, which Japan has deflation.  

by corncam on Wed Nov 30th, 2005 at 12:05:33 PM EST
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