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Generational Dynamics Web Log for 9-Feb-2010
9-Feb-10 News - Europeans say they won't bail out Greece

Web Log - February, 2010

9-Feb-10 News - Europeans say they won't bail out Greece

The Dow falls below 10000, as Greece's problems spread to Spain and Portugal.

Greece's financial problems appear to be spreading

European financial officials appear to be saying that they won't bail out Greece, according to Bloomberg. European Central Bank President Jean-Claude Trichet said the bank is "confident" the country will cut its budget gap from its current 12.7% of GDP to below 3% by 2012, and implied that this will happen without EU help.

If Greece is not bailed out, then Greece's debt may default, and the danger is that Greece's disease may spread to other countries.

You hear the twin words "contained" and "contagion" a lot these days, with respect to the situation in Greece. Are Greece's problems "contained"? Or is there "contagion," and the problems will spread elsewhere?

Hearing those words should make anyone hide under the bed. For example, Bernanke said early in 2008 that the "subprime mortgage crisis was completely contained," and would not affect the broader economy. That turned out to be very wrong.

According to MarketWatch, Greece's problems are spreading at least to Spain and Portugal. The cost of credit default swaps (CDSs) to insure Spanish and Portuguese government debt against default have risen to new record highs on Monday. High CDS rates mean that investors are betting that the debt will default.

Spain says it's a victim of a conspiracy by "financial speculators," according to FT Alphaville. The speculators are orchestrating a plot against the euro currency and the Spanish market, according to Spain's development minister, Jose Blanco. "Nothing is happening in the world, including editorializing by foreign newspapers, that is casual or innocent," he says.

In fact, Deutsche Bank AG is warning that the increasing CDS costs may be a "dress rehearsal" for the U.S. and U.K., which are also having budget deficit problems, according to Bloomberg.

Dow closes below 10000

The Dow Jones Industrial Average closed below 10000 on Monday, for the first time in months, and analysts are blaming it on the problems in Europe.

According to the NY Times, traders are skeptical of reassurances from officials that they'd keep an eye on the situation in Greece. One analyst is quoted as saying, "You can tell investors there’s no contagion, but it doesn’t matter, because people start to think there’s more than one cockroach. Right now, it’s still a little wait and see."

This is a good time to commemorate the first time that the Dow crossed 10000, in this 1999 15 second video:

From the point of view of Generational Dynamics, the situation hasn't changed. The stock market has been historically overpriced by substantial amounts since 1995, and by the Law of Mean Reversion, will have to fall sharply and stay down there for a comparable length of time (15 years). This is a mathematical certainty. (See "How to compute the 'real value' of the stock market.")

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More people are paying their credit card bills before paying the mortgage, according to the Washington Post. This is a big behaviorial change from just a few years ago. They can always find a place to spend the night if they lose their homes, but without a credit card they won't be able to buy food.

There's a "new math" on campus, according to the NY Times: There are so many more girls than guys in college these days that girls can't find a boyfriend any more. Another famous victory for feminists.

(Comments: For reader comments, questions and discussion, see the 9-Feb-10 News - Europeans say they won't bail out Greece thread of the Generational Dynamics forum. Comments may be posted anonymously.) (9-Feb-2010) Permanent Link
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Generational Dynamics Web Log for 9-Feb-2010 9-Feb-10 News - Europeans say they won't bail out Greece

Greece's financial problems appear to be spreading

Dow closes below 10000

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Generational Dynamics Web Log for 9-Feb-2010
9-Feb-10 News - Europeans say they won't bail out Greece