Crisis Is Contagious and Is Based on a Domino Theory

“The world is in a debt crisis.” That’s how experts describe the current situation. The United States has huge problems, and Europe is on the verge of following in Greece’s footsteps. Governments are trying to cut back expenditures while citizens are feeling pressured to save. People are losing their trust in both the dollar and the euro, which only increases the possibility of a currency crisis.

A large part of the Georgian population is made up of migrant workers, for whom the main source of income is from the United States and European countries. The other part of the Georgian population, who still lives in the country, is supported by those immigrants. In the country, dollarization is on the rise and imported goods make up the majority of the internal market. So if the world’s leading countries find themselves covered in debt, our country will not be left out from the crowd.

Nodar Khaduri, an expert in microeconomics, said, “Today, the prestige of the most powerful and trustworthy economies is shattered into pieces. In general, individuals should support themselves with the income they produce, but often this rule is ignored and they support themselves with future expenses. They take out loans. If the loan is much higher than their income, it’s not a problem. But if the monthly interest rate on the loan is greater than the monthly income then individuals will be unable to pay off those interest rates. The same can be applied to companies and countries.

A national economy will not be affected if individuals cannot afford to pay off their debts; collection agencies will take care of them. But in this case, the United States, the finance giant, is the one involved in an uncertain situation. Every month the United States’ capital expenditure exceeds her income by $125 billion.

At the same time, governments are taking on new debts, returning the old debts, etc. But unlike individual debts, government debts have limits. In accordance with the Economic Freedom Act, Georgia’s debt cannot be more than 60 percent of its GDP. On the other hand, the U.S. has taken on debts for more than 200 years now and its debt exceeds its GDP. If these debts are not paid off in the near future, the U.S. will lose its high economic profile. Globally, the trustworthiness of all securities is measured against U.S. securities. The U.S. does not go around borrowing money; she issues treasury securities. So far there has been no instance in which the U.S. was unable to manage her securities, but without the recent debt ceiling increase by Congress, the danger was nearly inevitable.

The American economy has a major affect on the world’s economy as a whole and her currency is the unofficial world currency. With few exceptions, U.S. currency is accepted in most countries. Even Venezuela, a major U.S. competitor, sells its oil in dollars. The euro’s attempt to replace the dollar failed. When a country does not pay off its debts it is called a default. Thirteen years ago, Russia defaulted on its debt. In August of 1998 Russia rejected to offer treasury securities. At that time the exchange rate in Russia radically fell, which created huge problems, not only for Russia but also for Georgia. Throughout this period the Ergneti market was established. The establishment of this market had an economic basis. The price of exports from Georgia to Russia quadrupled, which had a negative impact on exports. At the same time, the price of imports from Russia dropped significantly. For example, a sack of flour was priced at three to seven Georgian Lari, a change that created problems for Georgian production of wheat and flour.

Do you think US might default?

I can tell you with certainty that the U.S. will never default because if she does, it will cause huge problems on foreign exchange markets. But she will never be able to pay off her debts; she will pile them up. It would be impossible for the U.S. to pay off $14 trillion in debt. The United States is building a pyramid, but unlike others, she has a machine that prints dollars. The U.S. economy stands behind every country’s currency and the American dollar is the backbone of the world economy. According to Chief Economist at the International Monetary Fund, Oliver Blanchard, there are about $700 billion around the world but only $150 billion in the United States. Essentially, money that is printed in United States does not stay in the country. Rather, it is distributed around the world. In any case, the world is sitting on casks of gunpowder.

For the last 20 years Europe has lived with a united currency system. Europe tried to make the euro an economic counterbalance to the dollar but it failed. Today Greece, Italy, Spain, Portugal and other countries have huge debt problems.

I think that we never came out of the economic crisis of 2008. Economic growth is based on a principle that says economies rise, fall and replace each other. It is impossible for commercial banks to survive by themselves. A cash-credit policy is needed to safeguard their capital and credits. For example, in Maryland, prices for a house range from $10-$20 thousand, cheaper than buying a car, a result of these houses having been foreclosed and now being sold cheaply to cover the debts.

If the world economy stands behind the U.S. economy, wouldn’t these processes spread to other countries? Nowadays, it is impossible to find an apartment in Tbilisi with $10,000 in down payment.

There is a similar situation in Europe. In Bulgaria, you can purchase a beach villa for just $20,000. This type of process will result in capital inflow to the United States and her problems will be resolved at the expense of other countries. Something that costs $10-$20 thousand in today’s U.S. dollars will cost $200-$300 thousand tomorrow. All the investments around the world will go to U.S. economy.

Do these processes affect the Georgian economy?

The Georgian economy is a small economy, and therefore not all global process affect our system. But of course some events will have a significant impact on our economy. The crisis will definitely decrease oil prices, which will create stable oil price in Georgia. On the other hand, if world capital moves to the United States, less money will be left in both Europe and Georgia. Also, money available for investments will decrease. Sources say that the economy will grow by 6 percent this year, but at what expense, no one seems to know. The economic crisis means that the production of goods will go down and Georgia’s exports will decrease. Our major partners from the EU are Bulgaria and Germany. If they no longer demand our exports, Georgian manufacturers will suffer. This economic crisis is contagious like the domino theory.

Should we keep our savings in dollars?

What other alternatives do Georgian citizens have in regards to money?

Precious metals, real estate...

Real estate is not as stable as it was before, and the U.S. situation is a great example of that. The price of gold might decrease but it will not be a drastic decrease. The best way to save is to diversify. That is, have dollars, euro, gold, real estate and others forms of capital. Aside from gold, the dollar at this point has no alternative.

Should imported products be cheaper in domestic markets?

For many of us, price dynamics in Georgia for certain products have no logic. Take for example, the price dynamics of oil. Perfect competition in this market does not exist. Certain oil companies can determine the price of the product, which is why current events in the world market reflect Georgian markets in the opposite way.

By the numbers:

-The international credit rating company, Standard &Poor’s, decreased the EU’s economic growth forecast for 2011 from 1.9 percent to 1.7 percent. But the EU has no worries about a new recession.

-In 1970 the price of a gold was $35 per ounce; now it is $1,900 per ounce.