Globalization: The World Gets Smaller, The Problems Get Larger

Kansas City, Missouri – Nick Newton

This might be the year you decide you can live without a few of your favorite things. Because if you thought we had seen the worst of the economic woes, allow me to introduce you to the nasty side of globalization.  Much like we Americans did when we packaged our toxic mortgage mess and exported it around the world, it appears European banks have decided to return the favor.

Bank On Some Trouble

Let’s think back. Not too long ago, homeowners were having a hard time paying their debts.  Now, sovereign states cannot pay the bills. Enter Greece. You ask what in the world has Greece got to do with me. I will tell you.  Not since Jackie Kennedy became Jackie Onassis has Greek affected us to this degree.  Essentially, Greece has borrowed its way into oblivion, along with a few other Euro-wielding countries, and it can no longer afford to pay its debts.  Those debts mostly belong to other European nations, not the people, but to the European banks.  This is where it gets nasty because a nation is about as healthy as its banking system.  And Europe is headed to the hospital.

In the United States, our banks are capitalized by us, the people. Those deposits we place in banks (time deposits), keep them in business. In Europe their primary source of capital is wholesale funds or funds generated by borrowing from other financial institutions.  When markets discover you might not collect on your debts, they begin to question if you can pay your bills. As a result, it costs more to borrow (remember last month’s article about downgrades increasing the cost of borrowing).  This entire situation creates, once again, a negative feedback loop.

How Does This Affect You?

A substantial number of companies in the United States have chosen Europe as the “go to place” for expansion. As the European financial situation worsens, it calls into question the market demand for our American-produced products and services.  And that creates uncertainty in the markets. Uncertainty creates loss of capital, which affects your 401(k). The more uncertain the outlook, the more companies delay further investment. They stop hiring, stop spending, and the nation’s unemployment rate does not budge.

So, what do we do? Stay the course, and take every opportunity to let your elected representatives know how important it is to put job creation at the top of our collective priority list.  Although the world is increasingly global, the pain is felt most acutely at home.