The events of the past several days, as we have covered recently on this blog, have had a dramatic impact on investor perception of sovereign debt risk. This issue has led to a gradual decline in stock markets worldwide, including the Dow Jones Industrial Average in the United States, which had recently hit all-time record highs.
Yet economists are scratching their heads as to why markets react so strongly to certain events, despite assurances from central bank officials that liquidity in global debt markets will never dry up.
One prevailing theory is that the global economy is suffering from a systemic loss in confidence. This problem is manifesting itself through higher interest rates on certain assets, including the debt instruments of troubled European states. The Wall Street Journal's Michael Casey argued in a recent article that the Cyprus bank rescue blunder exposed a lack of fresh ideas needed to tackle the ongoing sovereign-debt issue. Because of this, investors are beginning to demand more and more of a return if they decide to put their money into risky markets.
"It's this underlying breakdown of trust that authorities should most fear. It will play out in a proclivity to trust conservative investments such as gold instead of funneling capital to more productive ends, in sluggish growth, and in a gradual loss of faith in fiat currencies," Casey wrote.
How can the average investor do well in this environment? During times of economic stress, relying on hard assets and natural resources have historically proven effective. Additionally, measures such as purchasing cash flow real estate to provide a steadier source of income may also be helpful. To learn more, visit GreatWealthStrategies.com today and download a "Free Game Plan Report."