World Economies Decoupling Theory a Myth.

The World Economies Decoupling Theory is a Myth.

By Luciano Vigliotti.

Tue, 05 Feb 2008 12:00:29 GMT Every time I hear “it is different this time,” especially when it comes to long established economic and financial principles, I just want to shriek. You heard it from the financial talking heads back in 2000 during the dotcom bubble, when they tried telling you that profits did not matter in the new economy. And we all know how that turned out!

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You recently heard it again when it came to the US sub-prime depression. These same talking heads were saying that the US-subprime problem would not spread worldwide, which of course it has!

Now you are hearing it once again from the economic talking heads that the world-economies have decoupled from the US-economy and a US slow down or recession will not translate into a world-wide slow down. I’m afraid we are simply heading for a similar results.

Unless they haven’t looked, the US-economy is still the largest economy in the world! To me, if one uses a financial example, you can equate the worldwide economy to a single company. Which by the way is the basic principle behind the ground-breaking book “The World Is Flat” by Thomas L. Friedman. Then the Decoupling Theory is like saying that a corporation can have its largest division go into a recession and the company is not affected.

So our conclusion, do not wait for these people to ring a bell to announce they are wrong because they somehow never do. The skeptic in me believes that at the same time they are pedaling these myths, many of them are positioning themselves on the opposite side of the bet.

If you check the news today, you will read that the UK is entering into a recession. So the contagion has more than begun. You may be asking yourself, what about the government stimulus package and the Fed’s emergency interest rate cuts. If you have been one of our readers for a while now, you are well aware that our position is that the structural problems in the US will not be fixed with short-term stimulus packages or emergency interest rate manipulations.

So if you want the real, real as we like to call it, the truth that is, keep checking back with us on these and other matters that may help you not lose money!