September 6 2011|08.00 AM UTC

Erik Chang

What Has Athens Got To Do With Wall Street?

Category: InvestingTags: , , , , , , ,

We have all heard about Greece’s economic crisis, but should it be cause for concern for the American economy? Unfortunately, the Greek economy and the American economy may be painfully interlinked. Alan Greenspan, former Chairman of the Federal Reserve, has said that a Greek default would drive the US into further recession. The fact that the Greek economy might drag the US down is certainly a cause for concern, but the bulk of the US deficit is not tied to the European Union.

A greater concern is that the Greek situation may be a foreshadowing of things that might happen to the US. While the US and Greece economic crises may be different, it is important to look at what happened to avoid following in their footsteps.

So what caused the Greek economy to fall? Basically, European politicians promised investors that Greece was fine, causing them to buy Eurobonds from Athens. But, in actuality, Greece was investing heavily in a defense budget that they couldn’t afford to bolster itself against Turkey and had been spending beyond its means for years.

Other countries continued to loan money, via bonds, to a dysfunctional economy, while Greece continued to spend the income. When Standard and Poor decreased the rating of Greece’s economy to BB+ in April 2010, the world was stunned and the Euro declined.

The key difference between the US and Greece is that the GDP of the United States in 2010 was $14.7 trillion and the national debt was $13 trillion. Greece’s national debt, on the other hand, reached 113% of their GDP in 2010.

Another way to put it is that Greece is the college student with a new credit card. They figured that they could just continue paying off one credit card by charging it to another. Luckily, the US seems to be far from that scenario. While we may have a lot of debt, currently, it is something we can afford to manage. If it is left unaddressed; however, the Greek scenario may not be too far away.

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