Is the U.S. economy in the calm before the storm? Even with unemployment around 8 percent, the U.S. economy appears to be chugging along in a slow-growth mode, and, according to some, stocks are not overpriced. According to David Wessell of the Wall Street Journal, however, “Euro Woes Will Cross the Pond,” disrupting the U.S. economy and sending the stock market sharply lower.
Greek voters (and indeed voters everywhere across Europe) seem poised to vote out any politician who calls for austerity measures. If Greece rejects austerity, it is almost certain that it will be forced to leave the Euro currency union absent significant changes in the current European environment. That would be a disaster for Greece by most accounts. Some say it would strengthen the Euro. According to Wessell and many other observers, Spain and Italy would experience bank runs, increased borrowing rates and sever recessions that will spread throughout Europe to the rest of the world, including the U.S. In fact, many of these events are already starting to occur.
Since systemic risk has become international, these events will al most certainly impact the U.S. European banks lend twice as much money as U.S. banks do. The worse the recession in Europe gets, the more European banks will stop lending and the greater the risk that one or more of them will fail. “A sharp pullback by Euro area banks’would impede credit creation around the world, with the most acute pain felt in emerging economies,” J.P. Morgan Chase economists were quoted as saying. The U.S. would feel the effects, too, as European banks lend the equivalent of 10% of U.S. GDP to the U.S.
Big losses for U.S. banks that have lent money to European banks would make further U.S. banks less likely to make loans in the U.S.
There could be another run on money market funds. Wessell observed: “When Lehman Brothers went down in 2008, U.S. authorities were stunned to discover that some money-market funds had money in a firm whose troubles had been, like Greece’s, widely publicized. They did, and that triggered a run on the money funds that threatened funding to the nation’s biggest companies until the government stepped in.”
On top of a likely credit crisis, European recession would hurt U.S. exports and a flight to the U.S. dollar would increase the cost for recession-wracked Europe of buying U.S. goods further impacting U.S. exports. The result could be a global recession.
The watchword for investors and their advisers is to exercise extraordinary caution in making investment decisions during these times of great uncertainty.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.