Will Greece pull down everyone’s economy?

The nation of Greece is in the middle of a debt crisis that, because the European Union, has a single integrated currency, the euro, is pulling down the European economy.  And its effects may reach here.  The analysis by the British”Financial Times” is sobering reading.  From FT.com / Comment / Opinion – A Greek crisis is coming to America:

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”, but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.

That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bail-out led by Berlin. Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Joe

    “What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch.”

    Wow. How surprising. No one could have possibly realized that before now.

  • Joe

    “What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch.”

    Wow. How surprising. No one could have possibly realized that before now.

  • Orianna Laun

    I heard/read somewhere awhile back that Greece’s fiscal problems started with their hosting of the Olympics. They poured money they did not have into it. It makes the whole idea of a global economy pretty intimidating. Maybe we should listen to Gordan Liddy and invest in gold. Then again, maybe not.

  • Orianna Laun

    I heard/read somewhere awhile back that Greece’s fiscal problems started with their hosting of the Olympics. They poured money they did not have into it. It makes the whole idea of a global economy pretty intimidating. Maybe we should listen to Gordan Liddy and invest in gold. Then again, maybe not.

  • DonS

    What a shock! They chose the bailout option. Let’s just defer the problem a little bit longer. Maybe we won’t be in office anymore when the roof falls in.

    The whole concept of a “one size fits all” currency throughout the “eurozone” was nuts to begin with, and it was even more nuts for relatively strong economies like Germany to tie their fortunes to the likes of Greece and Italy. Now they are reaping the consequences of that awful decision.

    What’s even more ludicrous is that the Greek unions, in the face of this historic crisis, are protesting because of pay cuts! Reminds me of California.

    Of course, this is merely a bellwether of what will occur eventually in many other places around the world, including here in the states. Will we learn our lesson from this? Doubtful.

  • DonS

    What a shock! They chose the bailout option. Let’s just defer the problem a little bit longer. Maybe we won’t be in office anymore when the roof falls in.

    The whole concept of a “one size fits all” currency throughout the “eurozone” was nuts to begin with, and it was even more nuts for relatively strong economies like Germany to tie their fortunes to the likes of Greece and Italy. Now they are reaping the consequences of that awful decision.

    What’s even more ludicrous is that the Greek unions, in the face of this historic crisis, are protesting because of pay cuts! Reminds me of California.

    Of course, this is merely a bellwether of what will occur eventually in many other places around the world, including here in the states. Will we learn our lesson from this? Doubtful.

  • Steven

    “[Z]ero interest rates plus quantitative easing” are not “saving” us either. Quantitative easing = running the printing presses , i.e. paying for the massive debt by inflating the currency, while zero interest rates create distortions in the capital and input markets leading to misallocations of scarce resources. This only creates a long-run, sustained economic crisis that envelopes and contains the current crisis and any impending debt crises. We will “emerge” from the current crises by stepping blithely right into the path of the next one, and the next, …

  • Steven

    “[Z]ero interest rates plus quantitative easing” are not “saving” us either. Quantitative easing = running the printing presses , i.e. paying for the massive debt by inflating the currency, while zero interest rates create distortions in the capital and input markets leading to misallocations of scarce resources. This only creates a long-run, sustained economic crisis that envelopes and contains the current crisis and any impending debt crises. We will “emerge” from the current crises by stepping blithely right into the path of the next one, and the next, …

  • Peter Leavitt

    It’s hard to know whether Greece or the other southern Mediterranean states, Portugal, Italy, and Spain will involve us in yet another economic setback. I would bet that Germany will cover this debt, though at considerable risk of moral hazard. It would probably be best to let these profligate nations suffer the consequence of their fiscal folly.

    Americans, however need to focus on the economic extravagance of the Obami who are involving us in unsustainable federal deficits, similar in the long run to Greece et al. Michael Boskin, a Stanford professor of economics, in a WSJ article today, When Deficits Become Dangerous
    Debt-to-GDP ratios over 90% have significant impact on the pace of economic growth,
    writes:

    President Barack Obama’s 2011 budget lays out a stunningly expensive big-government spending agenda, mostly to be paid for years down the road. He proposes to increase capital gains, dividend, payroll, income and energy taxes. But the enormous deficits and endless accumulation of debt will eventually force growth-inhibiting income tax hikes, a national value-added tax similar to those in Europe, or severe inflation.

    Boskin points out that the Obama budget forecast, “unprecedented in spending, taxes, and accumulation of debt is by and large the most risky fiscal strategy in American history” could lead our country to a parlous fiscal condition. Last week Standard and Poors warned that it was seriously considering lowering the credit rating of Americas federal debt, a heretofore unheard of proposition.

