Grease Greece is not the word!
Greece is a member of the European Union (EU) (i.e. an economic and political union of 27 European nations). Greece’s population and economy are both very small in comparison to the entire union of nations; however, it is having a dramatic impact on all EU nations.
Fears of the Greek government not being able to pay off its debts is rooted in the fact that this country has a history of out of control spending, and the inability to get its financial house in order. This has resulted in investors worldwide concerned that Greece can only meet its obligations via other EU nations bailing them out. Unfortunately, Germany, France and other EU members’ are struggling from the recession. As such, they are concerned that if they guarantee or take on Greece’s obligations, then other economically challenged EU members will consider doing the same.
This is resulting in the Euro (EU currency) and member nations’ stock market both declining this year. As was noted in today’s Wall Street Journal, a Harvard study has shown that once a nation’s debt rises to more than 90% of its annual economic output, it faces tremendous challenges and long odds of ever recovering. Currently, Greece’s debt exceeds this threshold. The fears associated with Greece’s economic predicament has resulted in its stock market being hammered and interest rates climbing dramatically in 2010.
The lesson the U.S. and other countries need to learn from this is that once your nation’s debt reaches a certain level, no amount of guarantees will stop that nation’s currency from declining, interest rates increasing and its stock and bond market from being hit.
The United States is not nearly in the same predicament as Greece, and we are a much more robust, innovative and growth-oriented economy. As such, I believe we can take steps to avoid what occurring in Greece. Greece should not become the poster child of moral hazard and any default on its sovereign/ government debt would be much more of a crisis in confidence than economic. However, such an event would make investors worldwide wonder who may be next, which would result in them demanding higher interest rates on any government bonds. This would directly raise the borrowing costs for all individuals and businesses, which only puts an additional drag on their economies.
I believe if Greece wants any help, it must receive a dose of tough love. This would entail huge spending cuts. I am not one to favor tax increases; however, Greece is notorious for its inability to collect taxes and its citizens take pride in evading taxes. Maybe one good starting point is not only enforcing the tax laws on the books, but for every $1 of tax increases, the government must reduce spending by $3. This may sound extreme, but I have yet to meet, talk with or read about any individual who’s been able to spend their way out of debt. Thus, how realistic is it that a government could do any better.
China is also causing investors indigestion
China’s economy and stock market have been the envy of most nations over the past year. Unfortunately, the Chinese government implemented a large stimulus package and there has been an explosion bank lending. This has resulted in a run up in not only Chinese stock and real estate prices. We all know what happens when too much money at artificially low interest rates makes its way through an economy – bubble!
The Chinese government is taking steps to correct this situation by tightened lending. This has made global investors nervous that either a new bubble could be occurring or economic growth will be hurt by these measures.
Winter doldrums – What does it mean for Spring?
I had lunch with a commercial real estate and economically astute professional today and his motto for 2010 is “Flat is up!” I believe this could be very accurate. This year could be year of slow recovery. Along these lines, the severe winter weather that has hit many parts of the U.S. could actually result in unfavorable economic numbers for the first quarter of this year. Many areas of the east coast have been paralyzed by snow, and if you can’t get to work, then productivity takes a hit. In addition, other than the snow removal industry, many other businesses are seeing a lull.
The bright spot is people are getting sick and tired of this weather. As such, there will be a pent up demand once spring and warmer weather returns. I believe people will respond to frustration of being homebound via spending (i.e., going out to eat, movies, travel and spending money on various other items). It could be we experience a very lackluster first quarter and see more positive numbers in the second quarter.
Quotes
“If all the pessimists of the past had been right in speaking of their society’s running out of creative possibilities, or going to ruin, civilization would indeed have ground to a halt long ago.”
Sissela Bok, philosopher
“You can think about your problems or you can worry about them, and there is a vast difference between the two. Worry is thinking that has turned toxic…Thinking works its way through the problems to conclusions and decisions.”
Harold Walker, author
“Happiness is not a reward–it is a consequence. Suffering is not a punishment–it is a result.”
Robert Green Ingersoll, orator and attorney
“The longer I live, the more deeply I’m convinced that the difference between the successful person and the failure, between the strong and the weak, is a decision.”
Willie E. Gary, successful attorney
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
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