Thursday, August 27, 2009

European optimism - all eyes are focused on getting back to normal after the crisis was

Even as the reports come out reflecting that European consumer prices fell by the most in at least 13 years in July after energy costs declined and unemployment rose to the highest in a decade, Europeans are not focused on the potential that there will not be a recovery.

How can you recover when there is no demand? How do we know there is no demand - well there are lower prices. Much, much lower - 40% lower food costs are stunning for Germany. Yet nearly all of my European friends emotionally  dismiss any reference to future or imminent risks. Spending by Germans is occurring in a mostly normal fashion for individuals even as Nieman Marcus and Sax Fifth Avenue and other luxury stores struggle or close. Food prices have crashed in Germany, temporarily that makes consumers feel better...especially when you can receive 66% of your salary from the government welfare when you lose your job. 

But what we see is less and less value creation and more and more value combustion. Deflating food prices mean less jobs not more. Many other prices will deflate and result in less revenue, less jobs, and less payments - resulting in lower prices still, less jobs and less revenue. And on top of that we have hundreds of thousands of people in Germany with tons of time on their hands getting paid 66% of their incomes while contributing nothing to value creation is like dynamite to value creation. A double whammy create no value and sap value from the economy by using valuable capital that could be used for something productive.

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