Why Europe’s Financial Woes Matter to Every American

Competing against the Herman Cain/Michael Jackson/Gloria Allred/N*****head Ranch/ “newsworthy” juggernaut is difficult of course. Admittedly, ballot concerns on this day are correctly centered more in Ohio and Mississippi with extremely important issues to hundreds of thousands of Americans in the balance.  But I am determined to stay focused on largely economic issues and simply hope that some miraculous event (sans violence of any kind) will come along and change things for the better.When all is said and done, I suppose that is all that most of us can do.

Now, it’s hard for me to observe the economic problems in Europe unfold without wondering just what the impact will be on the U.S. and of course mine and your own finances. The possible outcomes are so myriad that specific prognostications are pointless, but it is possible to look at the big picture. Most of the effects will be negative, but there will be a few opportunities as well; just as there were after the 2008 market crash following the real estate bubble burst. Buying Ford stock for $1.57 might’ve looked risky at the time, but it sure looks like a no-brainer now, yes?

Here’re the ways I see the problems in Europe playing out in general, albeit likely, scenarios.

It seems remote that Greece will be able to pay its debts; somebody or somebodies will have to take a write-down. Either banks and other private holders of Greek bonds would have to agree to take some fraction of what is owed to them, but even so, a write-down would doubtfully be sufficient to make Greece viable, especially since bonds held by institutions that are publicly held, like the European Central Bank would not be written down. Of course the Greek people are resisting further austerity, so a partial, possibly managed default would be hard to engineer no matter how the governmental leadership/party issues are resolved.

If the political situation in Greece deteriorates even more and progresses into a chaotic maelstrom, the damage to the banking system would be exponentially greater. Out of the question? Sadly, no.

Another possible outcome could be the expulsion of Greece from the euro zone, the result of which would probably be a short-term shock to the global banking system with the concern that it would result in ongoing stagnation throughout most of Europe. Given that Italy’s borrowing costs have already reached dangerous levels there is a very real possibility that solutions will be elusive for several years.

The most troublesome outcome would be a breakup of the euro zone, or possibly a division resembling a messy pie chart. From a long-term point of view, this would make a lot of sense, economically, but this is the result that could initiate a shock wave resembling a tsunami.

Whatever happens, there will be a dicey period for the U.S. Since current stock prices already reflect some risk, I imagine that the downside is less than it was in early 2009, but greater than earlier this year. These benchmarks cover a pretty wide range that gets to bear-market territory (a decline of 20%), and which could always be worse.

Contraction of already limited credit could occur as banks absorbed losses on government bonds and cut back even more on lending. Given that the U.S. has made little progress recovering from recession, and the Congressional Republican blockade in apparent full force until November of nest year, this credit contraction could easily cause a double dip and would certainly exacerbate slow growth, high unemployment and weak real estate prices already taking place.

The Federal Reserve and European central banks will try to maintain adequate credit, which will probably mean continued low interest rates. Such a policy may reduce the effects of current problems in the banking system but also create the conditions for an eventual revival of serious inflation.

Grim, yes?

It’s been noted to me on numerous occasions that the government has never created a job and never will. Often times this type of statement occurs while standing and chatting on a perfectly manicured rest area along The Natchez Trace Parkway, or an interstate highway that people that still have jobs use to get to work. This type of statement usually comes from someone who has a job with a company that they don’t realize has a contract to do work for one of the branches of government.

It’s worth noting, I think, that while there is no denying that there is waste, fraud, corruption and unnecessary administrative jobs under the umbrella referred to generically as “government”, but what is also undeniable is that the waste begins and ends with politics. In democracies, it always has and always will be that way.

But it’s also worth noting that when you take the financial influence out of politics, what you are left with is a true democracy. A democracy that strives for solutions to issues that making living more than a job, more than a political philosophy, more than an “Us vs Them” mentality.

My hope is that we can get to that point before we self-destruct.

Harvey A. Gold

  1 comment for “Why Europe’s Financial Woes Matter to Every American

  1. jackarm
    November 8, 2011 at 11:53 am

    Good analysis of Greece. Now there is Italy to deal with. getting to the big fruit now. I think Greece will go out of the EU. (and the rest will be glad to see them go). Drachma will come back but the euro will still be widely circulated in greece. 2 currency economy.

    Italy – I am unsure what will happen. no one will want to pony up the money to bail them out.

    in retrospect – the UK was smart to stay out of the EU for now.

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