  • Peter Leavitt

    It’s hard to know whether Greece or the other southern Mediterranean states, Portugal, Italy, and Spain will involve us in yet another economic setback. I would bet that Germany will cover this debt, though at considerable risk of moral hazard. It would probably be best to let these profligate nations suffer the consequence of their fiscal folly.

    Americans, however need to focus on the economic extravagance of the Obami who are involving us in unsustainable federal deficits, similar in the long run to Greece et al. Michael Boskin, a Stanford professor of economics, in a WSJ article today, When Deficits Become Dangerous
    Debt-to-GDP ratios over 90% have significant impact on the pace of economic growth,
    writes:

    President Barack Obama’s 2011 budget lays out a stunningly expensive big-government spending agenda, mostly to be paid for years down the road. He proposes to increase capital gains, dividend, payroll, income and energy taxes. But the enormous deficits and endless accumulation of debt will eventually force growth-inhibiting income tax hikes, a national value-added tax similar to those in Europe, or severe inflation.

    Boskin points out that the Obama budget forecast, “unprecedented in spending, taxes, and accumulation of debt is by and large the most risky fiscal strategy in American history” could lead our country to a parlous fiscal condition. Last week Standard and Poors warned that it was seriously considering lowering the credit rating of Americas federal debt, a heretofore unheard of proposition.

  • WebMonk

    Just to be fair here, let’s not pretend this would have only happened with President Obama in the White House. Had McCain won, we would have faced the exact same thing in just about the same amount of time.

    Heck, even before President Obama took office, we were expected to have a federal debt that exceeded GNP by the mid twenty-teens. President Obama just hurried it up a little, probably about the same amount as a President McCain would have.

    The only candidate who would have delayed (not stopped, merely delayed) the point where debt became larger than GNP was Ron Paul.

    Also, let’s not totally freak out because of the crossing of the magic number where Debt>GNP. Technically, right now my own personal debt is greater than my GPP (gross personal product) because I have a mortgage. The obvious differences being:

    1) I have something backing up the mortgage (the house and expected future income) while the government doesn’t have anything backing up their debt except the expectation they will be able to pay back their creditors in at least the near future.

    2) I am reducing my debt regularly whereas the government is doing quite the opposite.

    The point where Debt>GNP isn’t a doomsday point, but reaching it with no change of direction in sight is a very bad sign. I am far more worried (though I already read this elsewhere and expected it even then) by the official CBO prediction of never running a balanced budget again.

    THAT is the real killer.

    The true doomsday point is where the interest on the federal debt exceeds the total income of the federal government. At that point the federal government is completely hosed with the only option of paying the debt being a complete hyperinflation through massive printing of money to pay it off. (By that time I expect the tax levels to have risen to the point where further increases will be of little use.)

    Right now the US govt takes in around $2.3 trillion and the interest is around $0.24 trillion. However, the PRACTICAL doomsday point where the interest on the debt overwhelms the government’s income will arrive long before the theoretical doomsday point I mentioned above.

    I personally have a SWAG of 25 to 30 years to that point.

  • WebMonk

    Just to be fair here, let’s not pretend this would have only happened with President Obama in the White House. Had McCain won, we would have faced the exact same thing in just about the same amount of time.

    Heck, even before President Obama took office, we were expected to have a federal debt that exceeded GNP by the mid twenty-teens. President Obama just hurried it up a little, probably about the same amount as a President McCain would have.

    The only candidate who would have delayed (not stopped, merely delayed) the point where debt became larger than GNP was Ron Paul.

    Also, let’s not totally freak out because of the crossing of the magic number where Debt>GNP. Technically, right now my own personal debt is greater than my GPP (gross personal product) because I have a mortgage. The obvious differences being:

    1) I have something backing up the mortgage (the house and expected future income) while the government doesn’t have anything backing up their debt except the expectation they will be able to pay back their creditors in at least the near future.

    2) I am reducing my debt regularly whereas the government is doing quite the opposite.

    The point where Debt>GNP isn’t a doomsday point, but reaching it with no change of direction in sight is a very bad sign. I am far more worried (though I already read this elsewhere and expected it even then) by the official CBO prediction of never running a balanced budget again.

    THAT is the real killer.

    The true doomsday point is where the interest on the federal debt exceeds the total income of the federal government. At that point the federal government is completely hosed with the only option of paying the debt being a complete hyperinflation through massive printing of money to pay it off. (By that time I expect the tax levels to have risen to the point where further increases will be of little use.)

    Right now the US govt takes in around $2.3 trillion and the interest is around $0.24 trillion. However, the PRACTICAL doomsday point where the interest on the debt overwhelms the government’s income will arrive long before the theoretical doomsday point I mentioned above.

    I personally have a SWAG of 25 to 30 years to that point.


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