The European Union Trap

Let's start with the conclusion to today's Outside the Box:

"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer." - Rob Parenteau, CFA

Let me state upfront that this is not the easiest to grasp Outside the Box that I have sent you. But if you can get what Rob is saying, you will understand why the problems facing the world, and especially Europe, are so difficult. Everyone cannot export their way out of this crisis. Someone has to actually run a current account (trade) deficit.

My suggestion is that you read this once through, and then read it again. If you see where Rob is going, it makes it easier to understand the second time. Warning: Rob Parenteau is an Austrian economist. In many circles, what he is saying is controversial, if not at least counter-intuitive. But it makes us think, which is the purpose of Outside the Box. If I get a response that is robust and thoughtful, I will run it in the future. The problem that Rob articulates is the center of the problems we face. There are no good or easy choices, as I have been writing for a log time.

Rob Parenteau, CFA, is the sole proprietor of MacroStrategy Edge and editor of The Richebacher Letter. He also serves as a research assistant to the Levy Institute of Economics. For those interested, you can subscribe to The Richebacher Letter at https://reports.agorafinancial.com/RCH497ControlPromo/LRCHL300/landing.html (yes, more hyper marketing copy, but that is the link if you want his letter.)

John Mauldin, Editor
Outside the Box

subscribers@mauldineconomics.com

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Will the Earnest Quest for Fiscal Sustainability Destabilize Private Debt?

By Rob Parenteau

The question of fiscal sustainability looms large at the moment - not just in the peripheral nations of the eurozone, but also in the UK, the US, and Japan. More restrictive fiscal paths are being proposed in order to avoid rapidly rising government debt to GDP ratios, and the financing challenges they may entail, including the possibility of default for nations…