- The impact of the current downturn could be shaping up to
have some interesting long-term ramifications. This is now the
second market crash in less than two years and could be shaping
up to be the third time small investors have been seriously
burned in a decade. You have to wonder how comfortable the
small investor is in this market now. The game must appear
entirely rigged to an unsophisticated investor and the
accusations of a system error during yesterday's trade has to
make some people wonder why they are putting their hard earned
cash at risk of a massive computer glitch. Investors were
beginning to feel comfortable about the economic recovery and
then whoosh! -1,000 points in one day. I don't know exactly how
this will impact prices in the long-term, but my guess is that
the small investor is growing increasingly frustrated with the
equity markets. This can't be good for the long-term
performance of stocks.
- Although developments in Greece are stealing all the
headlines the developments in the U.K. are nearly as interesting
as election night comes to an end. They have managed to entirely
sidestep the mess in the EMU by maintaining their own currency,
but are somehow attempting to drive their economy into a near
equally disastrous situation. I cannot stress how important it is
that the U.K. is the sovereign issuer of their currency. They are
the monopoly supplier of money in a non-convertible floating
exchange rate system. What does this mean? It means that the U.K.
has the same exact currency system as the United States and
Japan. Why does this matter?
Because the U.K. cannot technically default
. This is most important because solvency is not a problem as it
is in Greece or any other EMU nation. What's interesting is that
their leaders and populace continue to call on the government to
cut the budget deficit in order to stave off the "next Greece."
Greece is in their current debacle because they don't control
their own monetary policy. Of course, this doesn't mean that the
U.K. can just spend and spend, but like the U.S. and Japan they
can spend up to a certain level so long as they don't cause
inflation. In this continuing period of low aggregate demand,
high unemployment and general deflation the government of the
U.K. has a great deal of buffer room in which they can spend. The
high deficit is not an immediate problem. Thus far, government
spending has done much to bolster their economy. As of this
writing it looks like the Conservatives will win the election and
with them will come the harshest of fiscal austerity measures.
They have promised harsh budget cuts in order to avoid default (
which is impossible
). It will be very interesting to see if Cameron's attempt to
save the nation from default actually drives the nation back into
recession. My guess is that Europe is already headed for a double
dip on the back of this Greece mess and that the U.K. is likely
to get dragged in with them - the deficit cuts will be the icing
on the cake.
- Speaking of Greece - I have been doing a bit of research on
their austerity measures and am increasingly convinced that they
should defect and default. I hate to keep beating on this story,
but it did cause a market crash yesterday so please bear with me.
We have a fairly recent precedent for Greece in Ireland. Ireland
implemented harsh austerity measures in 2008 and these programs
have done nothing to help matters. In fact, their deficit
continues to go backwards. Since the government implemented
austerity measures in 2008 their government debt as a % of GDP
to 64% from 43.9%. Government deficit as a % of GDP has almost
doubled. This is exactly what will occur in Greece as tax
receipts will fall off a cliff and austerity measures will result
in decreased aggregate demand and recession. That means a Greek
bailout will likely prove fruitless unless the ECB plans to offer
low rates ad infinitum. This is one of the primary reasons why
the market is now looking beyond Greece at surrounding nations. A
bailout is looking like a waste of money. The only true way to
fix Greece is by fixing their currency. The sooner the member
nations of the EMU realize this the sooner a workable solution
can be formed.
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Flaws of Market Capitalization Indexes
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.