If the world’s confidence in the US economy is lost, the result would be a selffulfilling crisis

- "Many factors could cause a loss of confidence worldwide in the US economy:
• insolvency among part of the households and holders of commercial real estate loans, and as a result chronic weakness of retail banks, the real estate sector and the Agencies;
• enduring deterioration in the US labour market situation, especially due to far lower flexibility;
ongoing weakening of wage incomes, deleveraging and impoverishment among households, condemning household demand - which was the engine of the US economy - to long-lasting weakness,;
• slimming-down and lower profitability in the finance sector, whose weight was considerable;
• persistent external deficit, due to the shortfall in savings that has not been corrected, and therefore a persistent risk of a long-run depreciation of the dollar that would logically discourage foreign investors (the People's Bank of China?);
• risk of insolvency of public finances at some point in the future."
- "If non-residents (including central banks) share this pessimistic view, they will stop investing in the United States, which will create a huge financing problem, leading to a sharp rise in interest rates, a worsening of all solvency problems (households, real estate, government, Agencies, etc.) and a decline in domestic demand, i.e. precisely the developments that non-residents dread. Such a loss of confidence cannot have the same self-fulfilling effects in countries that are self-sufficient in terms of savings, such as the euro zone."

Natixis Flash Economics 423 20100830

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