Given how close to the edge of the abyss Greece came and taking the European Union down with it a couple of months ago, fiscal policy in Europe has suddenly taken a left turn. Governments across Europe, including England and Germany, have embraced austerity measures to cut some debt out of their budgets. Some of this has come on the numerous losses by incumbent politicians who advocated spending in the past. But just the fear of “ending up like Greece” was enough to cause Europeans to re-evaluate their fiscal policies.
However, while austerity is being instituted in Europe, the United States now remains the only major country trying to spend their way out of economic trouble. At the recent G-20 summit, President Obama warned European leaders that cutting back at this juncture of the economic recovery could lead to a double-dip recession. In other words, the United States wants to continue spending money it doesn’t have and needs other partners to spend as well.
President Obama is correct in that restricting money flow will lead to slower or even negative growth in the short term. However, United States fiscal policy for the past two decades has also been short-sighted. The near economic collapse of Greece has demonstrated to other Europeans that spending is not the answer and that fiscal responsibility is required for the long term viability of a country.
The problem the United States has is with the speed of the economic recovery. 3% economic growth for decades was the norm and was an indicator of a strong and steady economy. However, we have been so used to 6-10% growth over the past two decades, that 3% economic growth today simply means a slow recovery. It is just not strong enough to recreate all the jobs that were lost in the past couple of years. Based on the current rate, it would take 8-10 years to replace all of the jobs lost. For a politician, who is up for re-election every 2-6 years, this is simply unacceptable. They need a speedy economic recovery to save their own seat in government and will spend any amount of taxpayer money to get it. We can spend the money now and worry about the consequences later, they say. The politicians and most Americans just want things to go back to the good ol’ days of the past two decades. However, those decades were built on unsustainable economic policies and after two boom and bust economic cycles, will not return.
Europe has recognized this and has taken steps to ensure their long term viability. Unfortunately, the United States is still in denial. Hopefully, United States politicians will wake up and smell the coffee soon, otherwise we might “end up like Greece.”
Wednesday, July 14, 2010
Friday, May 7, 2010
A Greek Tragedy
In Greek epics, a hero who has died usually has his body burned at a funeral pyre. Unfortunately, countries in Europe and around the world are now contemplating doing the same to Greece.
After a good bounce off of the lows of March 2009, the market stagnated in November. During this time, the market was caught evenly between two opposing forces. On one hand, the economy has shown positive growth over the last few quarters and profit margins for companies continued to improved. On the other hand, this economic recovery has shown little job growth (unemployment still near 10%) and most pundits feel that economy is being propped up artificially by government stimulus and worry that the economy would falter once the stimulus is removed (which it still hasn’t). These two forces have worked to keep the market relatively flat, although it had crept slowly upward from November until Mid-April. The Dow / gold ratio has even stayed relatively unchanged between 9 and 10 during this time.
However, that has all changed this week with events over in Europe. Greece, a country the size of Alabama, has been causing huge headaches for the European Union. Huge mismanagement of their budgets over the last decade has led the country to the brink of bankruptcy. Since the currency that Greece uses, the Euro, is shared by fifteen other countries, this means that failure of Greece’s monetary policy could have a domino effect across Europe. Portugal, Italy, Ireland, and Spain, are in similar situations, though not as severe (the five countries are currently known as PIIGS).
With the European nations discussing a bailout package for Greece, this has basically tipped the balance the markets have been in towards the negative. Europe is the second largest consumer region after North America. Therefore, if the debt crisis continues without resolution, the region threatens to derail the global growth recovery story.
Since April 23, the markets across the globe have dropped about 10%, the last 5-6% coming within the last week alone as Greece and Europe wrestle over the details of the bailout package. Commodities have been hit particularly hard as predictions of a European slowdown has tempered demand. Technology stocks have also taken significant hits as many companies generate substantial revenue in Europe. With value of the Euro declining in the currency markets, that means that tech companies will be bringing home less revenue, meaning less profit for shareholders.
