OBSERVATIONS AS THE WORLD TURNS

 

What Does It Mean If Greece Exits the Euro Zone?

 

In the near term, not much. This crisis has been so long in the making that longer term investors have already factored in the decrease in the Euro. Short term investors, who are always exposed to turn around situations, might be caught off balance.

The larger meaning of a Greek exit is of greater moment. It affects the stability of the entire Eurozone Experiment. After centuries of warring with one another and attempting to get along by intermarrying their kings and queens, the countries of Europe decided to give free markets and democratic principles a chance to improve their lot.

Unfortunately, as we have found out, free markets and democracy since the 2nd World War have worked very well for some and no sot well for most. The Eurozone is 16 years old and was never actually a fair playing field. Government officials and business titans formulated policies that all but guaranteed high unemployment and deficits but gave them the power to serve their own personal agendas.

While Greece itself may not be a game changer, the stability of the 2nd largest economy in the world is very important.

 

 

 

The Chinese Experiment

 

An experiment of a very different nature, blending capitalism with state control of markets, is having its’ own problems.

Fueled by the US consumers’ bottomless demand for cheap products, the Chinese economy grew by double digits until recently when that demand dried up and could not be replaced by domestic demand. Excessive borrowing by the government and leverage by investors fueled a stock market bubble that is now breaking. Sound familiar?

From a high on June 12th, the Shanghai Index has fallen by 22%. This represents a loss of $2.3 Trillion in market capitalization. This equates to a 4000 point drop in the Dow Jones from 18,000 to 14,000. The Chinese central bank has responded by cutting interest rates in an attempt to direct money into stocks and away from bonds. Again, sound familiar?

Remember, China’s economy was expected to pull the world out of a protracted recession. That hope appears to be gone.

What I find interesting is that this development has been well reported in the foreign press with little to no mention of it in the US press.

It appears that the central bankers of the world who have orchestrated the post-crash economies are finding themselves with less and less “wiggle room;” meaning interest rates cannot go lower. Lowering rates is the emergency measure to reflate an illiquid system. Without this tool the crisis of the future will easily turn into the next crash.  Anyone with exposure to market risk must understand this.

 

 

 

 

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