We’ve all seen or heard the media reports about the possibility of countries defaulting on their loans.  Most recently the U.S. has come under fire about their obligations and ability to pay.  Rating agencies are threatening to downgrade the U.S., which would have dire consequences for the US economy.  Frankly, I don’t believe that will ever happen.  The threat of a downgrade was intended to be exactly that, a threat.  In other words, this was a public shot at the U.S. government, an attempt to exert public pressure for the U.S. to get their act together.

Where this is real and happening today is in Greece.  So what happens if Greece doesn’t pay?  Do they file for bankruptcy? Does that mean their bankruptcy will appear on their countries credit bureau report for the next 7 years?  Does it mean that no one in Greece will be able to get a mortgage until their country has been discharged for 2 years?  I ask these questions with tongue firmly planted in cheek.  The answer is that the countries debt doesn’t go away.  It means that Greece has not met its financial obligation for that particular month.  The creditors will demand payment, but unlike consumer debt there’s nothing to repossess.  It’s not as if the lenders can foreclose on Athens.

The reality is that the Greek currency will go into the toilet because they’ll be printing money like mad.  They may opt out of the Euro currency for some period, possibly two years, and go back to the Drachma, Greece’s currency prior to entering the EU.  This will lead to hyperinflation, and there will be zero demand for their currency or more importantly trust in their currency.  This reminds me of the 80′s when I visited countries in the Balkans.  I would go into the bank, exchange $100 Canadian for the local currency, and I would need a wheelbarrow to carry my cash around.  A devalued currency will mean that all imports will be extremely expensive, and this will have a direct effect on the standard of living in Greece.  Then there’s the obvious, borrowing in the future may become next to impossible for Greece.  To be clear this isn’t just Greece’s problem, there’s concern for Spain, Ireland and Portugal as well.  They may be next.

Back to the U.S. – One of the funniest solutions I have heard recently about their debt came from comedian Dennis Miller.  On his most recent HBO special he talked about the US debt.  He said, and I’m paraphrasing, “I don’t understand this debt issue.  The numbers are way above my head.  But if I was in the White House I would say bleep’em, we’re not paying.  We got nukes”.

Until next time,

Cheers

One thing you should never underestimate is America’s resolve. As a country, America has been on the brink on a number of occasions, and yet it has always managed to find it’s way back. From a historical standpoint, America has faced it’s share of crisis; The War of Independence, The Civil War, WW 1 and 2, The Great Depression, The Korean War, Vietnam War, The Bay of Pigs, The Cuban Missile Crisis, the Assassination of John F Kennedy, Robert Kennedy, Martin Luther King, the impeachment and resignation of Richard Nixon, the attempted Assassination of Ronald Reagan, 9/11 and the aftermath. This illustrates the U.S. isn’t squeamish about getting blood on their hands in the name of national interest, and they’re certainly willing and able to fight. Yet I can’t help but wonder where has America’s resolve gone? I’m referring to the economic plight America faces today. It’s stunning to watch the US muddle through this recession. The US has faced many deep recessions in the past, however, the present day recession has reduced this great nation to look for handouts, debt owed to China, and facing the fact that today America has zero leadership. It’s shameful that the Obama Administration, as well as the Republicans, are playing politics at this crucial moment in their history. The US is so devoid of any leadership one can’t help but be worried for our neighbours to the South.

Why does this matter to us? Canada is a branch plant economy. We export 70% of our goods to the U.S.  America is a consumer based economy, and we need a healthy and vibrant U.S. economy so we can sell our goods to them. The situation in the U.S. makes the Canadian government nervous. This is why the Conservative Government is pressing full steam ahead to negotiate free trade agreements with Europe, and South East Asia. Our reliance on the U.S. puts our economy at risk, and our government is attempting to mitigate this risk by negotiating new free trade agreements. But that will take time, maybe years. So in the short-term we’re stuck, and all we can do is keep our fingers crossed that the leaders in the US will put petty politics aside and finally lead.

In last week’s National Post there was an article about the unemployment situation in the U.S. Statistically things don’t look good (National Post – “U. S. Job Growth in June Falls Far Short of Expectations“). Their unemployment rate is inching towards 10%, and that figure does not include those people that have stopped looking for work, and in some cases fallen through the cracks.

If their economy, and their unemployment rate doesn’t improve before the 2012 Presidential Election, Obama may well end up being a one trick pony. The voters in the US will look to punish someone.

Until next time,

Cheers.