I was asked to write about the issue or event that had the biggest impact on the first six months of 2012 in the world of finance. My first thought was the issue of “Sovereign Debt” – European debt, U.S. debt, and Illinois debt. However, I resisted for two reasons: 1) it’s too obvious, and 2) it is so “big”, so widespread, and so difficult to resolve that the average person prefers to ignore it. So I kept avoiding this “first six months in review” article because I couldn’t gather up the energy to write it.
Then, week after week, headline news kept driving me back to face reality: “Sovereign Debt” is, without question, the single biggest obstacle that faces our world, our country, and our state as we try to crawl out of our economic malaise and move into a better, more hopeful future.
The best way to summarize the devastating impact of enormous debt in the midst of anemic economy activity and high unemployment is that it creates a “no win” environment, including: 1) little to negative return on personal savings; 2) monumental uncertainty and anxiety; 3) highly volatile investment markets; 4) reluctance on the part of banks to lend the billions of dollars they have available; 5) great hesitancy on the part of corporations to spend their extraordinary amounts of cash on hiring and business growth. As far as governments are concerned, there is no “easy solution” – so the politicians in charge try their best to ignore the issue and “kick the can” down the road, which only serves to drive us into a deeper hole.
A great case in point is Spain. http://pingroof.com/article/a-closer-look-at-spain http://pingroof.com/article/mario-and-mariano-offer-blunt-talk-at-euro-summit Prime Minister Mariano Rajoy was very candid in June regarding Spain’s need of help in bailing out its troubled banking system. By the middle of June, the EU promised tens of billions of Euros to fund such an effort – a step that temporarily cheered (or appeased) the investment markets, resulting in a glimmer of “hope”. However, as with every announced “European fix” for their debt crisis, “temporarily” was the operative word. The only difference between this year and last year is that Greece is now considered mostly “hopeless”, while the daily financial crises in Italy and Spain dominate the headlines… and move the markets. For example, the slide included with this article shows volatility in the S&P 500 Index related primarily to news regarding Spanish debt bailout promises in June: the rush of “hope” lifted the market 3.26%, but as “reality” sank in, the market tanked by almost 2.5%. Such is the impact of “debt news” these days.
In Part II, we’ll review the details of the debt levels in the world’s largest economies.