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Why the us economy will substantially outperform the eu for the long run


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The unconventional oil & gas industry is a game changer that the US embraces whilst Europe is cold on the ground of environmental concerns

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Why the us economy will substantially outperform the eu for the long run

  1. 1. Why the US economy will substantially outperform the EU for the long runI do not intend to be comprehensive with tons of indicators which are available: I will onlyfocus on a few which, in my opinion, are making THE difference.1. The banking sectorWhilst US banks have largely cleaned up their balance sheet, or more exactly dramaticallyreduce their leverage to around 15 x, and have been able to return to markets to fundthemselves at market price (the FED has withdrawn its unconventional liquiditymeasures), the European banking system remains under life support from the ECB in theturn of EUR1 trillion Long-Term Refinancing Operations. The European banking systemhas a funding gap of EUR 1.3 billion, and as the WSJ writes “… if European banks werefunded the same way as U.S. banks, they would have a deposit surplus of $3 trillion”.This is why the US banks are lending t the US economy and European banks do notfinance the EU economy whilst remaining too leveraged at 30 x. To worsen the situation,banks are increasingly hoarding money with the ECB: USD1.4 trillion as of 9 November. 1
  2. 2. Lending to the economyThe US commercial and industrial loans from all commercial banks is an indicator I followon a regular basis and it proved to be a good early indicator of the US economyturnaround. Velocity is however part of the money creation and has dramatically fallensince the beginning of the financial crisis.Today, I am adding velocity to present a more precise picture. Interesting enough velocityof MZM1 * commercial & industrial loans by all commercial banks turned up +/- 1 yearago, adding a bullishness view on the US economy, despite the fact that MZM velocity is at1.4 x, the lowest since 1959 (when it started to be reported). Banks are financing theUS economy.1 MZM = M2 less small-denomination time deposits plus institutional money funds. Money Zero Maturity 2
  3. 3. EnergyOne point largely occulted by commentators regarding the US fiscal and trade deficits isthe energy sector. If the US, and everything seem pointing in this direction, becomes selfsufficient within 10 years, this will be huge boost to the trade balance and therefore theGDP growth.The oil & gas 2011 trade deficit stood at $993 bn for a GDP 15,321 bn or a negative growthof 6.5%; if one assumes that thanks to unconventional oil & gas the US can reduce itsenergy trade deficit by 50% this would add 3% to GDP: this is a game changer and thefiscal cliff would be much easier to climb.The unconventional gas industry will have far reaching effects including jobcreation and re-industrialization. According to HIS, “the shale gas productionsupported 600,000 jobs in 2010, a number that is projected to grow to nearly 870,000 by2015”. 3
  4. 4. mentions in a 2011 report that by 2025 shale gas will save US manufacturersUSD11.6 billion a year in gas expenses and add 1 million workers.Hence my positive stance on the US economy.What will enhance competitiveness of the US industry will have the reverseeffect in Europe which largely ignores shale gas on the ground of ecologicalworries. This will represent a competitive disadvantage to Europe not only in term of pricebut also independence, since Europe largely relies on non-EU supplies. 4
  5. 5. enlarging the picture, the map shows that the US competitive advantage goes wellbeyond Europe: other countries are paying 3 to 4 times the US price.Finally, the competition between energy sources had a direct impact on crude oil in theUS. The gap between the Brent and WTI started to widen two years ago to reach a 20%price advantage today, not petty money. 5
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  7. 7. Reserve Bank of St Louis: Economic Research Energy Regulatory Commission: Natural Gas Markets Street Journal: Why Europe’s Banks Trail in Deleveraging Process Wall Street Journal: European Banks Still Hoarding Money!798ED78D-6CA2-442D-A41B-54FA9CB860A9Penn State University: The Economic Impacts of the Pennsylvania Marcellus ShaleNatural Gas Play: An Update The Economic and Employment Contributions of hale Gas in the US Shale Gs – A renaissance in US manufacturing? 7