U.S. Markets are not as bad as they seem

Posted By on May 17, 2012

Just my opinion, but the “social” disease that infected Greece, Spain, Portugal and other European states should not be impacting markets in the U.S. in the way that they are. Sure we have our major issues when it comes to be fiscally GreeceDebtGDPresponsible all the way around: corporate governance, banking and housing, personal spending and borrowing, employment, laziness spurred on by the bloated government safety net and total chaos when it comes to managing the federal government … BUT we are in a very different place.

Our banking system, despite bad bets/hedges/investments by banks is strong compared to European banks. Our employment situation, although tenuous, is “and wants” to improve … confidence is even higher in recent month according to a new USA Today poll. The housing crisis has bottomed and there are signs in some markets that we’re seeing improvement. Our corporations have spent the past several years leaning their workforce and fattening their balance sheets … they are now in excellent shape. Politically the discourse is discussing our long term problems and recognizing them … although admittedly not doing much about them.

European companies on the other hand have weaker financial balance sheets and may not have plugged their leaks, not to mention having even tighter government regulation controlling their decision-making. We may question our tax policies, but the majority in congress recognize the need for an over the board “fair” corporate tax (agreement seems somewhere around 25%) in order keep U.S. companies competitively producing and hiring new employees. Those of the socialist mind in Europe don’t see things the same … and that’s still a big difference for a strong economy.

We obviously don’t have a handle on our debt and excessive spending, and yes that is concerning … but even without being closer to a balanced budget, it is possible that Europeans diversifying out of their sinking ship and EU$ currency, will move to those that are still floating … perhaps the US$. This is not to claim our boat doesn’t leak, just that it is still floating higher in the water than the perceived EU$. Maybe a false bit of confidence as an American, but we are in a much better place to be than the PIIGS and still have time to do the right things.


So what are the lessons for countries that are looking at Greece as the first domino to fall while they sit too in the domino line?

Lesson one is that “you cannot spend beyond your means forever.” Before you ask for your money back (this is a lesson??), remember that Dick Cheney was proclaiming only a few years ago that “deficits don’t matter.” It is true that deficits can be sustainable for a long time. But eventually they will get you. If I can modify the former Vice President’s words: “Deficits don’t matter. Until they do.”

Lesson two is linked to one: soft budget constraints allow countries to get away with bad policy for a long time. Twice Greece was forced to make changes after an economic crisis: in the late 1980s and early 1990s and then against in 2010. Yet Greece’s changes in the 1990s did not last. When the political goal was met – enter the Eurozone – the consensus disappeared and in the absence of any constraints, the state reverted to its old ways.

Lesson three is that debt is a political problem, not just an economic one, and it usually reflects an underlying political economy. In Greece it was the political economy of patronage, barriers to competition and lax enforcement of taxation. It was the political economy of legitimacy through state spending and letting future generations foot the bill. That structure did more than wreck the economy: it weakened the state’s capacity to govern by making it a mechanism for spending money and it also concentrated its basis of legitimacy on one pillar – spending. This, in the end, is Greece’s challenge: to create a state where political allegiance is divorced from patronage.



Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.
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