No drachmas for Greece, unless there’s a tragedy

St. Michael says:

01:26pm | 22/05/12

But we are risky, because we’re not a developed economy.  We are a primary industry economy, with no real manufacturing base and very little in the way of tertiary industries like tourism or education (which I would define as long tourism, really.)

Our economic position rests entirely on the thirst for Chinese resources.  Should the Eurozone collapse, that thirst will be affected.  When the US dollar tanks, that thirst will largely disappear.  It’s not so hot to have a 20% debt-to-GDP ratio when you can’t pay that debt at all.

St. Michael says:

01:08pm | 22/05/12

For those of you who don’t realise how this works, the reason Greece’s loan interest rate was close to triple every other European country was essentially because of the risk to the person loaning Greece money.

Consider the difference between the interest rate on a home loan and the interest rate on a credit card loan.  Usually the home loan rate is lower because there’s less risk to the lender: you’ve got a house the lender can take if you default on the loan.  Credit cards, not so much—they have to chase you through the courts and risk you declaring bankruptcy, so the loan rate is higher.  The basic point being that if you’re taking a high risk, there must be an incentive to do so—a higher rate of interest.

The same applies to countries, albeit it’s in reverse.  Countries ask you to give them money for a period.  These are called “bonds”, which are no different to a term deposit at your local bank—you give the country some money, it pays you back in six months time, or whenever, with a certain amount of interest.  You are loaning the government money.  You usually have no tangible asset (like a house) to claim against - only the government’s promise to pay you back.

The point being that some governments are better at keeping their promises to pay bonds back than others.  If the government of Screwupia has a really shitty economy and a history of not paying its loans back, the only way you’d even consider loaning your money to them as opposed to, say, Australia, is if Screwupia offers you a much higher rate of interest.  You take a higher risk than you would with loaning money to Australia, but Screwupia will give you more cash if it works out.

Greece had such a bad economic reputation it had to offer three times the interest rates of other European countries in order to attract people to loan it money.

In passing, then, if you want to get a better idea of how a country is performing economically, one good place to look is at the rates of interest it’s offering on its bonds.  Most financial websites will have tables of these squirreled away in a subpage somewhere.  They are a much more reliable estimate of how screwed their economy is, mostly because if they’re offering much higher rates of interest, the market is very hesitant about loaning it money.

(Good comment, Rocko - just wanted to expand on it a bit.  People have to start understanding economics, bond markets, and inflation right now.)

St. Michael says:

12:38pm | 22/05/12

If so, they’ll be very rich tourists, since they’ll either be paying for their tickets to Australia with a shitload of worthless drachmas - or they’ll have had the means to sock away their euros where the Greek government can’t get it.

St. Michael says:

03:27pm | 22/05/12

@ RyaN: note that particular debt clock masses together all public *and* private debt owed to nonresidents - it’s not solely a measure of *government* debt to GDP ratio, which is the more important number.  But yes, as a general principle you should never believe what comes out of a Treasurer’s mouth.  And especially one who defines economic greatness as simply being less in the shit than the rest of the world.

RyaN says:

03:07pm | 22/05/12

Wow look at that http://www.usdebtclock.org/world-debt-clock.html
Our external debt to GDP ratio is right up there.
Guess we aren’t doing as well as the Labor government would have us believe then, especially compared to the likes of Argentina, Brazil, Canada, China, India, Japan, Mexico, Russia, Saudi Arabia and South Korea to name the ones listed here.

St. Michael says:

03:04pm | 22/05/12

@ Esteban: when talking about hyperinflation I’m not referring to a slow release QE3 scenario - indeed the very low velocity of money through the US domestic market seems to have been keeping inflation down for the moment.

I’m talking about what would result after a bond market panic and consequent run on the US dollar - a decision by the US’s major bondholders to dump US bonds en masse and therefore wipe the US’s capacity to pay its debts back without hyperinflating the currency.  I think, given current US conditions, that is the more likely outcome.  There’s a (former) US Senator who wrote a book called The Debt Bomb that sets out the scenario in the first chapter.

Unlike the various PIGS nations where the default has at least been partially orderly because the IMF and EU were in there early enough and with enough money to slow it down (not to mention that the various PIGS nations don’t have control of the Euro and therefore can’t hyperinflate their currency) the same couldn’t be said if there’s a panic on the bond market regarding US bonds.  Like I said, nobody can bail out the US dollar.  The debt under it is too big for the IMF or indeed anyone.

