Greece Could Happen Here

May 10th, 2010 at 11:42 am | 32 Comments |

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Eli Lehrer in a recent post argued that a crisis similar to the one that Greece faces now is unlikely in America because the U.S. has strong fundamentals, look much lower debt than Greece, see Americans work hard, pharmacy the Fed can manipulate the dollar and the U.S. government has more political legitimacy.

Of all the points the only one that works in favor of Lehrer’s argument is the ability of the U.S. to manipulate its currency. Being able to devalue the dollar gives America a more politically safe way of managing a debt crisis. Nevertheless such a tool might mitigate a crisis but might not be able to halt many of the negative consequences.

At this point the Greek crisis becomes relevant to the United States. The Greek government is not any less legitimate in the eyes of its citizens than the American one. Greece has been using the parliamentary system for many decades and the public is quite used to it – so much so that the Greeks don’t like the idea of making it more representative. The government is as legitimate as the Clinton presidency was (he never got a majority of Americans voting for him) or the first Bush presidency (which came second in the vote count) or the filibustering U.S. Senate.

Greece used to be very productive as well. In the 50s it was only second to Japan in economic growth and in the 60s and 70s with a fast developing tourism industry it experienced high growth as well. Greece’s debt in 1981 was 31.2% of its GDP, a number that would be desired by even the most responsible nations today.

Greece in the 80s started to do what America commenced in the 2000s under Bush and now the Obama administration: transferring income from future generations to itself with a vengeance. The most destructive effect of debt wasn’t the magnitude of the debt per se but the socioeconomic consequences and the revolution in social norms and expectations. When I was starting primary school in the early eighties young people wanted to open their own business. When I was finishing high school near the mid-nineties young people were dreaming of a government job. It was a change so roundabout but universal that only in retrospect one may realize the rapidity of its progress.

As debt was financing the dependency habits of the general population it was also creating an infantilized political class that was unable to govern and manage any crisis effectively, be it natural, diplomatic or political. Whatever the political costs of a mismanaged crisis, the government always expected to be able to recover by throwing money in some new government handout.

Debt growth had the effect of robbing society of the ability to deal with the consequences of a debt crisis, leaving on the one hand, a society pretty sclerotic in its expectations, and on the other, a political class exceedingly incompetent when it comes to governing.

So yes, Greece is not able to manipulate its currency. This is a major disadvantage. Nevertheless, the situation could have been manageable or at least have had a reasonable hope for success if Greece had not made it so difficult for itself.

As the global sovereign debt bubble gathers more attention by the day, issues like that will become central in European politics. European political classes and societies might find themselves awfully lacking in dealing with a dramatic swift change in expectations about sovereign debt. A revolution in investors’ confidence and perception could expose the ominous contradictions and inadequacies of the European welfare model that has been decades in the making.

The American governing majorities seem very eager to follow the European path while ignoring the consequences of such a choice. Not only will they make America vulnerable to present financial crises but they will also create the conditions for almost certain mismanagement of future ones. If there is no change of the present course the future may look very Greek.

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32 Comments so far ↓

  • ottovbvs

    …….Ok Napoleon…….Americans are as feckless and incompetent as the Greeks……given your previous record in the Nostradamus department (eg. Will Greece break the Euro?)…..pardon me if I don’t treat your predictions very seriously.

  • mlindroo

    > Greece in the 80s started to do what America commenced in the 2000s under
    > Bush and now the Obama administration: transferring income from future
    > generations to itself with a vengeance.

    “In the 2000s”?? Aw, give me a f*cking break! The United States was not exactly a paragon of fiscal responsibility while Ronald Reagan was president in the 1980s.

    This particular “problem” began before GW Bush.

    MARCU$

  • CAPryde

    “The Greek government is not any less legitimate in the eyes of its citizens than the American one… The government is as legitimate as the Clinton presidency was (he never got a majority of Americans voting for him) or the first Bush presidency (which came second in the vote count) or the filibustering U.S. Senate.”

    This piece of analysis is deeply flawed, at best; I would call it hyperbolic.

    1) Nationwide protests and riots in Greece have taken place on a scale that makes the Tea Party look tame. This suggests that the Greek government is not, in fact, nearly as legitimate with its own citizens as the U.S. with its citizens.

    2) A government’s legitimacy is measured externally, not just internally. The U.S. government does some shady accounting, but Greece has been exposed actually cooking its books. Its inability to borrow is directly related to its lack of legitimacy in the larger world.

  • LFC

    Agreed, Marcu$. As Dick Cheney said, “Reagan proved deficits don’t matter.”

