What Greece can teach us
Greece’s problems concern us more than you think.
Germany is expected tomorrow to endorse a bailout of sorts for a Greek government whose recklessness has endangered the euro, the only currency besides the dollar that can be credibly called a global reserve currency. As the largest country that uses the euro, Germany has both the motivation and the wherewithal to keep Greece’s exploding debt from bringing down the Old World’s still-new currency.
I won’t try here to explain or predict all of the knock-on effects this could have for the dollar or our economy, although there are many. For instance, questions about the euro have sent investors fleeing to the dollar, perhaps keeping the dollar artificially high and masking problems that we eventually will have to confront.
I only want to make a very simple observation about what gets spendthrift governments in the end — including, potentially, the U.S.
For years, the most profligate European welfare states stayed afloat in part by manipulating their currencies, chiefly by devaluing them periodically to make their debts less burdensome. This was a vicious circle, one which finally was to end with the introduction of the euro. The new currency and its austere, mostly apolitical European Central Bank was a sort of deus ex machina for the likes of Portugal, Italy, Greece and Spain (now lumped together as the PIGS, with Ireland sometimes making it PIIGS).
At least, it was for a while. But they did not couple the monetary discipline imposed by the ECB with new budget austerity. Their debt-funded welfare states remained largely unreformed, despite near-unanimous opinion that reining in social spending was necessary. Loose monetary policy gradually exacerbated the problem, but a tighter policy alone wasn’t enough to solve it.
Now Washington, having counted on the Federal Reserve to fuel the party and then give us a hair of the dog when the hangover hit, wants to increase entitlement spending in the same direction as the PIGS and other European welfare states. And even if the Fed somehow manages to bring some sobriety to bear, we will still be spinning out of control if the budget keeps growing. Just like the PIGS.
Blame Bush, blame Obama, blame whomever you want. What matters at this point is which direction we take. Athens is the wrong destination.
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13 comments Add your comment
Davo
February 10th, 2010
11:30 am
2/9/10 Ron Paul with Brian Sullivan on Cavuto: Fed Involved with Greece Bailout?
http://www.youtube.com/watch?v=qUTuCRN0isw&feature=player_embedded
At least the Europeans have the luxury of dismantling their ‘union’ and still maintain their individual cultures and economies. Secession is still a dirty word here in states, at least for now.
Ragnar Danneskjöld
February 10th, 2010
11:38 am
Well argued – cannot add a word.
Churchill's MOM
February 10th, 2010
12:45 pm
My earlier post fits better here. I agree that we are in a REALLY big mess but who is going to save us. Our 2 major parties differ only in which lobbyist are paying them better. Check out this link if you think the RINO party is interested in cutting spending.
Rag Man.. has your son left yet? Are you set up with SKYPE yet?
http://www.washingtontimes.com/news/2010/feb/09/stimulus-foes-see-value-in-seeking-cash/
Paul
February 10th, 2010
1:04 pm
Greece, which is making most of the headlines, is a tiny economy. So are Portugal and Ireland. The only sizable player among the countries in the news right now is Spain. (If Italy really gets caught up in the crisis, that will change).
Spain’s story, for example does not at all fit Kyle’s storyline about debt-funded welfare states leading to inevitable crisis. Until the crisis hit, Spain was highly responsible on the fiscal front — more so than Germany (45% debt-to-GDP vs. Germany’s 60% debt-to-GDP). Their recent surge in deficits reflects the bursting real estate bubble and the lack, under the euro, of any way short of prolonged, grinding deflation for Spain to get its costs in line.
Ireland, also going through this crisis, also maintained a relatively low debt ratio relative to Germany and the US. (Until a few months ago, Ireland was the conservative model for low corporate tax rates.) In short, Kyle’s broad generalizations about welfare states do not apply.
dewstarpath
February 10th, 2010
1:10 pm
I agree with Kyle about the manipulation of currency by European
states to improve their economies. It happened in SE Asia too, in
Thailand – trying to adjust the value of the baht so that
their textile economy could compete on a more global basis.
Paul
February 10th, 2010
1:22 pm
On the issue of debt-funded welfare states, here’s the history of debt-to-GDP in the U.S.
Reagan/Bush 41 grew debt from about 35% of GDP to about 65% of GDP.
Clinton reduced debt from about 65% of GDP to about 55% of GDP.
Bush 43 grew debt from about 55% percent of GDP to about 75% of GDP.
Applying Kyle’s logic, the evidence seems to be that Republicans are socialists.
CJ
February 10th, 2010
1:29 pm
One of the highest sustainable growth periods for our country was during WWII and the following decade when debt-to-GDP ranged from 75% to 120%. In the long-run, we have to worry about debt, but not now when we should be stimulating the economy to deal with unemployment. When we’re back to full employment, then we should address the deficits.
Davo
February 10th, 2010
1:32 pm
PIGS Go Bankrupt
Posted on February 9th, 2010 by Patrick J. Buchanan
http://www.amconmag.com/blog/2010/02/09/pigs-go-bankrupt/
“Why should America bail out Greece, when the EU is larger and richer and did not help bail out California in 2009? The stimulus bill did that in 2009, to which Europe contributed nothing.
Where Greece is at today, however, we shall all arrive tomorrow”
Southern Europe’s Fiscal Crisis
by Gary North
http://www.lewrockwell.com/north/north810.html
“The Greek government is trapped. It cannot secede. It cannot inflate. So, it has to decide: default, higher interest rates, or run a budget surplus. The latter is out of the question in any European nation. So, it is down to default or raise interest rates. I think the latter is most likely.”
CJ
February 10th, 2010
1:42 pm
Here’s an article from the Washington Monthly that takes a closer look at Greece’s problems…
“Corruption and high state spending don’t invariably go hand in hand. Some extravagant states, like Sweden, are clean—and there are some corrupt places with manageable budgets.“
Churchill's MOM
February 10th, 2010
1:44 pm
CJ
February 10th, 2010
1:29 pm
Just when are we going to be at full employment?? The jobs that the working class had are in China now.
Your post WWII example is not valid, our WWII spending was on the war so there was a great deal of pentup demand.. Our current mess was caused by free spending of both the consumer and government during the Bush years.
Churchill's MOM
February 10th, 2010
1:46 pm
left out…. there is no pent up consumer demain after this depression.
Peter
February 10th, 2010
2:00 pm
Hey Kyle …..Who is going to bail us Out from Sonny Perdue, and his total lack of leadership ?
@@
February 10th, 2010
2:23 pm
Kyle, this is something I’ve been watching, but admittedly, my grasp of global economics is severely limited.
Their debt-funded welfare states remained largely unreformed, despite near-unanimous opinion that reining in social spending was necessary.
My greatest fear is that we, as a culture, may one day find ourselves TOTALLY beholding to our government overlords for a MERE existence. How can this happen?
Socialists won’t wean their babies…that sucking is good for the boobs in control. When the babies grow teeth, the revolution begins. We’ve got one brewing right here in the good ol’ U.S.A., and I couldn’t be happier.