Economic Collapse: How It Happens
While some of you are at the beach or on the golf course this week, enjoying hot weather and fun times, the European economy continues to encounter rough seas.
Even if you're not one of those on vacation, you may have little or no interest in this subject.
But it is one which, in conjunction with other issues, is going to create rough seas for the U.
S.
investment markets in the coming weeks.
For starters, Moody's Investors Services Tuesday downgraded Portugal's credit rating to junk status.
This ratings drop reduces that nation's ability to borrow money from investors in the bond market.
This has already happened in Greece and is likely to happen in Spain and possibility Ireland soon.
Just as any individual or business with a bad payment history and/or too much debt is unable to borrow money from banks, similar circumstances befall governments that borrow too much or pay back late.
When governments cannot sell their debt in the open market, it makes it impossible for them to continue operations without some sort of turmoil or disturbance.
Similar credit market interruptions, as a result of the Lehman failure, were what caused the market meltdown in the September through December 2008 time period.
Moreover, Europeans are increasingly demanding that government bondholders share in the economic pain by refusing bailouts unless bondholders take losses on their investments.
If bondholders ultimately end up enduring forced losses, governments across the globe will have more difficulty borrowing money and funding operations with debt.
This may be the only thing that stems the borrowing tide - in the long run an excellent reality, but in the short run a tremendous cause of unemployment and market turbulence.
The fact taxpayers in Europe are beginning to resist spending additional taxpayer funds to bail out troubled governments is forcing a most difficult situation.
It is similar to what was mandated upon General Motors bondholders in the U.
S.
during 2009 - reduction of their normal contractual rights as senior secured lenders - causing them to see losses on loans they made to borrowers.
Imagine the concept in the U.
S.
of "the full faith and credit" of our government not being sufficient to protect buyers of government bonds from losses, and you have the exact image of what has already occurred in Greece and is on the way for Spain, Portugal, and perhaps, Ireland.
It is even possible others in the European Union experience meltdown unless the EU is dissolved and individual countries are allowed to devalue their currency - itself another cause of rough market seas.
Just as the Chinese government has been a huge buyer of U.
S.
government debt, governments around the world buy the bonds of other governments.
When one government defaults, it affects all the other government that purchased those bonds.
The cascading result is government failure after government failure until some financial institution (or group of governments, banks etc) can backstop the problem.
The other option is the devaluation of the currency of the failed nation - a major short term pain, but a very efficient long term benefit and solution.
Democrats and Republicans here in the States continue to posture, waiting to see which party will blink first on our borrowing, spending, and debt limits.
Republicans are committed to no tax increases and spending cuts.
Democrats are equally committed to tax increases and status quo (if not expanded) spending.
The Democratic Controlled Senate still has not put forth a budget plan for the second year in a row while Obama's budget proposal was voted down 97-0 in early June.
Given these realities in the two dominant world economies (U.
S.
and Europe), turmoil in the investment markets of some magnitude is likely as the days move towards the August 2 "deadline", and beyond.
These rough seas will bring politicians hoping for re-election to serious bargaining so as resolve the U.
S debt issue.
Anticipating these concerns is/are the reason(s) we have moved more than 60% of the assets we manage into cash since the first of the year.
Moreover, we expect (and hope) these rough investment seas will provide opportunities for us to make high quality investments at really good prices in the coming weeks and months.
Even if you're not one of those on vacation, you may have little or no interest in this subject.
But it is one which, in conjunction with other issues, is going to create rough seas for the U.
S.
investment markets in the coming weeks.
For starters, Moody's Investors Services Tuesday downgraded Portugal's credit rating to junk status.
This ratings drop reduces that nation's ability to borrow money from investors in the bond market.
This has already happened in Greece and is likely to happen in Spain and possibility Ireland soon.
Just as any individual or business with a bad payment history and/or too much debt is unable to borrow money from banks, similar circumstances befall governments that borrow too much or pay back late.
When governments cannot sell their debt in the open market, it makes it impossible for them to continue operations without some sort of turmoil or disturbance.
Similar credit market interruptions, as a result of the Lehman failure, were what caused the market meltdown in the September through December 2008 time period.
Moreover, Europeans are increasingly demanding that government bondholders share in the economic pain by refusing bailouts unless bondholders take losses on their investments.
If bondholders ultimately end up enduring forced losses, governments across the globe will have more difficulty borrowing money and funding operations with debt.
This may be the only thing that stems the borrowing tide - in the long run an excellent reality, but in the short run a tremendous cause of unemployment and market turbulence.
The fact taxpayers in Europe are beginning to resist spending additional taxpayer funds to bail out troubled governments is forcing a most difficult situation.
It is similar to what was mandated upon General Motors bondholders in the U.
S.
during 2009 - reduction of their normal contractual rights as senior secured lenders - causing them to see losses on loans they made to borrowers.
Imagine the concept in the U.
S.
of "the full faith and credit" of our government not being sufficient to protect buyers of government bonds from losses, and you have the exact image of what has already occurred in Greece and is on the way for Spain, Portugal, and perhaps, Ireland.
It is even possible others in the European Union experience meltdown unless the EU is dissolved and individual countries are allowed to devalue their currency - itself another cause of rough market seas.
Just as the Chinese government has been a huge buyer of U.
S.
government debt, governments around the world buy the bonds of other governments.
When one government defaults, it affects all the other government that purchased those bonds.
The cascading result is government failure after government failure until some financial institution (or group of governments, banks etc) can backstop the problem.
The other option is the devaluation of the currency of the failed nation - a major short term pain, but a very efficient long term benefit and solution.
Democrats and Republicans here in the States continue to posture, waiting to see which party will blink first on our borrowing, spending, and debt limits.
Republicans are committed to no tax increases and spending cuts.
Democrats are equally committed to tax increases and status quo (if not expanded) spending.
The Democratic Controlled Senate still has not put forth a budget plan for the second year in a row while Obama's budget proposal was voted down 97-0 in early June.
Given these realities in the two dominant world economies (U.
S.
and Europe), turmoil in the investment markets of some magnitude is likely as the days move towards the August 2 "deadline", and beyond.
These rough seas will bring politicians hoping for re-election to serious bargaining so as resolve the U.
S debt issue.
Anticipating these concerns is/are the reason(s) we have moved more than 60% of the assets we manage into cash since the first of the year.
Moreover, we expect (and hope) these rough investment seas will provide opportunities for us to make high quality investments at really good prices in the coming weeks and months.
Source...