In the case of Greece, just to pick up that point, I think hyperinflation is still the outcome.  If Greece defaults on its debts before leaving the Eurozone, it will be in a position where nobody will lend it any money.  That, indeed, has been its position since 2010, and why it has to get money from the EZ instead.  If you have no money but you have massive entitlement programs to pay, the only way a government can get that money is loan it or print it.  Since they can’t loan it, they must print it instead.  That then destroys the value of the currency they issue - the Drachma.  They won’t cut the entitlements - not until they’re in poverty conditions and figure out there’s no other way.

Esteban says:

02:29pm | 22/05/12

QE3 is coming and will cause the USD to devalue and be inflationary.

However it does not necessarly mean it will be hyperinfaltion.

To get a handle on the inflationary impact of the quantatative easing we would need to know what percentage of the total amount of USD that have been “printed” as a percentage of the total amount of USD that exist.

Whilst the amounts of money “printed” in QE1 and 2 are huge it might be a small percentage of the total USD that exist. As such it would have a small impact on inflation.

Yes it is a snowball that will get bigger with QE3 and will ultimately cause hyperinflation if it does not stop but just how many USD are ther in the world and by what percentage has that been increased by QE?

In other words you don’t go from low inflation to hyper inflation in one go.

Esteban says:

02:13pm | 22/05/12

I think that part and parcel of pulling out of the Euro is that Greece defaults on it’s debt. Effectively they bankrupt themselves and force debt to be written off.

In fact it will be the default first followed by the conversion of greek held Euros to new drachma.

Hence they wont be stuck with Euro debt it will be gone.

There is no benefit in pulling out of the Euro without the debt write off.

On the US situation I think you and I have common ground based on postings over the last 2 years. However I think the way US debt plays out could go down multiple paths. No path is particularly attractive.

At what point the bond market catches on that the US bonds are junk is uncertain.

QE 3 is coming and will no doubt result in further devaluation of the USD. Yes it will drive up the cost of oil but in Australia we will be buying it with an Australian dollar that will have appreciated in value against the USD.

I maintain that you will know the end is nigh when oil starts to be traded in non US dollars.

Right now the Chinese are making quiet noises about buying iron ore in their Chinese currency RMB. Slowly slowly catchee monkey.

St. Michael says:

01:23pm | 22/05/12

@ Shane: I doubt it, since the Chinese are currently holding about 1 trillion in US bonds - which would be rendered worthless in the event of US hyperinflation.  Their problem being that they can’t try and dump all theirs right now, because that would cause the bond collapse they’re trying to avoid.

The Chinese also do not have the economy to sustain the entire planet or a reserve currency; they are wholly a parasite on America and the fact they won’t reveal crucial information about their economy suggests it is, in fact, a Ponzi scheme conducted at the governmental level.

You also do not want to be around when the world shifts to a new reserve currency.  Typically a lot of people get screwed in the shift.

Shane From Melbourne says:

01:01pm | 22/05/12

By that time the Yuan will be the world’s reserve currency anyway…...

St. Michael says:

01:10pm | 22/05/12

@ Shane: that doesn’t mean Goldman Sachs caused them to lie about their debt levels.  That is wholly the Greek government’s responsibility, and by extension the idiots who voted them in—as is their current refusal to pay back the billions given to them to try and solve their financial problems.  Let’s not get into Tinfoil John territory about GS, shall we?

Shane From Melbourne says:

12:52pm | 22/05/12

The Greeks with Goldman Sachs help, lied about their debt levels to get into the EU. There, fixed that for you.

St. Michael says:

03:23pm | 22/05/12

@ RyaN, everyone: it’s not so much that people are voting in socialist governments—though one might note across the EZ board they seem to be doing just that, or trying to in the case of Greece.

All that’s required to create the sort of crises we are seeing right now is that people vote in governments who are willing to hand the electorate unnecessary largesse from the public treasury.  Socialist governments just do this at an earlier stage and more often than most of the other forms.

This form of largesse-based vote buying would include the PIGS nations, the United States, Australia to a lesser extent, and pretty well most of the Western world besides.  We are seeing the results of that loose fiscal policy right now.  It’s not socialism, it’s vote buying with public money that is the problem - and note that France and Greece alike are now agitating for or have got socialists back in, so they haven’t learned their lessons yet.  They want their fix from the public treasury.

St. Michael says:

03:14pm | 22/05/12

@ Shane: the root problems even as you defined them still amount to government overspending.

