Saturday, May 15, 2010

Why The Greek Financial Crisis Matters To Us

For the past several days, even casual observers of current events will have heard about the riots occurring in the streets of Greece. Greece is effectively bankrupt and the massive austerity measures being imposed are likely to inflict significant economic damage.

There is no doubt that the Greek crisis will have an effect upon our economy. California and other states, face many of the same economic challenges, which could mean that the problems that face Greece could very well be heading our way. If nothing else, the near 1,000 point intra-day drop in the U.S. stock market demonstrates nervousness in the markets as well as the strong link between what's happening in Greece and the rest of the world.

But stock market volatility is only a symptom of a much larger set of forces. First, there is the fact that just behind Greece awaits several other European countries in equally fragile predicaments. Collectively they are now being referred to as the PIIGS, which stands for Portugal, Ireland, Italy, Greece and Spain. Even if the European Central Bank can bail out Greece, there's no way it can also shoulder the load for the other, much larger countries.

Secondly, these events demonstrate that the PIIGS, along with other developed nations, have been borrowing beyond their means. Just as the U.S. banks discovered, too much debt is as dangerous. Their situation is made worse by the fact that they have exploded their national debt in order to prop up their banks and their floundering economies.

Third, the value of the common European currency, the Euro, is crashing and probably will not survive very long — certainly not in its current state. A bad case of financial chaos may very well be the dominant situation in Europe. That would have the effect of making their goods much more competitive than American goods, thus threatening to forestall the U.S. economic recovery.

Fourth, these events are reminding everyone that the financial crisis is hardly over. We are now facing a contagious global sovereign debt crisis, which is feeding a massive case market anxiety around the world.

Nobody can say with certainty that we fully understand all the remaining risks. There is still the possibility of more unpleasant surprises ahead. If anything, this crisis is showing how fragile the world economy remains, while underscoring what many people have not focused on.

The financial crisis of 2008 was not caused by just a single event like the subprime mortgage markets, Wall Street abuses, or regulatory failures, or thirty years of poor economic policies in the U.S. and abroad. We are facing the perfect storm of financial upheaval around the world caused by all of these and other forces.

Most of all, Greece matters to us because America is on a similar economic and financial path. Imagine the reaction if Washington announced sharp cuts in government programs including Medicare, Medicaid and Social Security, and or cuts in the salaries, benefits and pensions of federal government workers. Imagine the reaction if the rest of the world stopped buying our national debt and if the Treasury Department was forced to dramatically increase interest rates, thereby making our debt burden unsupportable.

It is astonishing that Washington is now adding on new entitlement programs, just as the European social welfare model is collapsing. If we stay on the course we're presently on, we may very well be forced to endure some of the same measures that Greece is now taking. We need to balance the budget by cutting government spending and growing the economy. We can do it now, in an orderly manner or later in a panic. But we will ultimately have to do it.

There is some cause for optimism, since the US has strengths and flexibilities that Greece does not and there is enough time for us to correct the current course. If we wake up to this reality now, we can avert the worst of it. But, if we do not see the writing on the wall and respond appropriately, all bets are off.


traveler said...

All I have to say is "Good luck to us"

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