    The fact is that the GOP has expounded and run every election for decades on taxes and spending. They’ve cut taxes really well, but raised spending just as (or even more) efficiently. Their current rhetoric does not allow for path towards balance.

    Reagan created a big deficit to start, which isn’t unusual when dealing with a deep recession. I gave him a pass on those first few years, but was badly disillusioned when he failed to fight for something approaching balance in his second term. Obama too has a large deficit because he is dealing with an ever deeper recession, plus George W gobbled up most of the standard tools of recession fighting like reducing interest rates, cutting taxes, and increasing spending. Obama has vastly less room to maneuver than Reagan did.

    If, however, Obama does not make deficit reduction a major priority in the upcoming years, I will blame him (as well as all of the “spend more, tax less” crowd) as I did Reagan. Yes, he was dealt a far crappier hand by George W, but he took the job. He may fail with the politics of the day, but he must try.

  • WillyP

    Correction: Greece WILL happen here if we do not drastically cut government spending and send the money/resources back to the private, i.e. productive, sector. It doesn’t take a genius to figure this out, and the not so clueless have been pointing it out for a long time.

    I’m glad someone at FF finally got on board the bandwagon of restoring fiscal sanity to our government. Aside from the fact that Mr. Linardatos doesn’t have a very good understanding of the concept of money (cf., “Of all the points the only one that works in favor of Lehrer’s argument is the ability of the U.S. to manipulate its currency. Being able to devalue the dollar gives America a more politically safe way of managing a debt crisis.” & “So yes, Greece is not able to manipulate its currency. This is a major disadvantage.”), he does seem to understand the ultimate outcome of paper over debt.

    It’s rather simple – the political class continues expand their control, and having no objective basis of economic calculation (as provided by accounting’s profit/loss mechanism), with each new intervention destroys a little more productivity. Eventually you can’t continue to borrow, and must declare bankruptcy or hyperinflate. No other way about it.

    Of course, Greece being part of the Eurozone, the bureaucrats will shuffle some euros away from Germany and France (relatively better off), to delay what will surely by the complete breakdown of the European Monetary Union (a la moral hazard). Europeans long ago gave up the concept of self-rule, and today are more like managed livestock at the mercy of the Eurozone elites.

    Question for those who are bound to attack me: Greece is a small economy in Europe; the bailout cost nearly $1 trillion. What happens when Portugal goes belly up? What happens with a relatively robust economy in crisis – Italy? The Euro should be on the endangered currency list.

  • ottovbvs

    WillyP // May 10, 2010 at 2:29 pm

    “Question for those who are bound to attack me: Greece is a small economy in Europe; the bailout cost nearly $1 trillion. ………The Euro should be on the endangered currency list.”

    …….It didn’t cost a trillion, it cost 140 billion credit support, the trillion is serving an entirely different purpose…..but go ahead speculate your life savings against the Euro which was at 0.80 about 8 years ago and it’s still with us(not that you’d have the balls)……but say aren’t you that guy who doesn’t know the difference betwen the US economy and the stockmarket…….who felt “vindicated” because we were going into a double dip recession right before they announced the economy put on 530,000 new jobs in March/April ……most amusing

  • WillyP

    otto,
    This is coming from a guy who claims to understand classical economics, and yet cheerleads for every single interventionist method ever devised. Obama & Co. have tethered the financial sector, the healthcare sector, the insurance sector, the credit markets, the debt markets, and are acting to tax carbon through the EPA (in other words, through the bureaucracy, because it still can’t pass Congress – yes – despite the historically unprecedented attempt to convince everybody on the globe of anthropogenic global warming, people still aren’t buying it).

    You are, I hate to say, a spectacle. The pace and scope of interventionism is widening exponentially, just as was explained by Hayek and Mises. We have the world more or less repeating what occurred during the Great Depression, and Otto, the pollyanna, sees/speaks/hears no evil.

    If you think all is well and good, why is gold at $1,200 an oz? Why does it take an absolutely gigantic transfer of wealth to keep Europe from imploding? And who in their right minds thinks it is going to work in the medium-long run? For God’s sake, take a look at the American housing market. MASSIVE, UNPARALLELED intervention, and still home prices continue to decline. Commercial real estate remains in chaos.

    You’re right – this isn’t a double-dip. We’ve never gotten past the initial dip. Congratulations for advertising your imposing dunce cap.

