Global ABCs - Jeff Thredgold - Tea Leaf (07/05/11)

Austerity—the concept of a nation living within its means will spread across southernEurope as European authorities, the IMF, and global financial markets demand change.  The Greek people hate it

Banks (European)—one of the major incentives for German and French leadership to throw hundreds of billions of euros atGreece,Ireland, andPortugal?  G & F banks own massive amounts of bonds issued by the smaller nations

China—government efforts to keep inflation and excessive lending under wraps…while also avoiding a real estate bubble…should see this juggernaut’s growth pace slow somewhat

Dollar—with no shortage of critics, the American currency will remain the global community’s “primary currency” for years to come

I have noted before that if one’s household earns $60,000 annually, but spends $100,000, life is good…that cool vacation, a new car, that big screen TV, etc.   The following year, if one’s household earns $65,000, but spends $110,000, then more of the same.  One simply borrows the difference.

The problem is that pesky request to begin paying back the formerly borrowed money, along with that annoying interest expense.  This cycle can continue as long as one can find additional lenders and one can make requested payments on time.  Unfortunately, this whole approach to “living beyond your means” comes home to roost when the lenders say no more, when the cost of the debt payments and interest payments finally overwhelm the household.

Welcome to Greece today...and possibly the United States tomorrow

What is true for the household is also true for a nation.  Greece has been living beyond its financial means for years, with borrowed money making up the shortfall.  The lenders and investors in Greek debt securities have finally said no more.

Brake Set

The American economy is akin to an automobile moving down the highway.  This vehicle actually has two gas pedals—one for fiscal stimulus (government spending) and one for monetary stimulus (money creation by the Federal Reserve).  The multi-part brake pedal combines a list of concerns (or anxieties) impacting both businesses and consumers.