A major credit event in Europe looks inevitable. Would a European meltdown endanger the US recovery? We are looking at two channels, trade and financial. I tend to discount the trade channel. As a general rule, I think the propagation of such shocks is too weak to alter the fundamental cyclical forces underlying the US economy. The potential for financial shocks, however, keeps me up at night - this is the key to the US recession story. There is a nontrivial chance that credit event in Europe triggers a credit event in the US.
Read the whole post, On That Double-Dip at Tim Duy's Fed Watch
This has been my thinking for some time. Real economy is recovering — very slowly, but the financial system is still badly impaired. Any significant shock can tip things over the cliff, and the deteriorating situation in Euroland looks like another Credit Anstalt moment just waiting to happen. My money is on another shock, followed by the second leg down in Great Depression II. The crisis in Euroland could provoke it, but there are a number of other things hanging by a thread ready to break, too.