A Greek Tragedy
A Greek Tragedy
Greece is the cradle of modern thought. The concepts of architecture, democracy, philosophy, art, drama all can be traced back to early Greece. The Socratic method of inquiry, and debate is a standard tool of higher education in all of the world’s universities.
Now Greece is teaching the world a new lesson. Greece is teaching us about one of democracy’s shortcomings. Democracies are poor credits. Do not lend to Democracies.
Elected officials’ incentives are dramatically skewed towards taking on debt. Typically the debt is to pay for a large highly visible project, which will get a lot of press. The benefits will be obvious for everyone to see. But the costs are easily dismissed, because they will be spread out over the entire tax base, far out into the future. Only the most fiscally responsible politician would turn down the opportunity to spend some money on behalf of his constituency.
Greece spent money on the Olympics, and never recovered. Government officials made bad decisions. They made assumptions about the future, and were wrong. Yet, as individuals they were not responsible for their poor decisions. They got to throw the party, but didn’t have to clean up the next morning. It happens over and over again in democratic regimes. Obviously there is going to be a lot of parties being thrown.
The allure of debt is too powerful. Like the siren’s song that lured the sailors to crash on the rocks, borrowing money always sounds beautiful. Decision makers, who will be praised for their progressive thinking, will naturally tend to favor spending projects. Effective government in action, spending our money.
And that is the whole problem. They are rioting in Athens. The citizens want control of their own finances. They want to keep their wages unchanged, and their taxes unchanged. However that is impossible, the government spent money they did not have, and now it must be repaid. The citizens are on the hook for the debts of the officials.
We need to learn, from the Greeks who are rioting in the streets of Athens. We need to understand that their elected officials screwed up, but the citizens pay. We need to comprehend that our Congress, and our President are on a spending spree of epic proportion. They think they are heroes. They are governing us. Just remember, they might be wrong, and we are going to have to clean up the mess.
j.o.y. to the world
peter
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May 5th, 2010 at 11:45 pm
This is a very interesting perspective on the Greece debt crisis. With respect to our current government’s “spending spree of epic proportion”, do we the people want to resolve this economic crisis ourselves? If we were to allow “free markets” to continue without government aid, what would be the status quo for most of the population? I agree that our Congress and President are spending an enormous amount of money, but as I ponder other solutions, I find myself stuck on ideas.
My concern is the future cost of our debt, in the form of higher interest rates. The Fed maintains the commitment to keep rates extremely low for an “extended period”, but do they have the means to make this commitment? What is the potential consequence of low demand in future U.S. Treasury auctions? Will China continue to accumulate massive levels of U.S. debt? Is the Fed capable of maintaining large additions to its already enormous balance sheet?
You (obviously) have much more economic knowledge than I do, and I value your opinions. Any light you can shed on the issues I have brought up would be great. Thanks!
-Yoav
May 8th, 2010 at 10:27 am
Thank you for your questions and insight.
While I agree with your concern that the future is far from bright, I am not sure we agree on where the pain will come from.
As a country, we have already accumulated too much debt, and created millions of homes that are the equivalent of white elephants. This all was a result of Government AId as you put it, in the form of low mortgages. The low mortgages distorted the marketplace, and created a bubble.
The debt auctions and the amazingly low levels of interest rates that we are seeing now, clearly seems at odds with the spending spree of our politicians, and the future concerns that you so adroitly point out. There is only one possible explanation. I fear that we are seeing massive global deflation as more and more production capability is unleashed throughout the world.
As more is produced, we will see upward pressure on input prices, but we will also see massive downward pressure on finished goods.
The whole game is in dollars. This will only become more obvious in the months ahead as the euro-zone implodes, and the middle east erupts.
When you consider the alternative to dollars, the only thing close is gold. Holding massive amounts of gold is costly, because it pays no dividend, and ties up cash.
So they will buy our debt.
It is unfortunate that Obama spent all of the stimulus money so poorly. The debt we racked up, will not be paid off because of the projects he financed, but in spite of them.
peter
May 12th, 2010 at 2:08 am
Thank you for the quick reply. I understand your economic reasoning behind upward pressure on input prices, and the massive downward pressure on the price of finished goods.(On a side note, new growth in technological innovation could potentially raise output prices, which may occur simply due to increasing global competition.) However, I am having a hard time grasping how this plays out in the currency market. As we potentially see global deflation, are investors forced to chase any risk-adjusted yield they can find? Hence, money continues to flow into the dollar, and support for U.S. debt is maintained?
A lot has changed since my last post, most notably the massive EU bailout announced over the weekend. The Euro has (expectedly) declined, and the dollar has strengthened. Gold is now at an all time high, and is being talked about as the new second reserve currency by well respected finance gurus such as Dennis Gartman. “Central banks have no other choice now than to own gold.” Is it possible that U.S. debt accumulates to a point where central bankers would rather forfeit yield in return for preservation of capital? If we do see massive global deflation, what is the proper response out of Washington? Can we continue to print more money, accumulate more debt, and not face an imminent sell-off of U.S Treasuries? I find it hard to imagine that the rest of the world will remain “stuck” in U.S. treasuries, although I see no other options except gold (which is not most efficient, as you pointed out).
Clearly, there is no one specific answer. I am merely trying to figure out what the future potentially holds. We are going through an economic time where strong/passionate opinions of the future differ substantially among the most respected in the financial world. Thanks again for the insight, and let’s hope for the best!
May 25th, 2010 at 10:40 am
Very appropriate title. There can be no happy ending. We either keep printing money/issuing debt or we let markets do what they do best. Specifically, impose pain on those who are involved(directly and indirectly) in the malinvestment that always occurs in free markets. American’s have been content to enjoy the fruits of free markets when things aare going well only to demand the government take care of them when markets correct(moral hazard). Democracies fail becuase the voters demand there be no suffering. Politicians are only too happy to oblige. We will all have a lower standard of living whether through inflation or deflation. My money is on deflation first.