The alternative to spending and borrowing of course is to cut the spending and therefore the need to borrow,....still leaves us with a bunch of debt to pay off,...but the austerity measures necessary to get a rein over the spiraling debt would cause the economy to contract; less money for investments and a decrease in products being manufactured - a general lowering of the GDP and again, economic chaos. This time inflation will be where the goods and commodities are priced too high due to unavailability, or simply because they can go to the highest bidder.
We are seeing in Greece much of what is predicted to occur here in the United States. Greek workers going on strike against austerity measures. Ships sitting at docks not being unloaded; public transport sitting idle. Greece is fairly close to anarchy and the Greece government still needs to bring about additional austerity programs, including cutting outrageous retirement plans, benefits and entitlements programs to even begin convincing the rest of Europe to help with a type of a financial bailout of that country.
The European Union (EU) and International Monetary Fund (IMF) indicated that the Greek deal, which barely had enough support to pass, did not go far enough and time is running out to avoid a Greek default.
The EU and IMF are exasperated by a series of broken promises by Athens and weeks of disagreement over the terms of a 130 billion euro ($172 billion) bailout, with time running out to avoid a default.
Greeks, who have been suffering from years of recession, are very angry about the measures. Protestors routinely congregate and shout,...."No to layoffs! No to salary cuts! No to pension cuts! Do not bow your heads! Resist!"
In addition to the striking dock workers and transportation workers, Hospital doctors, Bank employees and Teachers are all reportedly soon to join the anti-austerity measure protests.
Officials hammered home the message that Greece's future in the euro was at stake.
"The consequences of disorderly default would be incalculable for the country - not just for the economy ... it will lead us onto an unknown, dangerous path," Deputy Finance Minister Filippos Sachinidis said. In an interview with the newspaper Imerisia, he described the catastrophe he believes Greece would suffer if it failed to meet debt repayments of 14.5 billion euros due on March 20. "Let's just ask ourselves what it would mean for the country to lose its banking system, to be cut off from imports of raw materials, pharmaceuticals, fuel, basic foodstuffs and technology," he said.
I am probably way too dumb to figure out all the nuances with the coming economic collapse in Greece and subsequent threats to other EU nations like Italy, Spain and Portugal but whatever happens there would serve as a baseline model for what could transpire here in the U.S.
I wrote the above several days before I posted it. What has transpired in the last few days is substantial rioting in Greece over austerity measures and inflation of the currency. Images of police in riot control gear, contact fire bombs hitting the streets and violence targeted against the police and the government are all over the television and internet. There are reports of people selling their gold jewelry in order to buy food.... .....however food is getting harder to find. Soup kitchens are springing up in the more populated areas.
Stay tuned for a worsening situation. If you think this cannot happen here in the U.S. then you are sadly mistaken. Last night on television and yesterday on the radio, Glenn Beck was predicting the same situation in the U.S. by the end of Summer. Get prepared, Stay Prepared.
The nuances are significant. A hard Greek default would expose and worsen the insolvency of many US and European banks who bought Greek debt in the form of bailouts and Greek bonds.
ReplyDeleteIf Greece defaults, that debt (which is written as a positive balance on bank books) suddenly becomes a liability because the banks will never see all of that money back, with the interest they were promised (137% interest in some cases). Even cutting the money owed by Greece by 50% or 70% means that the banks involved *lose* 50-70% of their investment outright. Meaning they have that much less to borrow against or even loan against, again exposing their insolvency. The world credit market will seize. We are talking about Trillions of US dollars worth of credit floating around, secured by the money given to Greece. Look at it like a bankruptcy. Greek defaults (becomes bankrupt), and her creditors (US and European banks) lose their investments totally or a major portion of them. Then you have the fact that the derivatives sold on that debt are "insured". In the case of a haircut (a partial or significant reduction in Greek debt) the banks cannot collect from their "insurance", because a "haircut" is not strictly a default. That affects the world credit and banking markets. The Greek default/haircut will slit the world's economic throat.
Two points worth noting on this issue: 1)Most/many of the Greek rioters aren't just common people sufferring they are the very people who through their unions got pay and benefits that caused the Greek collapse. They are not innocent victims they are the problem. 2)Iceland chose to bite the bullet, declare bankruptcy and then begin digging their way out of the economic mess. The investors and the IMF weren't happy with them but they are now on the way out of the problem. No riots, no serious economic problems.
ReplyDeleteWhat was the difference? Iceland didn't have a large constituency of overpaid civil service workers who would hold the country hostage to bleed the last penny from it.