Nevertheless, I’ve been waiting to see whether and when another shoe might drop. Specifically, I’ve worried about the creditworthiness of national governments, including our own. After investors shorted AIG stock and the US government bailed AIG out, investors began shorting the US dollar – signaling that they expected a run on the dollar. This is something I’ve long worried might result from large US deficits. A run on the dollar would be catastrophic for both the US and world economies.
Instead, the dollar rose against other currencies, at least in the short run. Investors worried about the state of the world moved their money to where they believed it safest – US Treasuries. Since then, as investors have regained confidence, the dollar has declined steadily against other major currencies, but not at a rate likely to trigger a run.
We now may be seeing the beginnings of a real sovereign debt crisis. The Greek government has been unable to bring its finances under control; its creditworthiness is in serious question. Spain, Portugal, and Ireland also have immediate debt problems. Portugal is having trouble refinancing its short-term debt. Even the biggest players are not immune. Two months ago, Moody’s declared UK and US debt “resilient,” reserving its highest rating, “resistant,” for French and German government debt. The Bank of England is no longer trying to stimulate the British economy with further UK government debt purchases. President Obama has proposed a selective discretionary spending freeze.
What does all this mean?
If the European economies were not linked through a common currency, the problems of a few less-well-off European governments would probably not be of major concern. After all, we weathered similar problems in Iceland and Hungary without incident in 2008.
But the problems of some Euro Community nations now inevitably affect others. Greece’s problems have triggered a slide in the Euro against the dollar, a renewed flight to the dollar, and a decline in the yield on US Treasuries. Normally, this would trigger a rise in stock values, but the equity markets don’t like what’s going at all, so they’re falling as well.
While fans of the US dollar might be tempted to celebrate any fall in the Euro (the Euro passed the US dollar as the world’s largest currency in October 2009), distrust of sovereign debt is unlikely to bode well for anyone. This growing distrust cannot help but be reinforced by the US Administration’s recent proposed budget, which projects trillion-dollar deficits into the indefinite future. Economist Alan Auerbach projects that within about ten years, US national debt will reach levels that historically have tended to trigger major economic and political shifts. His projections do not necessarily mean we have ten years to solve the problem; rational expectations theory tells us that if we really believe a crisis will hit then, we'll likely precipitate it earlier.
(Grover Norquist is presumably celebrating. He’s the anti-government activist who famously said that he wanted to reduce the US government “to the size where I can drag it into the bathroom and drown it in the bathtub.” He may soon get his way.)
What is the nervous investor to do? Buy German bonds? Maybe. But if Germany remains financially cautious it won’t issue enough bonds to meet world demand. And if the world economy falls into a tailspin, even the finances of the German government are likely to be adversely affected.The real danger is that investors will go into a “hide it in the mattress” mode. I don’t mean literally. One possible scenario, if investors stop viewing government debt as safe, is world-wide hyperinflation. If the US cannot refinance its short-term debt (an ominously large percentage of its debt is now short-term), it will be forced either to stop operating or to finance its operations by printing money. The former is unlikely to be politically or economically acceptable. The latter may trigger inflation at levels that we’ve never seen –- ever -- in this country.
So the “mattress” has to be real assets – not currency. What assets? Perhaps land (not mortgage-financed) and companies that produce essential goods (food, clothing, shelter) and are not heavily leveraged. Gold was once the safe haven of choice, but Russia has the capacity to produce as much as it needs to finance its spending; if it does so, gold will decline in value as well.
Unfortunately, if investors go into a "hide it in the mattress" mode, the rest of the world economy will be starved for credit, and we’ll be back to yet another -- but much worse -- credit crisis. Only this time, governments will not be able to borrow to bail us out.
Please do not panic. I am not predicting any of the foregoing. I am merely worrying. But I’m now sufficiently worried that I feel it appropriate to worry out loud.
Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
"Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM."
The Center for Responsible Lending says YSP "steals equity from struggling families."
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/release/?id=A09C6A80-537A-4EB1-83C5-31925F046B6F
Posted by: jmb27 | February 15, 2010 at 09:08 AM
Great insight on a current issue. I agree with what you were saying about the current investors in the government. Great way to give information to the public as a whole.
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Posted by: foreplay for women | April 29, 2010 at 10:04 AM
Watch the Greek debt crisis - this virus is prone to be infecting the eurozone leading to fears that the crisis will spread to other eurozone nations like Spain, Poratugal, Italy or Ireland! "Perfectly" engineered by the same financial group involved in provoking the US supprime mortgage crisis, chances stand that the Greek debt crisis has a big potential to now destabilize the EU but also to kick back to the US economy as well ... The world economies and finances are so interconnected within the global economy, that it became literally impossible for a financial shock like the one in Greece to remain without consequences for the other (remote) countries as well ... Stay tunes for what will happen next, and how EU will decide to go about it - the issue might reveal some interesting aspects and connections
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Posted by: Volker from Germany | May 30, 2010 at 09:23 AM
Mary is so right about the PIGS, Portugal, Ireland, Greece and Spain.
The EU cannot allow any these economies to fail, as it will mean the end of the Euro and the Eurozone.
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******************
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Posted by: bankruptcy attorney Chicago | October 26, 2010 at 11:49 PM
you know that some have predicted that the global crisis of 2010 will strike the entire system and will thus transform the world order, that the European Union will fall apart, and so will NATO...and so that the crisis will last for ten years and will end by 2020..whatever, i don't see that one coming, things will probably slow down and easily get back on track.
Posted by: nicole.babe | December 08, 2010 at 12:22 AM
The debt is owed, usually active reference should, but the term can also cover the legal and other interactions that do not need money. In the case of assets, debt is a way of using future purchasing power in the present before any amount has been earned. Some companies and corporations use debt as part of its global funding strategy of the company.
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if the lending company contibutes to this present economic turmoil....then what is the role of those borrwer who does not pay their debt?
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