Guest commentary by Slava Goldstein
Published Monday, September 26, 2011. 9:35 AM
The past two months have been quite a roller coaster ride for the financial markets worldwide, with the latest “thrill” occurring this past Thursday, September 22, when the Dow Jones Industrial Average dove almost 400 points.
More jitters continued this past overnight. Asian stock exchanges started out sharply lower but recovered slightly in the afternoon hours (local time in Asia). As of 8:00 AM EST, European exchanges, on the other hand, posted strong gains. For instance, the UK index, the FTSE 100, was up 1.4% and the Euro Stoxx 50, the European Union’s version of the Dow Jones Industrial Average, was up a whopping 4%.
So one may ask: why are the financial markets playing Dr. Jekyll and Mr. Hyde? The answer is quite simple: The time is coming to pay the piper, and the piper is nervous that he will not be paid. In other words, developed nations such as members of the European Union, Japan, and yes, the United States, are on the cusp of realizing that “there is no such thing as a free lunch.”
For decades, the welfare state has been a source of pride for many Europeans. Many have used it to explain the contentment within European citizenry (doubt on this theory has been cast, but that is for another story). Back in 1992, the French President, Francois Mitterand, criticized the United States. According to Mr. Mitterand, the shortage of social welfare programs in the United States led to the Los Angeles Riots. However, to build the welfare state, developed nations had to go deeper and deeper into debt, and today many of these nations’ fiscal conditions are at a point at which the creditors are doubting whether or not these nations will be able to pay them back.
Every creditor worldwide goes to bed worrying whether or not the person/institution to whom it lent money will pay him back. Obviously, this fear is stronger with some borrowers than with others: a rich person is more likely to repay his debts than a poor person, a well-established corporation is more likely to pay off its debts than a startup, and a government is more likely to pay off its debts than a large corporation.
However, at a certain point, after having accumulated enough debt on their books, even the institutions deemed most likely to be able to pay off their debts raise concerns. This leads the global financial community into where it is today, with countries such as Greece, Japan, Portugal, Ireland, and even the United States facing the risk of not being able to pay off their sovereign debts and with, each day, new information coming in to shed light on whether or not an outside entity such as another government (e.g. Germany, China) or a central bank (European Central Bank, Federal Reserve, etc.) will step in and help the troubled nations (read: lend them emergency money at a very low interest rate or buy off the bond securities off of the financial marketplace). At this point, all that is certain is that nothing is certain.
While everyone, from European governments to central banks to the U.S. Treasury Department, is well-aware of what is at stake, there seems to be very limited agreement as far as what should be done about it. Greece has taken measures to cut spending on its social programs, but that has sparked riots within the Greek populace. Last year, Japan tried to implement tax hiking and cost-cutting measures, but those moves were unpopular with the Japanese citizenry, and the ruling party lost its majority in the nation’s upper legislative chamber.
Other European nations such as Germany are considering bailing Greece out, but that is creating grumblings within their populations and legislative institutions. Finally, central banks are considering everything from buying the unstable sovereign debts to lending at ridiculously low interest rates, but they are aware that they will pay a price for this as well. In short, no one has been able to come up with a solution that everyone can live with. This means that one can expect the
roller coaster ride to continue into the foreseeable future.