Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, May 11, 2010

Trouble Ahead?

After reading the Wall Street Journal (WSJ) this morning, it raised concerns we’ve had for some time now, that while many believe our economy is finally emerging from the financial crisis of the last few years, we will, not too far down the road, face another financial crisis of significant magnitude. Today’s WSJ Review and Outlook editorial titled “The Real Euro Crisis”, makes a solid case for the fact that “The EU’s bailout postpones the day of fiscal reckoning”.

We believe that the European Union bailout announced over the weekend will have the same affect as the bailouts in the U.S., the last couple of years. We are concerned about the level of U.S. debt resulting from bailouts, the new healthcare programs and other continued spending by Congress. While the economy may improve in the short term, we worry that we will see significantly higher interest rates and inflation in a couple of years along with higher taxes that will stifle economic progress and potentially bring about another severe recession.

The WSJ editorial summed up the Euro crisis as follows: The real euro crisis, in short, is one of overspending and policies that sabotage economic growth. Sunday’s shock and awe campaign has merely postponed that reckoning – and at a fearsome price. Much the same could be said of our Congress’ bailout of the U.S. Economy.

Another WSJ article about Fannie Mae added fuel to the fire. Titled “$145 Billion and Counting”, the article discussed Fannie Mae’s announcement yesterday of its “11th consecutive quarterly loss of $11.5 billion—and asked for another $8.4 billion in taxpayer assistance.” The article went on to say: “Once the checks from the Treasury clear, Fan and Fred (Fannie Mae and Freddie Mac) will have consumed a combined $145 billion in taxpayer cash, and the end is nowhere in sight.” To make matters worse, the financial regulatory bill being considered by Congress has no provisions related to Fannie and Freddie.

Another article by Zachary Karabell titled “the World’s Dollar Drug”, discusses the fact the dollar is the world’s reserve currency and “remains the linchpin of the global system”.
Other countries depend on the dollar and need to buy dollars to do business. The article states: “The dollar’s dominance has short-term benefits for the U.S……… when the American federal government wants to take on additional debt, it has the advantage of a world that must buy dollars” Mr. Karabell goes on to say: “The U.S. government also has the ability to print that global reserve currency when dire straits demand it. That gives the U.S. considerable latitude to spend its way out of a crisis without confronting real structural changes.” We worry that we can’t continue to avoid addressing the structural changes needed and that down the road there will be a severe price to pay.

We hope our assessment is wrong but it sure seems that spending our way out of trouble avoids the root causes of our economic problems and may in fact make them worse.


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