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Wishbone vs. Backbone

Greek rioters and protesters in Spain have humbled European political and economic leaders. They know both countries are sunk in a financial cesspool, but they also do not want their governments to implement far-reaching austerity measures that would require greater concessions from the citizens and result in severe cuts to social services.

Last week, Europe's leaders failed to agree on the terms of a second bailout program for Greece; they want the government to “approve stricter austerity measures before a final decision is made on a further 12 billion euros in loans,” according to a Reuters report. The government in Athens agrees it must bow to lenders' wishes, but ordinary Greeks are piling pressures on their parliamentarians because they know some painful medicines are on the way.

Economic problems are cropping up elsewhere in the world, and the high-tech industry won't be immune from the aftershocks. Corporate stock valuation will certainly take a hit. Already, fears are growing that the global economy may experience a double-dip recession this year.

In the United States, the economy is beginning to soften again, although the government and the Federal Reserve have indicated they would not be injecting another round of fiscal stimulus into the system. The effects of these concerns are evident on the equity markets, foreign exchange rates (dollar is rising against the euro, for instance), and in the price of crude oil, which after pushing past the $100 per barrel range has since decreased to just slightly above $90 per barrel.

It's not clear yet how deeply these events will hurt demand for high-tech equipment at the corporate and consumer levels, but it would be naïve to think the sector will continue to rack up sales and profit growth, despite problems in other manufacturing segments. Consumers initially held up tech equipment purchases for years, but the latest problems have cropped up just as corporate IT folks were expected to start buying new equipment again. The housing market is obviously a constant source of concern in the United States, but so is financing for businesses (fortunately, high-tech is flush with cash), consumer lending, and manufacturing.

I haven't yet seen anything that tells me high-tech sales will drop precipitously in the third quarter; forecasts call for single-digit growth across most industry segments. However, many expect the full impact of the March Japan earthquake will hit the industry in the third quarter. But with sales moderating, we may not even notice the negative impacts of any supply chain disruptions. I am looking forward to second quarter results and forecasts for the third quarter. By now, companies have somewhat good ideas what their shipments would be for part of the second half.

What should the industry do if demand sinks? They could spend some of the cash sloshing around in their short- and long-term investment portfolios on R&D, on marketing programs, and on further separating themselves from the competition. The US Federal Reserve estimates non-farm, non-financial corporate businesses have more than $2 trillion dollars in deposits, money market funds, etc., as at the end of the first quarter. (A complete breakdown of financial holdings is available here.) Businesses, obviously, can afford to invest in new markets, if they find this justifiable and if they could gin up the conviction. History shows that not many CEOs and CFOs possess such vision and the audacity to steer down opposing analysts and shareholders.

This brings me to the headline of this blog. It seems there is a major disconnect between what many wish for and the sacrifices they are prepared to make for longer-term gains. The Greeks and the Spaniards want to continue living in a past where the government coddles them and where minimal tax is collected, even as demands for social services keep skyrocketing. Meanwhile, corporations would rather sit on the sideline and wait for governments to jumpstart global economic growth than use internal resources to hire in key areas and champion the innovation required for increased sales and consumption.

We seem to have replaced our backbones with a wishbone. It doesn't quite do the same work.

10 comments on “Wishbone vs. Backbone

  1. Ms. Daisy
    June 20, 2011

    Interesting post!

    The common denominator in the two words in the tittle is the bone and that is where the similarity ends. Your statement  about the US, “the Federal Reserve have indicated they would not be injecting another round of fiscal stimulus into the system” helps to define the need for Americans to have the backbone to face whatever the second recession brings without whining. Just like the Greeks and Spaniards, we in the US depend on the wishbone to continue life as it was forgetting that the scenario has changed and the tensile strength of the wishbone cannot carry us through the painful austere measures that is needed to jump start the economy and move the country back to production of most of what we need (food, clothing, oil, housing materials etc) thereby reducing heavy dependency on foreign supplies while we live lavishly on borrowed money and time.

    Its great that the high tech industries are cash rich and can dictate the tune. I hope all the law makers can take a peek at what the industry is doing differently to get the current result in a bad economy. Greek and Spanish paliamentarians as well as American legislators and the US President need to stand firm with strong backbones to let the populace really see the countries financies for what they are and stop borrowing.

    When you are down in a hole you stop digging or you might be making your own grave.

