Raw Finance

While in the short-term, equity markets are concerned about potential sovereign debt defaults in Europe and unemployment in the U.S., investors with a more long-term strategy should pay attention to this weekend’s G-7 meeting of central bankers and finance ministers.  There are two things to look for: 1) at some point central banks are going to put out the fire that is raging in Greece and spreading to Spain, Italy and Portugal, and the G-7 meeting will be the appropriate forum to draw up a plan; and 2) Treasury Secretary Tim Geithner is expected to urge other G-7 nations to keep providing stimulus through the rest of this year, arguing that without continued government support the fledgling recoveries could falter, plunging the world back into recession.

The talks, which will begin with a dinner Friday night, are scheduled to wrap up with a closing joint news conference on Saturday afternoon.

Recently, markets have been betting on the duration of stimulus aid.  As signs of economic recovery continue to improve and concerns over budget deficits and inflation gather, a question of when stimulus efforts should be ended and monetary policy tightened has emerged.  However, Geithner is expected to argue that government programs to support jobs must be kept in place through this year to give business and consumer spending time to gather momentum.

U.S. stimulus spending has raised fears that budget deficits could trigger inflation and further drive down the dollar’s value, so if Geithner is successful, expect that to happen. A further fall in the dollar would irk nations such as France and Germany. Their manufacturers have complained that the dollar’s slide against the euro gives U.S. competitors a competitive edge. A weaker dollar makes U.S. goods cheaper in overseas markets and European goods costlier for American consumers.

Essentially, if stimulus programs remain in place and rates are held near zero, investors will be penalized for holding cash.  Thus, investors will continue to, despite the current fear, chase after risky assets for yield.