Overnight European markets fell on concern their trillion dollar aid plan won't end the debt crisis.
Looks like folks got the memo that trying to solve a too much debt problem by piling on even more debt doesn't always work.
(Scratches head) "uhh...can someone please explain how that was ever supposed to work to begin with"? Here's my stab at it:
A simple personal metaphor can help us think about the problem. Say you have a mortgage and you lose your job. You're concerned about tapping into your retirement savings to pay your monthly mortgage and other bills. So you borrow money, perhaps from a credit card with an available balance, to pay bills while you look for a new job. A few months pass, and you find a job. Now that you have a new job and are making money again, you tighten your belt for awhile and pay off the credit card. This allows you to resume making your mortgage payment out of the income you earn. This kind of borrowing strategy can make sense.
Where things differ in our example from Europe is that some countries in Europe, like Greece, have not just the equivalent of one mortgage but more like five mortgages. And they don't have any retirement savings. Further, they're not likely to find the equivalent of a very good paying job anytime soon due to how uncompetitive they are and how slow the economy grows. The marketplace was about to take away Greece's credit card, but Europe's $1 trillion aid plan just handed it back. But should they have? With a situation like Greece's, realistically they can't find the job or tighten the belt enough to pay off the credit card and far too many mortgages. The hole they've dug for themselves is now too deep.
The only sensible thing to do is to recognize that the game is up and try and find an orderly way to default. But that would be painful, so Europe chose to put this pain off for another day.
Whether that day comes next year, three years from now, or sometime this year no one knows for sure. But what can be an indicator of how bad the ultimate crisis/panic will be is how long the buildup goes on. The reason is that even more debt will be piled on in the interim. And the behavior which led to the problem will likely persist. The problem will be exacerbated and the ultimate reckoning even worse.
Put simply, the bigger the bubble the louder the pop.
Looks like folks got the memo that trying to solve a too much debt problem by piling on even more debt doesn't always work.
(Scratches head) "uhh...can someone please explain how that was ever supposed to work to begin with"? Here's my stab at it:
A simple personal metaphor can help us think about the problem. Say you have a mortgage and you lose your job. You're concerned about tapping into your retirement savings to pay your monthly mortgage and other bills. So you borrow money, perhaps from a credit card with an available balance, to pay bills while you look for a new job. A few months pass, and you find a job. Now that you have a new job and are making money again, you tighten your belt for awhile and pay off the credit card. This allows you to resume making your mortgage payment out of the income you earn. This kind of borrowing strategy can make sense.
Where things differ in our example from Europe is that some countries in Europe, like Greece, have not just the equivalent of one mortgage but more like five mortgages. And they don't have any retirement savings. Further, they're not likely to find the equivalent of a very good paying job anytime soon due to how uncompetitive they are and how slow the economy grows. The marketplace was about to take away Greece's credit card, but Europe's $1 trillion aid plan just handed it back. But should they have? With a situation like Greece's, realistically they can't find the job or tighten the belt enough to pay off the credit card and far too many mortgages. The hole they've dug for themselves is now too deep.
The only sensible thing to do is to recognize that the game is up and try and find an orderly way to default. But that would be painful, so Europe chose to put this pain off for another day.
Whether that day comes next year, three years from now, or sometime this year no one knows for sure. But what can be an indicator of how bad the ultimate crisis/panic will be is how long the buildup goes on. The reason is that even more debt will be piled on in the interim. And the behavior which led to the problem will likely persist. The problem will be exacerbated and the ultimate reckoning even worse.
Put simply, the bigger the bubble the louder the pop.
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