What is it like to be German today?

First it was Greece and now Ireland. Who’s next? On Sunday the European Union (EU) agreed to give $89.4 billion in bailout loans to Ireland to help it weather the storm created by its massive banking crisis. Two of the 16 euro-zone nations have now sought financial support from the EU and the International Monetary Fund (IMF). Portugal and Spain are rumored to be next on the list of countries needing financial assistance. Germany has reluctantly supported the bailouts so far. The question is: Will they continue to offer their support if Portugal and Spain need a bailout too?


Germany is in a decent fiscal position today compared to the rest of the euro-zone with a Debt to GDP ratio of about 63%. Reference www.visualeconomics.com/gdp-vs-national-debt-by-country/ Germany has been proactive with their fiscal responsibility. They have a very hardworking culture and several years ago increased their “normal” retirement age from 65 to 67 to compensate for a rapidly ageing population that is living longer. However, in neighboring France a recent plan to raise the official retirement age from 60 to 62 provoked massive protests and outcry. Could the European Union shrink from 16 nations to something smaller so that Germany doesn’t have to continue supporting the bailouts of weaker countries like Greece and Ireland? At what point does the market start to demand higher interest rates on Germany’s debt because of the sins of their neighbors?

Certainly additional fiscal tightening is needed across the region. Tax increases are also likely to occur. Fiscal austerity is a must but does it threaten the structure of the EU or push the euro-zone back into Recession? Expect the financial problems of Europe to play out over a number of years and keep an eye on Germany as the key opinion in terms of both future bailouts and any eventual changes in the makeup of the European Union.

Global Economic Rebalancing

Later this week, President Obama and Treasury Secretary Timothy Geithner join other world leaders in a G-20 meeting in Seoul, South Korea.to address an agenda (http://tinyurl.com/24odlxl ) that includes "build on this less-than-robust recovery and further enhance international cooperation to generate strong, sustainable and balanced growth."  The world for some time now has grown in an unblanced way, with emerging countries like China enjoying above average savings and investment but below average consumption, while developed countries like the U.S. had high levels of consumption and low levels of savings and investment.

Certainly, a rebalancing must occur.  However if that rebalancing occurs too rapidly, the effects of reducing consumption in the U.S. could cause significant global economic problems including another dip into recession in the U.S.  Each country sees the manner and timing of this global rebalancing differently. 

China and the U.S. are the 2 most important players in this rebalancing.  In China consumption represents approximately 36% of GDP, while savings and investment is about 50% of GDP.  Consider the U.S. where consumer spending is about 70% of GDP while the savings rate is around 5%.  There is a neat diagram of components of GDP at http://www.moneychimp.com/articles/econ/gdp_diagram.htm.

It will take a long time to rebalance China and the U.S. to something significantly different than their present components of GDP.  Also, the rebalance will periodically happen in sudden and unsettling fashion.  As governments take different approaches to the rebalance we should all be hopeful that G-20 and other vehicles can help the world avoid problems as much as possible.

Could U.S. November Elections be Catalyst for Stocks?

A recent scoring of projected Congressional election results for this November as seen in the Wall Street Journal showed Republicans picking up 42 House seats to take majority at 220 to 215, and 7 Senate seats to close to 48 Rs and 52 Ds.  We recently listened to a money manager (with $45 billion under management) explain his optimism for stocks in a variety of terms, including those political.

The political positives per this manager were that the November election results would see enough change in Washington to give investors comfort of a more stock-market-friendly set of office holders, thus proving a catalyst for market gains.  If the projection for Republican gains proves accurate, we may well get the opportunity to see if the "catalyst" theory proves true.