What exactly is the problem with the European debt crisis and how does it affect you here in the good, old United States of America? Isn’t that just some sort of boring, Old World problem that doesn’t have anything to do with the rest of us? Not exactly. Today’s world is much too interconnected for one financial system to crash without everyone else feeling it like a punch in the solar plexus. So we have Federal Reserve chairman Bernanke joining with European Central Banks to “infuse liquidity” into the volatile situation. Big mistake.

This means the rest of the world is trying to to prop up sputtering countries like Italy, Greece, and Portugal by pumping much-needed dollars into their economies. You’ll remember that, despite many tales of its imminent demise, the American dollar is still the world’s currency, especially now that the euro is looking positively anemic.

Here’s where it gets interesting.

Think back over the past few years. Does it seem that our own economy has been a model of robust virility? Umm, not exactly. We’ve been mired in the midst of something of a Great Recession in recent years, since about 2007, and any money tossed towards Europe contributes directly to our own massive indebtedness. Here at AIPIS, this seems akin to jumping into a leaky lifeboat clutching an anvil.

As a real estate or mortgage professional, it makes sense to be aware of what is happening in the rest of the world so it doesn’t catch you completely off guard if (when) the whole thing blows up. For a quick recap of the unfolding of the European debt crisis, here is a time line of major events over the past few years.

Feb. 2, 2010 – The Greek government acknowledges it has a serious problem and outlines a plan to reduce budget deficit from 13% of GDP in 2009 to 3% of GDP in 2012. Houston, we have a spending problem. Sound familiar?

Feb. 3, 2010 – Spain formally announces they have a spending problem also. Their deficit numbers look almost as bad as Greece’s.

Feb. 11, 2010 – With Greece’s fiscal nightmare threatening to spread to other European nations, EU leaders say there’s nothing to worry about. Help is on the way. Problem solved.

March 2010 – The new austerity measures implemented by Greece outrage a populace grown used to living on the largesse of government programs. Typical result – rioting in the streets.

May 2010 – The battered euro continues to tumble in value as Portugal joins the financial-disaster-waiting-to-happen line.

Over the next few months, Spain sees its triple-A credit rating downgraded to double-A-plus, while Moody’s Investors Service cuts the entire nation of Greece to “junk” status, citing “considerable uncertainty” surrounding the measures underway to strengthen the economy. Portugal soon joins the downgraded party and, in August, Ireland is hit with a downgrade. More follow for the countries involved over the next year. We could provide the gruesome details, but what’s the point? It’s simply more of the same.

What is important is to look more closely at why this house of cards came tumbling down at this precise moment in history. In a nutshell, it goes like this. These European countries got themselves into trouble by selling bonds to raise money to finance their free spending ways. Unfortunately, when banks consider you to be more of a credit risk (as a result of downgrading) you pay the financial price with a higher interest attached to money that is loaned. Countries like Greece, Spain, Portugal, and Ireland were already in serious debt but decided to borrow more to try and fix the problem.

If this isn’t a disaster waiting to happen, we don’t know what is. The European debt crisis is a direct result of the same economically brain dead policies that we have been following in the United States as well. Remember that the previously unassailable American credit rating was itself downgraded several months back? Our economic house of cards has some uncanny resemblance to these blowouts in Europe. So far, we’ve been kept from implosion only by the sheer grace that our currency is still the world’s reserve but if you don’t think China isn’t hellbent on changing that, you’ve got another think coming.

As a superpower in swift decline, how long will it be before we come to the stark realization that Europe’s crumbling economic picture could be a snapshot of our own future. Meanwhile, Mr. Bernanke and Obama continue to switch on the printing press in order to send funds to struggling EU members. Money that is financed by the selling of – high interest debt.

Now that REALLY sounds familiar.

The AIPIS Team

Flickr / endiaferon