  2. AnalyzeThis
    June 20, 2011

    @Ms.Daisy, good post, I was going to say something similar about how the US isn't all that different than the Greeks and Spaniards: we all want our debt and economy problems fixed without making any sacrifices. Raising taxes has been deemed simply “unacceptable” to Republicans, even if you're just talking about repealing the Bush tax cuts for the wealthy or the reduction of subsidiaries to oil companies.

    Anyhow, Bolaji, I saw an article today which said that Greece is prepared to sell billions of dollars worth of state assets: real estate, airports, etc. Do you think this is a viable solution? I personally think that such moves won't hurt, but this problem is far too big to be solved by selling off some facilities. And I wonder if the US will ever get to this point?

     

  3. Nemos
    June 20, 2011

    The situation in Greece is very complicated, and it is not just an economic crisis as it is in U.S.A or   in Spain. The protest in Greece is not only for the new hardest measures that are coming. We have a total failure in our political system. Lot of people from citizens to our politicians has broken the law but even today NOBODY is in jail. Corruption is here and I don't see taking action against it.

  4. DataCrunch
    June 20, 2011

    The problem is not only about Greece, but also how viable of an entity is the EU.  It is difficult to unify all of these European countries into one currency while letting them govern independently.  Does the EU lend Greece additional mega-billions knowing full well that it may never (or a very, very long time) recoup the monies or does it let Greece default?   I have heard many commentators state that the EU is a failed experiment and that it should be disbanded, although event that is extremely difficult to do as well.  Not an easy time in our world, as well as domestically in the US.

  5. eemom
    June 20, 2011

    I had heard the same thing.  The problem in Greece is not just about taxes but about ending corruption and useless spending by the government.  I loved your analogy of backbone vs. wishbone.  I would hope that US companies rise up and try to use the cash they continue to horde to stimulate the economy when/if a second recession hits.  The government cannot continue to spend dollars they don't have to bail out the country while individual companies sit on a trillion dollars in cash and equity.  We need to hold all governments accountable for their spending and their policies, but we also need to hold ourselves accountable for what we do with our own budgets and resources. 

  6. Parser
    June 21, 2011

    “The Greeks and the Spaniards want to continue living in a past where the government coddles them and where minimal tax is collected … “

    I think this would be true in any country. Don't pay taxes and get benefits. 

    I think that it was our (US) financial crisis which triggered the European. America stopped being a place where anything got sold. European revenues plummeted so the tax base. Domino effect pushed everything down. The states, which were already over their budget got quickly into real trouble. 


  7. jbond
    June 21, 2011

    This is an excellent article that points out many hidden flaws that are now coming to light. The U.S. recession helped start the domino effect throughout the world, but wasn't the cause of it. Too many countries and businesses relied on the U.S. too much. When the U.S. had a reality check and needed correction, the world felt it also. The EU has many internal issues that are now coming into the open. When you take a conglomerate of different cultures and corruption, and expect them to work together as a well oiled machine, there are going to be failures, sometimes catastrophic.

  8. Ms. Daisy
    June 21, 2011

    I guess the Brits were right to stay out of the “Euro” issue. Too many complex cultural, moral, and geographical issues to sort through which makes the money mix a bad recipe .

  9. Himanshugupta
    June 21, 2011

    What happened in US was unprecedented and unstopable but i believe that such thing is not going to happen due to crisis in Europe or due to default in Greece. Actually, i read an article in theEconomist that support the idea for Greece's default. The article argue (or show in histogram plot) that those countries that have defaulted have improved their growth after the default. Anyway, Europe is conservative and they will not let one or two nations destablize the whole zone.

  10. Hardcore
    June 22, 2011

    Unfortunately, Britain staying out of the Euro is not going to save it.

    The issue is not about donations to the EU/ Euro or even  a backhander to the IMF, the reality is that british banks are once again up to the hilt with potentially bad debts, whilst they may not have directly taken the Greek debts, they have underwritten them to a staggering level.

    Greece should never have been allowed into the EU, but being the massive ponzi scheme it is, they were allowed to enter the Union even though the EU members knew the financial records were highly suspect, but it was a massive ego boost to those people over in the continent, for they were on a mission to consolidate the whole continent.

    Personally I for see big mess on the horizon, because this bailout will in no way satisfy Greece, they do not have the infrastructure in place to pay off the debts or even the interest and all it will take is a future government that decides it is NOT going to pay off the debts.

    But until that time, the EU is going to keep loading money onto a horse that did not even run, if Greece had not joined the EU, then the problem would have been self limiting years ago, since if they had to get money from the international market, they would have been clamped down upon, a long time ago.

    With friends like the EU , a country really does not need enemies.

     

    HC

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