It’s almost as if the EU and the U.S. Congress are in a contest to see which group can do the most damage to the global economy.

We know the EU strategy well enough. It starts with denial. The EU is in denial that Greek default is inevitable. They are still talking about a 21% debt forgiveness, when the market is pricing in 50% (or more). The fact that the EU can’t see this – or admit it – is unsettling.

So, as a follow-on, the EU is also in denial of the reality that Euro-banks need more capital to withstand Greek default. Maybe the banks are fine with current reserves if 21% default is the final number. But again, the market is pricing in 50% default, and investors are saying loud and clear that Euro-banks aren’t prepared for 50% debt forgiveness.

Heck, investors are even saying that U.S. financial institutions like Morgan Stanley (NYSE:MS) aren’t prepared for the effect of 50% debt forgiveness in Euro-banks.  

Greece’s finance minister said yesterday that Greece will run out of money by mid-November. But why wait to re-capitalize banks and reassure investors?

If the EU can’t see what its indecision is doing to assets and the global economy, then we’re dealing with more than denial here. It’s like it’s deliberate.

Which brings us to Congress.

The debt deal fiasco that pushed the U.S. close to default and invited a downgrade was certainly intended to send a message. But what was the message? That spending is out of control? Or that certain factions of Congress will sacrifice the economy to get their way?

It’s been pretty well established that the Smoot-Hawley Tariff of 1930 sparked a trade war that further contracted the U.S. economy and helped turn a recession into a depression.

So what does Congress want to do now? Why, impose punitive tariffs on China as punishment for currency manipulation.

Now, part of the reason stocks have been selling off is the fear that China’s economy is slowing and that it will import less raw materials and finished goods. China accounted for 40% of global growth in 2008-2010. A trade war would make the global economy worse.

In 2010, the U.S. exported $92 billion worth of stuff to China. I understand that we import far more stuff (around $250 billion more) from China. And we also like the cost advantage of buying cheap goods from low-cost producers like China (Hello, Wal-Mart shoppers). Does Congress really think it would be a good idea to jeopardize $92 billion in exports, with no back-up plan?  

Why not enact some legislation that would make it more attractive for manufacturers to do business here in the States? That sounds better than trying to tick off our third largest export market?

It seems like Congress is trying to make things worse. Fortunately, cooler heads will prevail and this ridiculous tariff bill will be killed.

Meanwhile, Fed Chief Bernanke is at least trying to reassure the market by saying that the Fed stands ready to do more. Too bad he seems like the only one that wants to see the economy improve. And in fact, he called on Congress (again):

"A second important objective [for Congress] is to avoid fiscal actions that could impede the ongoing economic recovery.Putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term."

Bernanke’s is a voice in the wilderness at this point. It’s too bad. The world could use more leaders focused on solutions to the problems we face.

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Published by Wyatt Investment Research at