Could a Greek Downfall Affect the US Economy?

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Could a Greek Downfall Affect the US Economy?

The Facts:

Greece is a small economy. As a whole, they account for 0.3% of global output. The US only exports about 0.5% of it merchandise to there. It is such a speck in the grand scheme of our trade relations that we have to wonder, what effect will Greece have on the US economy?

The answer: very little.

If Greece were to shake us at all, it may cause a quiver in exports. A Greek exit from the Eurozone could potentially weaken the euro, thus strengthening the dollar and hurting exports in the process. Less exports could cause a bit of unemployment, but nothing statistically significant. Even if the crisis in Greece caused economic slowdown in the rest of Europe, Europe only accounts for one fifth of our total exports. So Greece could affect our exports, but it would cause a ripple, not a wave.

In addition, all banks with exposure to Greece have had ample time to mitigate their risk, especially after the last scare in 2012.

Even the Fed has said it will continue with its plan to raise interest rates, although they will postpone it due to Greek conditions. They want to be sure there is no impact on the US, and that fear does not spark undue volatility which would be exacerbated by interest rate hikes.

For investors, if there are effects in the market, there will be heightened volatility that reflects our concern. However, since Greece is such a small part of our economy, with exports to Greece account for 0.006% of our GDP, any shock will be recovered from quickly.

 

The Fiction:

How does a bubble form? People overvalue an asset. They invest in it, pushing its value high above what the asset’s fundamental worth is. Why do they believe the value of some asset will continue to go up? For no other reason than “irrational exuberance”. The thrill of rising prices causing a surge of optimism in investors, and they continue to pour money into an asset even though the value is above its worth, for no other reason than they believe its value will keep rising. Eventually, some psychological factor causes people to realize the asset is overvalued, they panic, and the bubble bursts.

So what do bubbles have to do with Greece?

Greece could function like a bubble in reverse.

We know a major correction is imminent in the market. Two hundred years of market history are screaming at us that the market must take a dip, and it must do so soon. We’ve never recovered from a secular bear market so quickly. No one is optimistic that the soaring levels of the stock market are a permanent beginning to a new era. They believe we will go back through the cycles history tells us we will.

Now we have a nation of investors, worried and apprehensive, waiting for the correction of the stock market. We know it has to happen. We just don’t know the trigger. Analysts are sitting around, guessing and pointing fingers–will it be China? Interest rates? Greece?

The market reflects our nerves. When Greece fell through on negotiation talks several months back, the market grew nervous, dipping for a moment before a quick recovery. Now, with talks of Greece likely exiting the Eurozone, the market took another small hit, but recovered just as quickly.

We recovered because Greece is too small to affect us. The only way Greece would cause our economy to crash is if we let their shaky economy scare ours into collapse. If irrational fear sparks a panic, and like a bubble in reverse, we let this problem become overvalued and expand into a market downturn, then it will– just because we know the market should turn soon, and we want to pull the trigger on it before it surprises us.

This is why we need to protect our assets. With a market driven by fear and greed, we need to make sure that the allocation of our own portfolio protects us from the uncertainty of the market. The reality is that even if Greece collapses, we should be fine. Our market should recover. Unless we let fear and irrationality turn Greece into a monster that it isn’t.

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