Global Financial Crisis Round 2

I’ve been listening to reports about the situation in Europe recently where Greece is apparently on the brink of defaulting on it’s debt obligations. That is, not being able to refinance a big portion of its debt. It really doesn’t sound good to me. The pundits are saying that the best course of action would be to let Greece go bankrupt (ie not repay their loans to the French and German banks). What would happen then is that Germany and France would have to bail out their banks again as they did in the original Global Financial Crisis and the good thing about this for France and Germany is that they then can move forward and forget about Greece. On the other hand, if they lend the money directly to Greece so the Greeks don’t default on their loans, they have to rely on Greece making cuts to public spending and increasing taxes massively in order to rebalance the books which the Greek public is resisting. So bailing Greece out could be a case of throwing good money after bad! We’ll soon see what happens next as the current proposal on the table is being put to member states for ratification soon.

At the end of the day, they are talking about either Greece or Germany reverting back to their old currencies and not using the Euro anymore! Amazing! If that happens, it looks as though some other European countries will follow the same path such as Spain and Portugal… And England is in trouble as well. So it looks very gloomy. On that alone, you’d have to say that stock markets around the world will tumble.

There’s a problem in this prediction, however. America is rebounding from its disaster with jobs growth and a strengthening ecomony (meaning the worst is well and truly behind it???). China is growing so fast that it is trying to reign in its overheating economy… That is, it is booming bigger than it was before the GFC. The GFC was simply just a hiccup for China. Taking that one step further, the nation of Australia is riding on China’s back because a huge amount of minerals are being sold to China increasing Australian employment and tax revenue – the GFC was simply a hiccup for Australia too. So where does it leave those of us with investments? On the one hand, the world looks shaky. On the other, parts are being shielded by the stunning emergence of China and the US is re-emerging slowly.

You know what it really looks like to me? The balance of power shifting from Europe and America to Asia. All in the space of 5 years. Asia dominates, the west faces crisis. Australia is in a strange position of not being in the West, being a modern economy and not being in Asia. There are drawbacks of being already developed, but advantages of having enormous mineral wealth and being situated in or close to Asia. I think Australia is in a very good position. Perhaps Canada too. The American story is widely debated and no one really knows the answer.

So when you look at investments at a macro level, there is probably no long term issues if you’re investing globally and not just in your domestic economy. Short-term, however, it could be very bumpy for everyone.

Like my non-professional analysis of the world economy from an Aussie perspective? Let me know!

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