In this book the author argues that the creation of the common European currency, Euro with little planning has hurt the global and US markets. The euro was created before its member's economic structure was made compatible; the individual economies did not converge to this one currency fits all nations idea. This pushed the nations further apart resulting in unsustainable booming in Ireland and Spain. They developed huge deficits with Germany, as they imported excessively and eventually financial collapse occurred. Secondly, the Europe's banking system grew gigantically with diverse business portfolios and without government's oversight. The crisis precipitated when troubled mortgages in the U.S was repackaged and sold to European banks, which soon discovered that these were costly mistakes. The European governments couldn't rescue these banks as they were too big and too diverse. In situations like this, governments prints more money and devalues its currency to pay the debt, but with euro that was not possible.
When Greece could not finance its deficit, the European Union wanted to bailout Greece in the hopes that strict austerity measures would solve the problem. But soon Ireland, Spain and Portugal also needed help. It was not only far too excessive and expensive for the European Union to handle, but they also found out that austerity measures were redundant. It ignores a simple economic concept of supply and demand; the austerity measures also curtail economic activity and concomitantly the revenue reduction and growth retardation ensues. This strategy severely hurt countries like Greece which could not halt the spiraling unemployment. In this regard United States took the alternative path of government spending which resulted in growth and revenue.
Government's ability to alter exchange rate could affect its exports and imports; credit that is ridiculously cheap leads to unsustainable boom and when the credit is tightened, the bust in the economy is obvious. In such an economic condition, investors seeking stability through diversification of their portfolios find risk management is difficult. Consequently the 401K plans suffers; in Oct 2008, in one week, the global retirement assets fell by about 20%.
The European problem still lingers on, and if any member country leaves the EU and revert back to the original currency or default on its debt, then it would cause market collapse worldwide. Because banks are leveraged and hold huge piles of government bonds which are known to be risk-free. Such an event will have immediate impact on the global banking system since they all are chained together.
The 2010/2011 market rallies were due to the assumptions that massive bailouts in United States coupled with the American job growth has worked. Severe austerity measures in Europe did not work. Excessive printing of "Fed" money, bank solvency, and continued Chinese growth has proven so tenuous that the market lost its confidence in governments. The time bought by cheap money and bailouts is running out and the author takes a pessimistic view that a strong recovery remains far away. He points out that the analysts and investors in the United States either downplay the European crisis or it is too far away on the other side of the Atlantic. The author cautions that markets and investors have great many things to worry about because the fundamental problems have not been solved and the current trend in U.S stock market is simply a result of Federal Reserve's cheap money pumped into the system.
Reference: Europe’s financial crisis: A short guide to how the Euro fell into crisis and the consequences for the world by John Authers, FT Press (November 14, 2012)
When Greece could not finance its deficit, the European Union wanted to bailout Greece in the hopes that strict austerity measures would solve the problem. But soon Ireland, Spain and Portugal also needed help. It was not only far too excessive and expensive for the European Union to handle, but they also found out that austerity measures were redundant. It ignores a simple economic concept of supply and demand; the austerity measures also curtail economic activity and concomitantly the revenue reduction and growth retardation ensues. This strategy severely hurt countries like Greece which could not halt the spiraling unemployment. In this regard United States took the alternative path of government spending which resulted in growth and revenue.
Government's ability to alter exchange rate could affect its exports and imports; credit that is ridiculously cheap leads to unsustainable boom and when the credit is tightened, the bust in the economy is obvious. In such an economic condition, investors seeking stability through diversification of their portfolios find risk management is difficult. Consequently the 401K plans suffers; in Oct 2008, in one week, the global retirement assets fell by about 20%.
The European problem still lingers on, and if any member country leaves the EU and revert back to the original currency or default on its debt, then it would cause market collapse worldwide. Because banks are leveraged and hold huge piles of government bonds which are known to be risk-free. Such an event will have immediate impact on the global banking system since they all are chained together.
The 2010/2011 market rallies were due to the assumptions that massive bailouts in United States coupled with the American job growth has worked. Severe austerity measures in Europe did not work. Excessive printing of "Fed" money, bank solvency, and continued Chinese growth has proven so tenuous that the market lost its confidence in governments. The time bought by cheap money and bailouts is running out and the author takes a pessimistic view that a strong recovery remains far away. He points out that the analysts and investors in the United States either downplay the European crisis or it is too far away on the other side of the Atlantic. The author cautions that markets and investors have great many things to worry about because the fundamental problems have not been solved and the current trend in U.S stock market is simply a result of Federal Reserve's cheap money pumped into the system.
Reference: Europe’s financial crisis: A short guide to how the Euro fell into crisis and the consequences for the world by John Authers, FT Press (November 14, 2012)
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