- If you spend too much as a government, that is government overspending.
- If you don’t tax enough or don’t enforce the taxation laws sufficiently, then you are still causing a net overspend: you are not getting enough money in to pay for what you are giving out.  Indeed if you don’t tax enough, the balance has to be made up by borrowing.  It is simply the other half of the equation, but still amounts to governments spending too much.  It’s a similar concept to how exceptional customer service in retail amounts to a price cut in real terms.
- A bank bailout is also reckless government spending.  Indeed in Ireland that’s part of the reason their entire country is in the shit, because they bailed out the biggest bank in the country without doing their due diligence or realising how big the debts were.  And they did it because they were too scared of being voted out of office—which, if you look at it from the other side of the equation, means they basically were too scared to say “no” to their own people even if it meant financial suicide.
- Having net imports would indicate too much money is being printed: it’s easier to import than make the goods locally.  So again, too much money in the system and therefore too much government spending and putting the money in the system in the first place.

RyaN says:

03:01pm | 22/05/12

@Shane From Melbourne: Ask Americans if they think Obama is a capitalist or a socialist.

hot tub political machine says:

02:36pm | 22/05/12

World English Dictionary
socialism (?s?????l?z?m) 
— n  
1.  Compare capitalism an economic theory or system in which the means of production, distribution, and exchange are owned by the community collectively, usually through the state. It is characterized by production for use rather than profit, by equality of individual wealth, by the absence of competitive economic activity, and, usually, by government determination of investment, prices, and production levels
2.  any of various social or political theories or movements in which the common welfare is to be achieved through the establishment of a socialist economic system
3.  (in Leninist theory) a transitional stage after the proletarian revolution in the development of a society from capitalism to communism: characterized by the distribution of income according to work rather than need

There, should make the discussion in here a little better informed.

Shane From Melbourne says:

01:55pm | 22/05/12

@Ryan- Hmm, seem’s the world’s biggest capitalist nation, the United States has been borrowing heavily from China. Therefore, according to your definition of socialism it must be socialist, right?

@St Michael- Actually it has been a mixture of problems. In Greece, it was widespread tax evasion, government spending and the fact that Greece has to import a lot of stuff. In Spain, where until 2008 Government budgets were under the 3% GDP Euro mandate it was a property bubble that burst requiring the Spanish government to bailout the banks (another example of private debt being transferred to the public sector). In Ireland the same thing, a property bubble burst leaving Irish banks exposed. Also in general Euro banks were heavily exposed to toxic CDOs from the United States. Another problem is that Euro banks have a large holdings of Euro bonds (For example, France’s Credit Agricole has a large holding of Greek bonds). The problem has not been caused solely by government spending or socialism, whatever people may believe.

andye says:

01:45pm | 22/05/12

@RyaN - Did you forget the GFC happened, RyaN? Silly sausage, you keep doing that!

andye says:

01:43pm | 22/05/12

@peter - err, it was a conservative government who presided over the collapse. They did introduce austerity, but failed to deal with the tax problem.

Greece didn’t go bankrupt because of socialist style wealth redistribution - it went broke because of Howard style middle class welfare and massive tax evasion.

St. Michael says:

01:14pm | 22/05/12

@ Shane: actually, the problem with capitalism is that it requires the rule of law, and therefore governments, to exist.  The Eurozone’s crisis has been wholly caused by flagrant government spending, not flagrant private sector spending.

RyaN says:

01:05pm | 22/05/12

@Shane From Melbourne: “There, fixed that for you” um, no you didn’t, your comment makes no logical sense whatsoever.
What was our debt here in Australia before we got a socialist / commie regime? Just remind me again?

Shane From Melbourne says:

12:49pm | 22/05/12

@Ryan- “The problem with capitalism is that eventually you run out of Chinese money” There, fixed that for you.

RyaN says:

11:36am | 22/05/12

@Peter: Amen to that!
Like Margret Thatcher said, “The problem with socialism is that sooner or later you run out of other peoples money.”
Greece has run out of other peoples money!

They will without a doubt be booted from the euro.

St. Michael says:

12:49pm | 22/05/12

Good call.  Basically, Greece is daring the Eurozone to throw them out.  But it looks like Germany’s finally gotten to the George McFly point of fighting back and is actually willing to do so.

wakeuppls says:

01:04pm | 22/05/12

The Greeks were never appropriate members of such a German-centric overvalued currency. Their economy contracted viciously not because of “laziness” (it would have contracted the same in the past if this was the case), it is simply the inability of Greece to market exports and tourism to the world when the cost of such products is inflated due to Euro inflation.

Tubesteak says:

11:44am | 22/05/12

iansand
Like all other countries, the banks are being bailed out because the government allowed asset bubbles to occur. In the case of the US, the government actively encouraged the housing bubble with the CRA.

For reece, the bail-outs are based on the government getting their act together

iansand says:

08:56am | 22/05/12

It’s bailout money for the banks, not Greece.  Any money flowing into Greece flows straight out again to the banks to service debt.

acotrel says:

08:15am | 22/05/12

Bit hard to make a living when your home is on a rock ?