Since I’m a firm believer that history repeats itself, I got to wondering how things turned out in the past for economies facing our current challenges.

Fortunately, I didn’t have to go too far back in time to find out.  I did, however, have to go overseas.

The Greeks are in much the same boat we are in the States, although their ship has taken on a bit more water.

The Greek government has pushed social welfare programs that they can’t seem to find the funds for.  The budget deficit will be more than 12% of GDP this year, and the elected officials campaigned on extra spending, yet they now find themselves having to cut costs dramatically just to keep their head above water.

And to say the EU is a bit peeved is an understatement.

Since Greece is on the Euro, they really don’t have the ability to print money like the U.S. does.  The European Central Bank is suggesting that the Greeks, among other European countries, are on the verge losing their credibility, adding that it could stall the recovery process.

The rest of the countries on the Euro will be on the hook to bail out Greece or cut them loose from the currency all together (a rather unsettling proposition).  If the Germans, French and English will be forced to bail out Greece, you can bet it will be with some very unfavorable terms.  Screw me once, shame on you, screw me twice…

The total national debt in Greece is expected to increase from 99% of GDP to 135% by 2011 without significant cuts in spending. Compare this to a ratio of 90% for the U.S. and rising to over 101% by 2011.

The elected George Papandreou instituted a pay freeze for state workers earning more than  €2,000 a month which did nothing but cause an uproar within the Hellenic Socialists party.

The U.S. has some eerily similar financial stats as compared to Greece.  The one thing we can do that they can’t is print money and expect the general population to underwrite the transaction.

I suspect the underwriters of the U.S. national debt will not be happy.  Just ask the French… and Germans… and English…

Economics, Finance debt, Economics, Greece, national debt

News out of the UAE yesterday that really shouldn’t surprise anyone.

Late Wednesday, Dubai World (the largest corporate entity) asked creditors for a six month reprieve on paying its $60 billion in debt.

You’ll remember that Dubai thrived during the last ten years due to the infusion of billions of dollars on financial infrastructure and tourist destinations like the indoor snow ski facility, the Palms and World man-made islands.

Since the current economic conditions don’t really facilitate a healthy tourism industry, and many financial firms are on the rails already, it’s not surprising that Dubai is struggling.

The news is having global impact on financial and equity markets.

In the U.S., the Dow was down more than 220 points today at the opening bell, the S&P 500 was down 2.3% and the Nasdaq declined 2.6%.

In Asia, the Hang Seng Index was down just under 5% and the Nikkei 225 was down just over 3%.  Combined, this made up the worst single-day percentage declines for those markets since March of this year.

The news out of Dubai suggests that we’re no where close to being out of the economic mess we’re in.

Finance

There have been a number of wild rides through bubbles in the last decade or so.  There was the dot-com bubble that closed out the 90’s and welcomed in the new millennium.  Then there was the financial bubble, the credit bubble, the housing bubble…

Arguably many of those are inter-related, and chances are, you were affected by at least one of them.

So where is the next bubble?

First, I’ve come to accept the fact that history will repeat itself.  We are all poor students of history, but deeper, no one can really understand all the forces at play to effectively stave off a repeat of a certain event.

With that, it’s realistic to assume there is another bubble brewing as we speak.

With all the government intervention in finances, and the U.S. Fed’s “as low as we can go” interest rate policy, I suspect the next bubble will be in interest rates.

If there is one thing that history tells us, and it seems those in power never seem to study enough, is that the Fed is notoriously late when it comes time to act on monetary policy.

Most recently, Fed Chairman Greenspan was slow to lower interest rates which kept borrowing at bay when borrowing was most needed.  To that tone, I suspect Fed Chairman Bernanke will be slow to raise interest rates in an effort to keep inflation at bay.

Since any sort of monetary policy is based on lagging economic data (by 3 months or so), it’s understandable why interest rate moves also suffer from the same lag.  Historically though, interest rate moves have been late to the game by as much as 8 and arguably 10 months.

In the end, I suspect Bernanke will delay raising interest rates until late next year, and he’ll be forced to raise them to levels he’d not anticipated to keep the wraps on inflation.

So what makes this the Mother Of All Bubbles?

In one word, China.

Unlike the past, the Chinese are taking a great interest in our monetary policy, primarily because they own so much of our debt and currency.  To say the Chinese aren’t really happy with how things are going would be an understatement.

The Fed wants to keep rates low for fears that increasing rates will hamper an economic recovery.  But the Chinese have more leverage in our debt than they do in our unemployment rate.  They’re really looking out for their own financial interests, and who can blame them.

The Chinese are worried that the current U.S. policy is creating insurmountable risks to the recovery of the global economy, and they’re worried we’ll bring them down with us.

Any freshman in a college history course knows that the Chinese will do just about anything to keep their economic freight train steaming down the tracks, and they’re not real happy about the prospect of U.S. monetary derailing that train.

They own a lot of U.S. debt, and they’re not afraid to use that debt to influence policy in the States.  Higher interest rates will appease them as it will increase the value in their holdings.  It’s only a matter of time before Bernanke will have to oblige.

Higher interest rates is what they’re looking for, and higher rates they will get.

I suspect that interest rates will be late to go up, and will go higher and stay higher for longer than they need to.   All in the name of keeping the Chinese at bay.

Banking, Economics, Finance bernanke, China, interest rates, monitary policy