Of course, with the decline of the Euro, gold suddenly took off again as a safety play and topped $1200 for the first time ever this week. With the Dow falling 5% this week, this means the Dow / gold ratio has dropped below 9 to approximately 8.5.
So where do the markets go from here? Much like the bailouts here in the United States, markets will unlikely go up in the short term until Europe gets their house in order to the world’s satisfaction. After the crisis passes, then the market will rebound somewhat (as a reflex) until the two opposing forces discussed above begin wrestling again.
In the meantime, a weaker Euro means that travel will be a lot cheaper beginning this summer. Therefore, if you have ever wanted to travel to Europe, the next couple of years might be the perfect time to do so.
After a good bounce off of the lows of March 2009, the market stagnated in November. During this time, the market was caught evenly between two opposing forces. On one hand, the economy has shown positive growth over the last few quarters and profit margins for companies continued to improved. On the other hand, this economic recovery has shown little job growth (unemployment still near 10%) and most pundits feel that economy is being propped up artificially by government stimulus and worry that the economy would falter once the stimulus is removed (which it still hasn’t). These two forces have worked to keep the market relatively flat, although it had crept slowly upward from November until Mid-April. The Dow / gold ratio has even stayed relatively unchanged between 9 and 10 during this time.
However, that has all changed this week with events over in Europe. Greece, a country the size of Alabama, has been causing huge headaches for the European Union. Huge mismanagement of their budgets over the last decade has led the country to the brink of bankruptcy. Since the currency that Greece uses, the Euro, is shared by fifteen other countries, this means that failure of Greece’s monetary policy could have a domino effect across Europe. Portugal, Italy, Ireland, and Spain, are in similar situations, though not as severe (the five countries are currently known as PIIGS).
With the European nations discussing a bailout package for Greece, this has basically tipped the balance the markets have been in towards the negative. Europe is the second largest consumer region after North America. Therefore, if the debt crisis continues without resolution, the region threatens to derail the global growth recovery story.
Since April 23, the markets across the globe have dropped about 10%, the last 5-6% coming within the last week alone as Greece and Europe wrestle over the details of the bailout package. Commodities have been hit particularly hard as predictions of a European slowdown has tempered demand. Technology stocks have also taken significant hits as many companies generate substantial revenue in Europe. With value of the Euro declining in the currency markets, that means that tech companies will be bringing home less revenue, meaning less profit for shareholders.
Of course, with the decline of the Euro, gold suddenly took off again as a safety play and topped $1200 for the first time ever this week. With the Dow falling 5% this week, this means the Dow / gold ratio has dropped below 9 to approximately 8.5.
So where do the markets go from here? Much like the bailouts here in the United States, markets will unlikely go up in the short term until Europe gets their house in order to the world’s satisfaction. After the crisis passes, then the market will rebound somewhat (as a reflex) until the two opposing forces discussed above begin wrestling again.
In the meantime, a weaker Euro means that travel will be a lot cheaper beginning this summer. Therefore, if you have ever wanted to travel to Europe, the next couple of years might be the perfect time to do so.
Monday, November 23, 2009
Dow / Gold Ratio Drops to 9
Timing is everything sometimes. Since our little series on currency, gold has taken off like a shot, topping $1165 an ounce today. The Dow hasn't been sleeping though this uptrend, moving up to 10450 today. However, the Dow / Gold ratio has now dropped from 10 to 9 in a matter of one month.
Experts continue to tell us that the dollar will remain weak as long as the Fed continues its stimulus plan of low interest rates and printing currency. The health care vote in the Senate this past weekend spurred gold into the latest uptrend as worries about where the money (~$1 trillion) to pay for the bill has yet to be debated.
Experts also tell us that the weakness in the dollar will turn when the Fed tightens money policy and the economy turns around. However, when pressed for an answer on when that will occur, those experts have been hemming and hawing. In fact no one in the government has stepped forward to even venture a guess. In other words, the dollar will remain weak and there is no solution in sight on if or when it will strengthen again.
