Last week, Detroit. Today I am travelling to New York. This allows me to catch up on my reading and one of my favorite weekly reads is The Economist.
Two things in this week’s issue caught my eye.
The first is that are advocating that Europe’s most indebted nations default. (Ireland, Portugal and Greece, to start.) This is a radical idea, but they cite compelling data showing that debt levels are simply not serviceable and defaulting sooner is better than later.
It struck me how similar sounding the logic was to the situation with the Detroit car companies two years ago. Even the idea of a “managed” default sounds like a “managed” bankruptcy.
‘Course the difference is that we had a Roman style dictator in the form of Steve Rattner to help the GM/Chrysler bankruptcies along. (The Romans didn’t view the term “dictator” as a pejorative.) Nothing like this seems politically in the cards for Europe.
The other piece was a look at commodity price inflation. The point was that commodity prices usually peak when demand is highest—at the high point of the economic cycle. It is unusual to seem prices rising this soon in a recovery.
Some blame can be placed on speculators who are anticipating increased demand as the global economy continues to recover and investors seek returns. But apparently this is not a primary driver of higher prices.
A stronger argument can be made that this is part of a longer-term cycle triggered by growth in emerging markets. This growth is putting pressure on existing supply, pushing up prices. This also suggests that prices that can only go higher as economies recover.
I mention both these pieces as they are connected.
Last week I posted about encouraging January vehicle sales. But these two articles point out the other side. There are still huge risks out there. A default could send interest rates sky high. Raising commodity prices will pull money from consumers that could be spent elsewhere.
Either (or worse still) both could easily derail the tentative recovery that is already being held back by housing and unemployment.
So is the glass half empty or half full?
