The Flinchum File

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Successful Rehab?

Today’s announcement that the GDP grew at 5.7% was clearly good news. In addition, the Chicago Purchasing Managers Index jumped from 58.7 in December to 61.5 in January. If that wasn’t enough, consumer sentiment increased from 72.8 in December to 74.4 in January. What a great day!

OK, celebration over . . . the question immediately becomes whether the good news is sustainable? Or, is this just an inevitable snapback from inventory levels being depleted during the Recession and now being re-built?

As I’ve written before, this economy is showing a Nike-shaped recovery, i.e., a rounded bottom with a slow recovery. The damage was too profound for a rapid recovery, and the current political disarray is not helping. Nonetheless, the recovery will continue, just not as sharply as today’s numbers indicate. But, as cardiac patients can progress successfully before having another heart attack, I am currently concerned about the problem with Greek bonds. Their debt substantially exceeds their GDP (roughly 120% vs 80% in the US). Their profligate ways have caught up to them, and they are having trouble selling more bonds, to keep spending without raising taxes. Holders of existing bonds have gotten crushed. Farmers are already blocking roads to demonstrate against cutting farm subsidies and other governmental services. It is all too reminicient of the “Asian Contagion” in the late 1990s. This could be different, if the European Union will use this opportunity to show a benefit to membership, like providing tax benefits for Europeans who buy Greek bonds, for example. But, it bears careful watching!

In 2007, the world economy had a cardiac event, originating from the financial systems. If we have another one in the near future, it will be from soverign debt. But, how do you make a soverign government rehab itself?