The superficial problem in Greece is the external debt. The deeper problem is the relinquishment of national
sovereignty and the tools that are needed to raise domestic demand and bring about an economic recovery.
William Hague, the U.K. Conservative opposition leader and Foreign Secretary, once
referred to the euro, the European Union currency, as a “burning house with no exit.” That sounds about right. If Greece leaves the euro, it will
suffer the tortures of the damned. And if Greece stays in the euro, it will suffer the tortures of the damned.
Listen, I love Greek tragedy as much as the next theatre-goer--especially Sophocles.
But this is ridiculous. Consider how we came to this point. Virtually all of
the world’s economies got whacked, very, very hard, by the Crash of ’08. Essentially, “aggregate demand,”
the total demand for goods and services, collapsed, because much of that demand had been sustained by borrowing against wealth
(think, “home equity loans,” “margin loans,” etc.), and then wealth collapsed. When aggregate demand
drops, there are only four ways out of that hole:
(1) Borrow and spend (aka fiscal policy).
(2) Print and spend (aka monetary policy).
(3) Put everything on sale (aka trade policy).
(4) Say goodbye (aka emigration).
That’s it. There are no other solutions to that problem. So let’s look at what happened to Greece after the Crash of ’08, when aggregate demand collapsed. When Greece joined the European Community/Union in 1981, it had to agree to zero tariffs
and the unencumbered movement of goods between Greece and other EC/EU members, as well as an external trade policy that is
uniform throughout the EC/EU. So after the crash, Greece couldn’t impose tariffs, subsidize exports, establish import
quotas, or anything like that.
Trade policy—no: After Greece adopted
the euro as its currency in 2001, it could no longer expand the money supply in order to spur domestic production. The European
Central Bank had that authority, not Greece. Nor could Greece impose any capital controls to keep euros circulating within
its borders. And as Greece’s economic problems deepened, capital fled the country.
Monetary policy—no: A government
accepting the euro as its currency must commit to keeping its annual budget deficit below a certain ceiling. Fair enough.
But what happens if large chunks of government revenue are shipped outside the country to pay external debt, rather than circulating
within the country? That just depresses aggregate demand more and more. Greece went into the Crash of ’08 with an external
debt of around 300 billion euros—for a country of 11 million people. The mere interest on that debt (forget about principal)
sucks an enormous amount of money up out of Greece each year, and sends it elsewhere. That made it impossible for the Greek
government to borrow more money and spend it domestically, to restore aggregate demand (think “American Recovery Act”).
And Greece’s creditors have insisted that the government run a “primary surplus,” meaning that net of the
debt payments, the government actually removes money from the domestic economy.
Fiscal policy—no: With no trade
policy, no monetary policy and no fiscal policy, the Crash of ‘08 and the ensuing turmoil utterly crushed Greece’s
aggregate demand. Gross domestic product has dropped 25%—the largest peacetime collapse in any advanced economy since
the Great Depression. Unemployment in Greece was more than 25% before this month—imagine what it is now, after the banks
were closed. That left desperate Greeks only one option: to leave. And, in fact, the population dropped by 1.5% in just four
years. But there are very stiff barriers to exit; among other things, you have to learn a new alphabet. And the population
drop further depressed aggregate demand, especially in the housing market.
Emigration—no: John Maynard Keynes
said that the government’s most important economic responsibility is to match aggregate demand to aggregate supply.
Too much demand = inflation. Too much supply = unemployment. Greece simply has no tools to match that match. Domestic aggregate
demand is far, far short of supply, and it’s getting worse.
The superficial problem in Greece is the external debt. The deeper problem is the
relinquishment of national sovereignty, the tools that are needed to raise domestic
demand and bring about an economic recovery. And the alternative, the neologism-of-the-year
“grexit,” where Greece just drops the euro? That is, in fact, the only alternative to the slow suffocation of
the Greek economy. But no one wants even to think about how fiendishly complicated that might be. How do you mop up a currency
that’s been sloshing around for 15 years inside your borders, and replace it with money backed by the “full faith
and credit” of a bankrupt nation?
At least for Greece, the euro is one of those many, many things in life that are wonderful
in theory, and horrible in practice. And the amount of pain that has been inflicted is staggering. The house is burning. And there is no exit.
For you who want to understand the Greek crisis, read the first attachment. I through a second one so as to better understand the economic reality, and why we can’t rely upon
the analysis of the ruling class.
I recall a statement by an African leader of the dilemma facing 3rd World
Nations, that of accepting the plans of the banking cartel or being punished by them.
There are very good reasons why the banking cartel “persuaded” nations to sign away their sovereignty through
trade agreements. As Napoleon said: “The
hand that gives is above the hand that takes.” As long as we have a banking
system based upon credit being created by national banks, they have the upper hand.
When the banks find a nation not credit worth and they double the interest on the debt obligations, the economy crashes.
Nations can’t afford to pay off the T-bills and other debt obligations when
they mature, so they simply roll them over and sell new ones to raise the funds to pay off the matured ones. If there aren’t buyers, they must sell the new ones at a higher interest rate. This higher rate is then passed along to consumers, businesses, and local governments seeking new loans. This starts the downward spiral that leads to a recession and worse.