  • WillyP

    One final point, to address your ludicrous charge that “… aren’t you that guy who doesn’t know the difference betwen the US economy and the stockmarket”

    “Roach Says Debt Crisis Raises Risk of ‘Double Dip’ Recession”
    That’s be Stephen Roach, Morgan Stanley’s chief economist…

    So says Roach:
    May 10 (Bloomberg) — The fallout from the European debt crisis raises the risk of a “double dip” recession for the global economy, said Stephen Roach, chairman of Morgan Stanley Asia Ltd.

    “When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that, you have some very serious risks to the global business cycle,” Roach said in an interview today on Bloomberg Radio with Tom Keene. “This concept of the global double dip which no one wants to talk about,” he said, “is alive and well.”

    http://www.businessweek.com/news/2010-05-10/roach-says-debt-crisis-raises-risk-of-double-dip-recession.html

  • ottovbvs

    WillyP // May 10, 2010 at 3:14 pm

    “You’re right – this isn’t a double-dip. We’ve never gotten past the initial dip.”

    ………..So why did you say you felt vindicated because we were experiencing a double dip?

    “For God’s sake, take a look at the American housing market. MASSIVE, UNPARALLELED intervention, and still home prices continue to decline………Congratulations for advertising your imposing dunce cap..”

    ………I’m sure you can find a Dunce’s cap for John Paulson too!

    “Hedge fund manager John Paulson, who earned billions by correctly betting that U.S. housing prices would fall in 2007, now expects homes to soon cost more and provide critical fuel for growth to rebound.

    The 54-year-old fund manager spent 1 hour and 20 minutes laying out arguments for why he expects the economy to rebound and detailing how he overhauled portfolios to make sure investors would benefit from the trend for years.

    Stocks emerging from bankruptcy will be especially lucrative, Paulson forecast, noting that this may also be an ideal time to purchase a house.

    “If you don’t own a home today, now is the time to buy one,” Paulson said, adding that people may want to consider buying a second house or helping relatives buy one.

    Housing prices, he said, will likely grow 3 percent to 5 percent this year and increase by 8 percent to 12 percent next year.

    Overall Paulson forecast a V-shaped economic rebound, citing news that payrolls surged 290,000 last month, easier bank lending, as well as fiscal and monetary stimuli.”

  • WillyP

    otto,
    it’s a little hard to take Paulson seriously, considering TODAY’s article in the Washington Post:

    Fannie Mae reports $11.5B loss, requests $8.4B to stay afloat
    “Fannie Mae, the government-controlled mortgage finance giant, said Monday that it cannot imagine a day when it would turn a profit”

    http://www.washingtonpost.com/wp-dyn/content/article/2010/05/10/AR2010051002850.html?hpid=topnews

  • ottovbvs

    WillyP // May 10, 2010 at 3:53 pm

    ” it’s a little hard to take Paulson seriously,”

    ………I’m sure you wouldn’t since you think you know so much more about the housing market than he does…….even when your belief that FM’s immediate financial problems are going to have any material impact on house prices over the next few years demonstrates for the umpteenth time that you haven’t the faintest idea of what you’re talking about

  • ottovbvs

    WillyP // May 10, 2010 at 3:32 pm

    “One final point, to address your ludicrous charge that “… aren’t you that guy who doesn’t know the difference betwen the US economy and the stockmarket”

    ……do I really have to go and dig up that claim you made that the stock market swoon “vindicated” your belief that a double dip was occurring…….or the statements you made to back up the claim that the stockmarket WAS the economy……..as well as being fairly stupid you’re a cheap little liar too it seems….and yep a prolonged stock market swoon could ultimately affect the economy but that doesn’t make it “the economy” or indicate it had actually already happened as you suggested……btw it’s up over 400 points today

  • WillyP

    Yes, the hedge fund manager who is involved tied up in fraud allegations – he seems like an honest “broker” of opinion, huh?

    Has it ever once occurred to you that maybe, just maybe, it is profitable for men like Paulson to mislead the public and markets and hedge their widespread ignorance? He did this not so long ago through a conduit known as Goldman Sachs.

    Honestly, who knows what Paulson’s true belief is. Mine is very straight forward and rests solidly on economic logic: the more intervention, the more turbulence and less prosperity. And here we sit, the stock market wildly gyrating from day to day, unemployment near 10%, unemployment among the young at nearly 50%, a president as Red as a beet, and the United States turning into the failed European Union.

    I’m sorry, but you are tragically in error if you think we’re on our way to recovery. Recovery will come with a new Congress, a new President, and a LOT LESS INTERVENTION!!!

