The U.S. economy is not an island

By DAVID MOON, Moon Capital Management, LLC
May 23, 2010

I recently polled 50 people about their knowledge and experience with the country of Greece. Most of these folks were adults; a handful were elementary students. Two out of the fifty had visited Greece. Only four of the people could find Greece on an unlabeled European map - and two of them were kids.

Every one of the adults, however, was aware that Greece is in the midst of some sort of financial crisis, although the level of understanding of the Greece problems varied widely in my terribly unscientific sample.

A repeated comment from among the many predictably right-leaning east Tennesseans was that the US might end up just like Greece if our government maintains its current borrowing and spending patterns.

Possibly. But there are even more instructional and immediately useful lessons.

We are not alone.

It has become fashionable to say that modern transportation and technology have made the world a smaller, more economically interdependent place.

Greece is simply a Socratic reminder that we didn't need electronic trading and Pakistani call centers to create cross-continent financial vulnerabilities. Although almost everything happens faster today, the US economy has always been deeply linked with the rest of the world.

Recessions in 1812, 1815, 1822, 1829 and 1847 were all impacted or instigated by problems somewhere else in the world.

The Panic of 1873 began a 23-year period that produced an almost constant US recession. It was more than two decades of volatile stock prices, declining real estate values and difficult employment conditions.

And it all started with a European recession which caused the failure of the largest bank in the US.

These sort of multinational impetuses and outcomes have been more the rule than the exception during our country’s history. Most of our economic problems have had a very obvious global cause or effect.

The US economic contraction of 1807 lasted almost three years and is considered by most historians to have been a depression. It was prompted by a US trade war with Great Britain and the passage of the Embargo Act of 1807.

In 1893 most European national investors withdrew from the US markets, causing a drop in our domestic stock prices. European inflation in 1918 was eventually felt in the US.

The vulnerabilities haven't only been with European countries, either. The US Panic of 1825 was precipitated by the bursting of an asset bubble in Latin America. More recently, the 1973 OPEC oil embargo, and subsequent quadrupling of oil prices, was the catalyst needed to light the fuse of an underlying economic ticking time bomb: the budgetary toll and debt associated with the Vietnam War.

There are folks who would like us to return to the good ole days when the US was more of an island unto itself. Those days never existed. The genesis of our country - and hence our economic system – is deeply rooted in global relationships.

This current economic Greek tragedy matters. This sort of thing always has.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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