This morning I spoke with economist Doug Holtz-Eakin, who has founded a think tank, the American Action Forum. I asked him what he thought of the Wall Street Journal’s survey that shows a third of polled economists think we are heading for a double-dip recession. He cracked, “Why people believe what economists say is a mystery.” That said, he notes that a majority still believe we won’t sink into a recession.
However, what could push us into a recession, he says, is .a “crisis of confidence.” He explains, “We saw a big downturn in confidence in August relating to the debt-ceiling debate. If that keeps up, it will affect consumers and especially businesses, who’ll say, ‘Forget it — we don’t want to hire now.’ ” He does agree with the bulk of economists, however, who think the Fed will be of no hope, although “it can be a lender of last resort here and in Europe.”
And Europe does remain a deep concern. For one thing, Holtz-Eakin notes that U.S. financial institutions, specifically money market funds, hold some of the debt. If the Europeans can’t repay their obligations, then the money markets can’t pay their customers. Just as we faced a crisis in 2008 in the wake of Lehman Brothers’ collapse when money market funds ”broke the buck,” we could face that situation with a collapse of the European economies. Holtz-Eakin remains hopeful, however, that the funds are “limiting their exposure” this time by offloading the risky holdings.
Europe is also a major trading partner with the United States, Holtz-Eakin explains. The European Union itself notes: “The EU and the U.S. economies account together for about half of the entire world’s GDP and for nearly a third of world trade flows. . . .The EU and the U.S. enjoy the most integrated economic relationship in the world, illustrated by unrivaled levels of mutual investment stocks, reaching over 2.1 trillion euros. Total U.S. investment in the EU is three times higher than in all of Asia, and EU investment in the U.S. is around eight times the amount of EU investment in India and China together. Investments are thus the real driver of the transatlantic relationship, contributing to growth and jobs on both sides of the Atlantic. This can also be illustrated with approximately 15 million jobs linked to the transatlantic economy.” In other words, as Europe goes, so goes a chunk of the U.S. economy.