  • ottovbvs

    WillyP // May 10, 2010 at 4:29 pm

    “Yes, the hedge fund manager who is involved tied up in fraud allegations – he seems like an honest “broker” of opinion, huh?”

    ………….Paulson may have sailed close to the wind but he’s forgotten more about the housing market than you and I have ever known……basically Willy you’re a nut…..and unfortunately as you just demonstrated not a very honest one

  • WillyP

    otto, the ludicrous charge I was referring to was that you seem to dismiss my suggestion that STOCK MARKET CRASHES – yes, like we’ve seen – have effects on the so-called “real economy.” I am not going to start a semantic argument, but I think just about everyone would agree that a stock market crash generally precipitates malaise in the “real” economy.

    I feel I’m actually getting stupider engaging in this discussion.

    Sure, it’s up 400 points today. Ergo, I recommend we just keep on passing laws that effectively bail out insolvent debtors. Makes a ton of sense. Perfectly logical. It’s all a meaningless abstraction from the heads of some bean counters with their Top Hat-wearing Capitalist bosses. The Bourgeois have their skilled apologists, but I’m not fooled. Debt is just used to keep down the masses. Happy to finally see Otto’s light.

  • WillyP

    otto says, “basically Willy you’re a nut”

    Pistachio? Brazil? Macadamia? Cashew?

    If I’m a nut for the reasons you believe, then at least I have some good company: Hayek, Mises, Milton Friedman, von Strigl, Hazlitt, Smith, Say, Reisman, etc., and just about every other decent economist, ever.

    No, what you’re experiencing now, whether you are aware of it or not, is the governing class taking the ideas of J.M. Keynes seriously. Just as Michael Novak has taken pains to explain that the Nazis and Communists were the end-result of taking the metaphysical implications of atheism and nihilism seriously, modern economists have, evidently, bought into Keynes fully. Interventionism is Right, is Normal, and is the Antidote for, rather than the cause of, malaise. And so our world is thrown into turmoil.

  • ottovbvs

    WillyP // May 10, 2010 at 4:40 pm

    “The Bourgeois have their skilled apologists, but I’m not fooled. Debt is just used to keep down the masses. Happy to finally see Otto’s light.”

    …….actually credit is fundamental to the operation of a capitalist economy as Hayek and Von Mises should have told you since you claim to have read widely in their works……..and does this debt slavery statement”

    “Debt is just used to keep down the masses.”

    ……. mean you’re actually a closet Marxist Willy?

  • ottovbvs

    WillyP // May 10, 2010 at 5:01 pm

    otto says, “basically Willy you’re a nut”

    Pistachio? Brazil? Macadamia? Cashew?

    …….Bellevue

    “No, what you’re experiencing now, whether you are aware of it or not, is the governing class taking the ideas of J.M. Keynes seriously.”

    …….They’ve been taking them seriously ever since he negotiated the Bretton Woods agreement in 1944 and his doctrines have basically been used to manage the world economic system ever since .

    “Just as Michael Novak has taken pains to explain that the Nazis and Communists were the end-result of taking the metaphysical implications of atheism and nihilism seriously,”

    …….Novak just picked up this idea from Koestler, Arendt, Berlin and others who were pointing it out as long ago as the late thirties……and since nihilism seems to be central to your credo what does this tell you…..not that you spend much time in introspection

  • WillyP

    otto,
    Being that I ended my Marxist tirade with “Happy to finally see Otto’s light,” it should have been clear I was mocking you. In case it wasn’t…. I was mocking you.

  • WillyP

    otto,
    “and since nihilism seems to be central to your credo what does this tell you…..not that you spend much time in introspection”

    Nihilism is central to my credo? Really?

    And how do you know that I don’t spend much time in introspection? Bizarre accusations, even from you.

  • ottovbvs

    WillyP // May 10, 2010 at 5:15 pm

    “Being that I ended my Marxist tirade with “Happy to finally see Otto’s light,” it should have been clear I was mocking you. In case it wasn’t…. I was mocking you.”

    …….well you’re as good at irony as at economics since I’m a minor capitalist

    “Nihilism is central to my credo? Really?…..And how do you know that I don’t spend much time in introspection?.”

    ……easy……since you don’t comprehend the essential nihilism of almost everything you ever say it’s totally self evident

  • WillyP

    otto,
    “……easy……since you don’t comprehend the essential nihilism of almost everything you ever say it’s totally self evident”

    Please, elaborate.

