Vicious Rants of an Angry Yellow Man

The news about whether Greece will go bankrupt and be out of the Euro union has dominated the financial news in the past week.  But more important to world economy is what is happening in the Chinese stock market.  Will take a quick look at both situations today and I can discuss in more specific detail if anyone is interested.

So Greece needs another bail out and it tried to get the money without having more austerity measures dictated to them by other European countries, particularly Germany.  But it looks like they have no choice but to capitulate and do what other countries tell them to do in order to get more loans.  What is not clear to me is this:  after the first two bailouts, did the Greeks do the austerity measures that were demanded of them?  If they did, then obviously austerity alone is not turning around the economy and maybe a stimulus plan maybe better.  If they did not raise taxes and cut back public spending as they were obligated to do, then they need to do these things that the creditors demanded of them now. 

My feeling is that austerity alone will not be enough.  If salaries of public employees and pensions are decreased, the likely effect is that people will not be able to spend as much and thus the economy will not pick up.  Also raising tax when people have no income will not work either.  I mean, neither liberals nor conservatives in this country would recommend these two methods.  The GOP would decrease salaries and pensions but not raise taxes.  The Democrats would increase salaries and pensions and increase taxes.  So what is best for Greece?  I am not sure but I don't think the demands of the European union by themselves, even if followed precisely by Greece, will not enough.

Far more important than Greece is China in the world economy.  First of all, even though trillions of dollars of paper money was lost in the past couple of weeks in the Chinese markets, it is not as bad for China as a whole as it looks.  The Shanghai market had doubled in the past year and so even a 40% drop still leaves it with a big gain for the year.  The problem is that it was a big bubble and it drew into the market people who are totally unsophisticated to investing and those people are losing their entire life savings.  What is also troubling is that things have stabled in the last couple of days due to the intervention of the government.  If the government's efforts do not keep thing well in the long term then it will cause big problems throughout the world.  But if the government's effort are successful, then it may create a belief that the government will always bailout investors and worse bubbles are going to happen in the future.  So I don't think that what the government did in the past week are good for the long term.

The one winner out of China's problem is Hong Kong.  The HK market did not go up like the Shanghai market did in the past year but its drop was much less than those of China overall.  It shows that the HK investors are much more sophisticated and the HK market as a whole is much more mature than those of Shanghai.  It shows that while China will eventually use Shanghai as the financial center of the country, HK is still a very important part of China's financial relations with the rest of the world in the foreseeable future.