Grecian obligations

Fiscal conservatism 602

I just returned from a trip to Italy, just a stone's throw from Greece, and kept up with the news on the EU-Greek bailout situation. Like our nuclear non-proliferation talks with the Iranians, the potential EU-Greek deal goal-line keeps moving as deadlines are missed, but the latest deadline appears to be this Sunday when the EU may decide to stop giving Greece more money without their (now broken-) promised economic reforms.

When you get a loan, you incur an obligation to pay it back. It is too bad that politicians can create obligations that their country must adhere to, but that's democracy. Changing politicians does not (nor should it) release a country from past promises.

It is laughable that Alex Tsipras, the Greek Prime Minister, thought that having a vote against austerity would carry any weight with other countries who loaned his country money. By extension, does this mean that a majority of voters can just cancel any debt obligations previously agreed to? Wouldn't that be nice if our family could legally renounce our mortgage (and keep the house) by majority vote of our family members?

The Greeks were able to greatly increase their standard of living on German financing. They took on too much debt because they could just promise to pay it back later. When the money ran out, it was suddenly Germany's fault that they loaned money to Greece. The rhetoric coming from the "vote no" camp was hysterical. Tsipras, who was negotiating for better bailout terms while he was (incredibly) urging his countrymen to vote against austerity, used words like "terrorist" to describe his creditors. Both diplomatic and thankful, eh?

Taking someone else's money and then being a victim is ludicrous, but that is exactly the position of the U.S. government when it took the side of mortgagees who were somehow "tricked" by banks into accepting loans on their properties that they couldn't pay back. Liberals call it predatory lending, but that doesn't sound right to me. Predatory lending is when you get a "payday" loan at 2,000% annual interest. Loaning someone $100,000 to buy a house at a nominal interest rate is not predatory. The house secures the mortgage and if the value happens to go down, you can give up the asset and declare bankruptcy if you must. But nobody holds a gun to a home-buyers head to sign a mortgage and be given a small fortune. Any other analysis of such a transaction means that adults are not free to purchase property without some sort of government approval, and therefore adults are not free to make their own choices. Is that what liberals believe?

One trick that governments use to pay for their overspending is to just print more cash. This may increase inflation, thereby devaluing everyone's savings, but it does technically avoid a default because you can pay back loans with these newly created funds. If there are perhaps other factors at work to keep inflation in check, then it may seem like there really is a free lunch. That could be what is currently allowing the U.S. to keep borrowing and spending without short-term apparent harm.

But Greece is not going to be as lucky as the U.S. in this regard. One can imagine drachmas (the former currency of Greece) flooding the market and the Greek standard of living being cut in half--or worse--if they are stopped from using the euro.

If you make a product that you sell to Greece for 100 euros, how many drachmas will you accept instead? 1,000? 100,000? How much risk will you assume by trading with Greece in drachmas not knowing if you can buy things of value with the new currency? Do you want to be holding onto a lot of drachmas if the Greek socialists decide to change the currency exchange rate to suit their "social justice" purposes?

Anything that is imported into Greece is going to be costing 5x or 10x more after Greece introduces its own currency.

Over the last few weeks, the Chinese government, which controls its economic and political system in a dictatorship, has found that maybe government can't control everything perfectly. Their attempts to prop up their stock market hasn't yet worked. Our stock market is still doing fairly well because of our easy-money policy and low-interest-rate policy. But that could quickly change like it did in China.

And we may find that our overspending, over-promising, and artificially low interest rates are going to backfire for us as well in the broader U.S. economy. Maybe with our start-and-stop recovery, it already has. Or maybe the shoe has yet to really drop.

The U.S. federal debt now stands at $18.628 Trillion and rising. ( If you include state and local debt, it is over $21 Trillion.

According to the "Debt Clock," the U.S. unfunded liabilities are now almost $100 Trillion. (This is an interesting website with all sorts of real-time numbers. When you add up the debts and unfunded liabilities, we are as broke as Greece but several magnitudes larger.

What will our economy do when we have to start paying back our debts and cutting back on our promises? What will happen when we have two workers supporting one retiree instead of 10 or 20?

Will the Chinese politburo be as generous to us as the Germans have been with the Greeks?

NEXT UP: Minimum wage hikes will be counter-productive:



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