Story here.
Greece is currently in trouble as investors are pulling their money out of Greek markets, and European Union officials are talking desperately to investors “in the hopes that investors will give the country a break and stop betting on its fiscal demise. “
Now, if we just took that sentence alone, we’d isolate how I’m sure some of the beaurocrats of Greece feel about this. The investors, by pulling money away from Greece, are simultaneously betting against Greece and causing trouble for it.
But, if we look at the whole article, we can see that there’s more to the story. Although superficially, the cause of Greece’s trouble is a sudden flight of investors, the fact is that people want to yank their money out of Greece because they think Greece is broke. It’s no fault of the investors that they want to get their money out from the hands of a debt-ridden government they can’t trust financially.
In the end, it is the Greek government whose irresponsible fiscal policy has led to the current troubles. They continued to spend more than the made, until their debt reached a level of about 94% of their gross domestic product. And it’s at that point that investors started to stampede away.
Is their stampeding harmful? Yes. But the stampede was caused by irresponsible government policy.
The irresponsible behavior raised the debt to 94% of gross domestic product.
The irresponsible behavior of the U.S. has raised our debt to 87% of GDP. If current trends continue, the debt-to-gdp ratio should be about 95% of gdp at the end of this year, and 105% by the beginning of next year.
This means that, considering the sizes of our economies, our national debt is set to very soon to reach and pass the amount of debt that is on the verge of impoverishing Greece.
Spending cuts may be painful, but economic depression is worse. Think about it.
4 Comments
I hate to say this, but I think that the best thing for a country is a depression every now and then. It cuts the fat and refocuses near about everything.
In a world where people are naturally responsible about finances, we wouldn’t have depressions, but you’re right. After a ridiculous boom of overspending and malinvestments, an economic downturn is often the only way to provide a much-needed corrective. Although of course the dynamics of a downturn are complex, it’s as though in overspending the present generation is borrowing from the future, and then the fall in spending is us repaying.
It’s my opinion that artificially lowered interest rates expand credit beyond its natural boundaries, leading to a debt-filled spending binge that must, out of necessity, end in financial hang-over. Probably the most succinct summation of this issue in rap anthem form can be found here: http://www.youtube.com/watch?v=d0nERTFo-Sk&feature=player_embedded
In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy would reflect badly on the “state of the Union” as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn’t commit themseves to bonds of longer maturity and that’s the beginning of the end.
Perhaps my post title was unintentionally misleading, as this post doesn’t address what’s happening to the Euro, so thanks for weighing in, CM.
It is true that Greece does not directly have the power to bring the Euro crashing down. But, as you noted, the whole European system is overleveraged and a Greek default just might be the domino that starts the whole system deleveraging its way into a depression.
And, again, it is low interest rates which have made overleveraging so easy, and then bites everyone as interest rates go back up.