Spanish economic meltdown could lead to recession at home

CLARKONOMICS: The economic trouble that’s reverberating through Spain right now could lead us into another recession here in the United States.

There I said it, didn’t I? I used the “R” word. To a lot of Americans, it feels like we never got out of the recession. Yet, by the very definition of recession, we did get out of it. The only problem is we’ve been in what economists would call a “growth recession,” where we’re growing albeit not enough to make a lick of difference to many people.

Ay caramba, trouble in Spain!   

But back to Spain. Their situation goes to the root of what happened here in the United States. They had massive real estate speculation in the hopes of appealing to Northern Europeans looking for vacation getaways in a warmer Southern European climate.

After they built up the coast, they went to the interior building facilities with fancy golf courses and all the rest. The lending was done by overleveraged banks that all went insolvent. (Hmmm. Where have I heard that before?!) The real estate developments failed, and now general unemployment is likely about 20% in Spain, if you believe what private economists are saying. It’s more like 50% for youth.

The problem is Spain doesn’t have the resources to deal with failed banks. So now Spain itself is on the line and its debt is in question. This just furthers the unfolding meltdown of the European Union and the euro.

Economists are speculating that the euro will sink to about 90 cents to one U.S. dollar. That will make some real deals for Americans traveling in Europe, but that’s an empty victory. Because the spinoff effects of what’s going on in Portugal, Italy, Ireland, Greece, and Spain — collectively known as the “PIIGS” — leads to a strong likelihood of another recession here.

How to handle your investment money

Americans who have continued investing are favoring dividend paying stocks and bonds of all types right now. My feeling is that may have served well in the rear view mirror, but I think it’s a dangerous course for the future. Safety could backfire on you.

You need to look wider. For true safety, you’ll have to put up with puny rates on savings and CDs. bonds can be dangerous. For higher income earners, shorter term municipal bond fund would be your equivalent of CDs, and they’re acceptable. But long term bonds, tax advantaged or otherwise, when the interest rates go up, you’ll get eaten alive.

Of all things, real estate remains a great long term play in much of America for investment!

For general investing, we are back to an era where it makes sense to have widely diversified index funds. Be sure to dollar cost average by contributing equally each pay period to your retirement account.

In a time of great uncertainty, it’s a great time to invest for the long term and not try to time the market. Be smart, have a plan, know your goal and know your time horizon. Things won’t be this bad forever.