    I’m genuinely curious to see how you explain this one, as I would consider your pseudo-scientific economics truly nihilistic. Would also rather enjoy seeing bad philosophy on display next to bad economics. If it lives up to my expectations, I may decide to use this sure-to-be contradictory explanation to deracinate the whole of your Keynesianism.

  • ottovbvs

    WillyP // May 10, 2010 at 5:35 pm

    “Please, elaborate……I’m genuinely curious to see how you explain this one, as I would consider your pseudo-scientific economics truly nihilistic. ”

    ……..Yeah sure Keynes was a pseudo scientific nihilist……I’m not your psychiatrist Willy (unless you’re going to send me a check)……..just re-read your postings they are case study in nihilism and immaturity

  • WillyP

    otto,
    As expected, once the true debate begins, you balk. Of course you do – all keynesians do, because they lost the same debate 3 generations ago, and will lose it every single time.

    Call me an immature nihilist. That’s fine. Evidently I’m a nihilist and don’t realize it – so says a fool.

    And when your boy, Obama, gets handed a 49 state loss because we’re still not recovered economically in 2012, I’ll get a chuckle knowing that you’re pissed off and fuming that an “immature nihilist” ran intellectual circles around such a forward looking intellect as yourself.

  • ottovbvs

    WillyP // May 10, 2010 at 5:56 pm

    ” As expected, once the true debate begins, you balk. Of course you do………And when your boy, Obama, gets handed a 49 state loss because we’re still not recovered economically in 2012I’ll get a chuckle knowing that you’re pissed off and fuming that an “immature nihilist” ran intellectual circles around such a forward looking intellect as yourself. ”

    ……Like I said Willy…..introspection just isn’t your thing……apart from the nihilism what’s with this constant need to tell yourself how brilliant you are and how you “win’ every argument

  • JonF

    You make no effort at all to refute any of Lehrer’s points, whether to show that they are untrue, or that they do not help the US avoid Geeece’s fate. rather you simply wav them away as irrelevant.
    This is not a valid way to argue your point I’m afraid.

  • thijsvn

    As long as you can refute “could not”, “could” is a valid opinion. But Napoleon didn’t quite get it right. ;)

    Greece is a strange country at any rate, with strong anarchistic roots among its people. You can compare economics between the U.S. and Greece, but I doubt you can ever compare the people living their. In comparison, the U.S. has a much stronger government, in the sense that if push comes to shove, impopular decisions will be made.

  • WillyP

    otto,
    “what’s with this constant need to tell yourself how brilliant you are and how you “win’ every argument”

    It’s not a matter of my brilliance, but it is a matter of winning an argument. It is an important argument to have and to win, and since people, just like you, believe in the fundamentally wrong doctrines of Keynesianism, it is my job to rectify these errors. They plague our world and send millions of families into hardship for no reason.

    It does not make much of a difference whether you specifically give up your interventionist inclinations. What is important for ME and MY generation is that enough people have the deficiencies of your economic teachings teased, exposed, and eventually expunged from government policy!

    Besides, you know, deep down, that I was/am correct. There’s no better example than our world today. If interventionism saves economies, why – 2 years after this meltdown began – are we still in the doldrums? The answer is that, in reality, it does nothing but prolong and intensify depressions.

    http://www.mises.org

  • ottovbvs

    WillyP // May 10, 2010 at 11:20 pm

    “2 years after this meltdown began – are we still in the doldrums?”

    …….You define the doldrums as GDP at + 3.5% rather than – 6%, and two month job creation of 530,000 rather than job losses of 1.5 million over the same period?…….. this along with the prediction that Obama is going to lose 49 states in 2012 says it all about your sense of reality

  • WillyP

    If you think that things are looking decisively up, fine. But unemployment is at 10%; Europe just papered over $1 tril worth of debt; and China just admitted a serious inflationary real estate bubble.

    Clearly distressing macro signs, but fine. You are entitled to your opinion.

  • ottovbvs

    WillyP // May 11, 2010 at 9:13 am

    “Europe just papered over $1 tril worth of debt;”

    ………….no they didn’t……they set up a credit line which may or may not be drawn upon(it’s essentially the same mechanism the Fed used here worth roughly 2 trillion) ……I don’t dispute some countries in Europe have debt problems which have to be dealt with but that’s a far cry from saying the European economy or their currency is going to collapse…….unfortunately as you just demonstrated again you don’t know what you’re talking about and can’t even count apparently since you think losing 1.5 million jobs in two months is no different from gaining 530,000 over the same period

  • ottovbvs

    WillyP // May 11, 2010 at 9:13 am

    ……anyway I’m going sailing…..have fun