This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
11/30/2010
Portugal and Spain in Trouble
Treasury prices rose today because of increased buying of U.S. bonds by European investors. These investors are searching for a safe haven for their money as crisis builds in Portugal and Spain. The Federal Reserve also stated today that as apart of the $600 billion that it will spend in bonds it will be purchasing bonds everyday this week. The move by the Fed to buy bonds is being scrutinized by sceptics claiming that the move will devalue the dollar. It is interesting that European investors are buying U.S. bonds as a "safe haven" when it appears that the dollar is anything but a safe haven right now. Portugal and Spain are both headed in the same direction as Greece and Ireland. This article speculates that it would be more wise for the EU to assist Spain rather than Portugal, because if a bailout of Portugal is accomplished there might be no more money left to bailout Spain. I think that we will start to see more and more contentious behavior in countries as governments start realizing that difficult decisions are going to have to be made concerning government programs, pensions, social security programs etc.
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There will be negative externalities created by such social unrest. For instance productivity will decrease and companies along with countries may loose competitive advantage as focus turns away from long-term strategic planning to short-term bailouts.
Oh boy. Portugal and Spain have been in trouble for a couple of years. We're just seeing another wave of bad sentiment here. Of course, it's hard to have anything else when you're talking about systematically mismanaged countries.
The part of this that is poorly understood is that these bailouts are really bailouts of one's own citizens. For example, Germany organizes a bailout for another country in Europe, so that this country's government can continue to make interest payments on loans.
To whom?
Probably some nearby country, with a surplus of savers, perhaps older ones that buy government bonds for safety ... like say ... Germans.
So a lot of what we're seeing here is domestic politics: German politicians making sure German citizens get their interest payments, rather than admitting that the loans have gone bad.
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