More than ever, we live in a connected world, one where the Global Economy is more connected and more diversified than ever before. A few decades ago, Russians and Americans argued about what the best economic system truly was and it’s very clear who won. To be clear, it’s also crystal clear that this capitalist system has been superior, has lifted more people out of poverty than any other system in the world, etc. It is a true miracle that the number of poor continues to diminish and while there are still too much poverty, we are lucky to have institutions such as Charity Water, the Bill and Melinda Gates Foundation and others that are working hard to rid the world of this poverty.
One Major Weakness
The one big problem though in our global economy is that it relies on one commodity more than anything else: “Faith”. It relies on the belief that we work hard, earn money that we can invest in the market, make decent returns that will help us fund our retirement, especially when you add your company and government pensions. Faith in the system basically.It’s Disappearing…
Over the past few decades, we have seen a few big companies go under, such as Enron, Worldcom and even a few countries default on their debt (Argentina and Russia are the first two to come to mind). Lately though, things have started to slip. There was the 2008 credit crisis that took out several global players such as Lehman and Bear Sterns while requiring massive government bailouts for so many others.
Then Greece Happened…
The European Union is in many ways the most important economic zone in the world and while the single economic zone and currency seemed like a brilliant idea to many, others wondered how it would be able to face major challenges. Greece has clearly provided that first test. It turns out that it forged its finances (thanks to Goldman Sachs help) to enter the EU in the first place, has a dysfunctional system, a weak economy, banks that are quickly going under, a government that has been unable to turn things around, etc.The Contagion Has Started
Then, after a few years of trying to patch up things, we seem to be on the brink of a much much bigger problem. If the possible exit of Greece from the EU was the only problem, everyone could live with that scenario. But we now have Ireland, Spain, Italy and others all looking at needing bailouts with many others starting to look vulnerable. If you look at the banking system, the backbone of our wonderful system, you will see that banks in those countries are quickly running out of money as investors and clients lose faith and move their funds elsewhere. The problem is that no one is able to tell who is now vulnerable, who isn’t which is quickly freezing up credit in ways which could end up making 2008 looking like a piece of cake. EU countries have already discussed the idea of limiting ATM withdrawls… can you imagine the panic?No Clear Solution
Governments, Central Banks, international institutions such as the EU the World Bank and the IMF have all been looking for solution to get out of this mess as have major banks but there are no clear solutions. It’s not even that solutions would require this person or country to accept. It’s much more critical. No one knows how this could end up well….
A Difficult Market
One clear consequence has been a complete lost of faith by investors in the market as they try to protect their assets as best as they can. Generating yield through dividend investing or by holding safe government bonds (the American ones.. not the Greek/Spanish ones.. just to be clear). It gets worse though. Markets have lost much of their value but there are also legitimate worries that some currencies could end up suffering greatly. Other assets such as real estate which have been losing value all around the world see few signs of slowing down.What It Has Come To
The Ideal
It relies on the belief that we work hard, earn money that we can invest in the market, make decent returns that will help us fund our retirement, especially when you add your company and government pensionsThe Reality:
-Unemployment rates are sky high everywhere, especially for young people in Europe. 50% People under 30 years old are jobless in Spain, almost 23% of the entire Greek workforce is looking, the US unemployment rate has climbed back over 8%, well over its target as it. -Markets outlook is gloomy, interest rates are near 0% with no sign of rising anytime soon -Retirement ages are being raised as governments try to cut down on their costs -With many companies running high deficits, they are eliminating benefits such as pension funds or going under without the money -With dozens of huge industrialized countries under threat of default, the odds that they will be able to deliver on their promises towards current and future retirees is very unlikely at best….Saving Greece Is NOT Enough
Greece will have elections this weekend which might turn out well (or not). Europe might find a solution for Greece… but even if it does, that likely will not be enough. All of these countries are running massive deficits and are unlikely to turn those around anytime soon…
