Market Update – May 14, 2012

2012 May 13
by SJ Leeds

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Today’s blog has two short pieces:

1. some thoughts on the EU

2. a few interesting stats


The Eurozone crisis continues.

Here are my thoughts:

1. Imagine that the US, Canada and Mexico had a common currency.  The three individual countries would lose the ability to use monetary policy to respond to their particular economic needs.  They’d also lose the ability to devalue their currency if exports were weak.  That’s what you have in Europe.  It doesn’t work.


2. In order for the common currency to work, countries need to have similar characteristics.  Unit labor costs should be similar, economic cycles should be similar, fiscal policies should be similar.  Greece and Germany…not that similar.


3. Many people argue that the US is very much like the EU – a group of states with a common currency.   Of course, the US is nothing like the EU.  We have a federal government, the states must balance their budgets, we all speak the same language and we have the ability to freely move among states – chasing opportunity.  (We have our own problems, but they’re not caused by a common currency.)


4. Governments like the Greek government (do they have a government now?) are problematic.  They responded to difficult economic times by expanding the government payrolls rather than becoming competitive.  But again, the real problem is that they’re not competitive.


5. You can’t really believe that time will heal these problems, can you?  Gimmicks designed to keep interest rates low in problem countries…will these help?  They delay the inevitable.  Do you really think that a country like Spain, with 25% unemployment, is going to fix their problems by cutting their budget?


6. Germany gets a lot of credit in the press for being much more efficient than other EU countries.  But, an alternative way of looking at the situation is simply to say that they are benefiting from a currency that won’t appreciate.  In other words, the way that they became the world’s largest exporter is by having an undervalued currency.  If the euro breaks apart and they have their own currency, it will appreciate greatly.


7. There is value to the EU situation dragging on.  It allows markets to get ready for the inevitable nature of what has to happen.  It will seem much less significant when Greece stops using the euro than if this had happened two years ago.


8.  With that said, leaving the euro will cause even more pain in Greece.  One of the biggest problems is that when they return to their own currency, it will be worth much less.  For businesses and individuals that have borrowed (in euros) from non-Greek institutions, they’re going to be unable to pay these loans back.  That will lead to a lot of bankruptcies.


A Few Interesting Stats

1. According to a recent MetLife study, nearly half of Americans say they gave money to a family member in the prior year to help pay bills.


2. The Employee Benefit Research Institute predicts that nearly half of Americans ages 36 to 62 may not be able to afford even basic living expenses in retirement.


3. In 2010, nearly one-fifth of 45- to 54-year-olds didn’t have health insurance.


4. The European Commission (the EU’s executive arm) sees unemployment in the euro zone averaging 11% this year, up from 10.2% in 2011. Only six months ago, the commission predicted unemployment would fall slightly this year to 10.1%.


5. Even with Medicare benefits, a 65-year-old couple retiring in 2012 will spend at least $240,000 in health-care costs during their retirement, according to a report from Fidelity Investments released Wednesday. That figure represents a 4% increase from last year, when the study estimated such costs would average at least $230,000.


Have a great week.

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