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Hi Gang,
If you’re confused by what is going on in the world, welcome aboard. We are all confused. Europe is having a major financial issue. Greece, long the leader in ‘gimmie. gimmie, gimmie’, the cry of a population that wants to be cared for from cradle to grave with little or no personal responsibility, has finally reached a point where the government can no longer borrow sufficiently to give the people what they have been promised. Not hard to understand. It is always a bad idea to borrow money for 20 years just to meet this year’s expenses. What they have been doing is effectively borrowing to pay this year’s interest costs on the loan they took out in previous years to cover day to day living costs. In addition they have borrowed more each year in between whose interest charges they are now borrowing more to pay. It is said that when you find yourself in a deep whole the best thing to do is stop digging. That is what they have finally tried to do. Perhaps too little, too late. Like many Americans, they have maxed out their credit cards and now can’t borrow any more to pay next month’s bills.
Not to bad mouth the Greek’s. They are not alone. They are just the smallest, so their house of cards collapsed first. There are a group of countries in the same boat. They have been assigned the unfortunate moniker of the PIIGS countries: Portugal, Ireland, Italy, Greece and Spain. They are all in debt up to their eyeballs using borrowed money to give citizens the programs they want without taxing them to pay for them. Certainly other countries in Europe (and elsewhere around the world) have done some of the same things, just to a lesser degree. But some, including the USA are rapidly catching up.
What will this mean to you and me? I’m not sure anyone knows but our recovery is by no means assured and this could derail it. In the past, countries would have inflated their currency (by printing more) to pay for these things. It is how the Italian Lire became worth so little. When the Euro replaced the Lira, the ratio was 1 million Lira was equal to 513 Euro’s in 2002. Being a millionaire in Italy was truly no big deal. Countries in the Euro-Zone (PIIGS) can’t do that. They are independent sovereign nations that have a treaty that adopts a common currency controlled by a central bank which operates under a charter. To print additional Euro’s would require agreement by the member countries. Since they all have their own political agendas you can imagine how difficult it is to gain agreement on something as important and whose effects will impact all the members, raising the cost of everything for all their citizens. This could imperil the Euro going forward. Will countries like Greece withdraw from the Euro and reintroduce their own currency? Will the Euro collapse and all bonds denominated in Euro’s suddenly become the subject of currency arbitrage? No one knows for sure. Generally it is believed that the Euro is here to stay. Whether all the members are here to stay is less certain.
What will all this mean to us here in America? It will mean slower growth in Europe will slow our exports. It means that companies that have significant assets and business in Europe may be less profitable affecting employment worldwide. This could mean slower job growth here and a continuing increase in unemployment. We could see unemployment rise to well above 10% in 2011. No one knows for certain but I’m betting that the recovery will take until 2017 for the USA to fully recover economically to where we were in 2006. It could take longer. Certainly pockets will enjoy better growth. We, here in the Wilmington area, are likely to see slow returns in the building industry and slow but perhaps more robust than average growth compared to the nation as a whole.
Of course this is just one man’s thoughts. Time will tell if I’m right.
Hang on, Change is coming!