The gold bugs say that gold should move to $1300 with relative ease unless the government makes a policy shift. That should push the Dow / Gold ratio down to 8 or less by spring 2010. Commodity-based stocks should also perform well during this time frame.
Experts continue to tell us that the dollar will remain weak as long as the Fed continues its stimulus plan of low interest rates and printing currency. The health care vote in the Senate this past weekend spurred gold into the latest uptrend as worries about where the money (~$1 trillion) to pay for the bill has yet to be debated.
Experts also tell us that the weakness in the dollar will turn when the Fed tightens money policy and the economy turns around. However, when pressed for an answer on when that will occur, those experts have been hemming and hawing. In fact no one in the government has stepped forward to even venture a guess. In other words, the dollar will remain weak and there is no solution in sight on if or when it will strengthen again.
The gold bugs say that gold should move to $1300 with relative ease unless the government makes a policy shift. That should push the Dow / Gold ratio down to 8 or less by spring 2010. Commodity-based stocks should also perform well during this time frame.
A Time For Thanks, But Also For Giving
The 2009 holiday season is upon us and the lights are coming out and the annual shopping hustle and bustle has begun. The economy has been through a lot and the experts tell us we are on the road to recovery. Most of us have more to be thankful for this year than most. Things we took for granted the past decade now seem to have more meaning, such as a job or home or even just family.
However, this season will also be unlike any other for many. Nearly 16 million are unemployed and nearly 750,000 families have lost homes due to foreclosures. For them, the holidays will be quite subdued and even depressing. Therefore, I ask you please give to others in need this year to make this holiday season just a little bit brighter and give them hope for 2010. While the government says they are helping, the true sign of American strength is people helping people, not government. It can be a small donation, but to those receiving it this year, it can make all the difference in their lives. Local food banks and Toys for Tots are my favorites to give to, but any charity that caters to those in need will be most appreciated.
May you and your family have a wonderful Thanksgiving.
However, this season will also be unlike any other for many. Nearly 16 million are unemployed and nearly 750,000 families have lost homes due to foreclosures. For them, the holidays will be quite subdued and even depressing. Therefore, I ask you please give to others in need this year to make this holiday season just a little bit brighter and give them hope for 2010. While the government says they are helping, the true sign of American strength is people helping people, not government. It can be a small donation, but to those receiving it this year, it can make all the difference in their lives. Local food banks and Toys for Tots are my favorites to give to, but any charity that caters to those in need will be most appreciated.
May you and your family have a wonderful Thanksgiving.
Tuesday, November 3, 2009
India Chooses Gold over US Treasuries
In a stunning move today, India purchased 200 metric tons of gold from the International Monetary Fund (IMF) for $6.7 billion dollars. It is the largest single purchase of gold in nearly a decade. The move spurred gold up to a record high $1085 an ounce.
You can read more about this and its implications here:
http://www.bloomberg.com/apps/news?pid=20601012&sid=al7qXOH.bVn8
You can read more about this and its implications here:
http://www.bloomberg.com/apps/news?pid=20601012&sid=al7qXOH.bVn8
Monday, November 2, 2009
California Takes Bigger First Cut
The fallout from the budget debacle in California has two little surprises not widely publicized by the media:
Surprise #1: Income tax rates will increase by 0.25% across all income levels.
Surprise #2: Beginning November 1, California will increase the state tax withholding on your paycheck an extra 10%. For example, if the state was withholding $80 per paycheck, it now increases to $88.
For those on tight budgets, this will only squeeze the taxpayer harder.
Read about it here:
http://www.ftb.ca.gov/aboutFTB/press/2009/Release_31.shtml
Surprise #1: Income tax rates will increase by 0.25% across all income levels.
Surprise #2: Beginning November 1, California will increase the state tax withholding on your paycheck an extra 10%. For example, if the state was withholding $80 per paycheck, it now increases to $88.
For those on tight budgets, this will only squeeze the taxpayer harder.
Read about it here:
http://www.ftb.ca.gov/aboutFTB/press/2009/Release_31.shtml
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