By Bryan Baumgart
In late 2009, Greece had found itself removed from a long period of unprecedented economic prosperity and cast into the throes of a severe economic collapse. The Greek Ministry of Finance, in a 2010 report “Stability and Growth Program” highlighted FIVE main causes of the economic collapse.
- GDP plunged due to lack of competition in the private sector. (Gross Domestic Product is the total value of all goods and services produced over a specific time period, usually calculated by adding the total income or the total amount spent by a nation).
- Budget Deficits skyrocketed when spending over a six year period (from 2004 to 2009) dramatically outpaced income, mostly to finance public sector jobs, pensions, and other social benefits.
- Government Debt Levels reached unsustainable sizes. Debt levels rose so dramatically that in April 2010, rating agencies downgraded the Greek economy to “junk status”, which caused the private capital market to freeze and bailout loans (from IMF) were required to avoid default.
- Budget Compliance was nonexistent.
- Statistical Credibility was compromised. To keep within monetary guidelines, the government misreported official economic statistics, even paying Goldman Sachs and other banks for helping them hide the actual level of borrowing. Flawed statistics made it impossible to predict accurate GDP growth, budget deficits, and public debt which turned out to be far worse than anticipated. Trust among financial investors was lost.
In May of 2010, Greece avoided default when the IMF (International Monetary Fund) agreed to a bailout of $163 billion dollars (110 billion euros). The conditions of the bailout required Greece to comply with
- Implementing austerity measures (cutting spending on benefits and public services/welfare).
- Privatizing government assets worth $68 billion dollars (50 billion euros) by 2015.
- Implementing outlined structural reforms aimed at improving market competitiveness and growth (moving the public sector back to the private sector).
Greece failed to comply quickly enough and another bailout of $171 billion dollars (130 billion euros) was required and offered in February of 2012, with a requirement of even further austerity measures (more cuts to benefits and public services/welfare), a rise in taxes, and even more privatization reform.
The tax increases resulted in record numbers of Greek businesses going bankrupt. In 2011, Greece lost a total of 111,000 businesses (up 27% from 2010). The unemployment rate jumped from 7.5% in 2008 to over 25% in July of 2012. During that same period, the youth unemployment rate skyrocketed from 22% to 55%.
As Jon Henley stated in a March 2012 issue of The Guardian:
“In an economy without a welfare regime to speak of, the impact of five consecutive years of recession has taken its toll. Charitable foundations that used to fund educational programs have taken a big hit themselves and have now shifted to paying for soup kitchens. Neighborhoods are marked by buildings that owners are desperate to sell or rent and a major increase in the homeless sleeping rough. Almost half of Greece’s young people are unemployed, as are one in five of their older peers. Despondency is everywhere, despite the “rescue”. If future Greek governments keep to the terms of the bailout, by 2020 public debt will be back to what is was when the crisis erupted in 2009.”
But the leftist government of Greece refuses to face reality. They have promised to hire at least 100,000 more people in the public sector, to restore all the budget cuts made over the past two years, and to offer free health care and social services to all illegal immigrants. To date, no real reforms have occurred in Greece. Not a single privatization has taken place. There have been no important changes in the labor market and no simplification of the tax system. Instead, the government has put nearly all of its energy into squeezing more taxes out of the overregulated private sector. The economy is in its fifth year of contraction, half of all young people are unemployed, the suicide rate is going up by double digits every year, and hundreds of thousands of people working in the private sector have not been paid for months.
Greece snubbed a policy of wealth creation for a policy of borrowing and subsidies. They have now reached such high levels of debt and government dependency that a realistic solution to their economic crisis is impossible. Riots and violence rage every time necessary spending cuts are made, because the citizens of Greece are now completely dependent on social assistance. The UN warned that Greece may be charged with human rights violations if necessary cuts are made as citizens could be left without food, water or shelter. The only solution is temporary; borrow while you can because it’s only a matter of time before it all comes crashing down! Then human rights go out the window and chaos ensues!
How does the United States compare to our European neighbors? Much like Greece, we found ourselves plunging from prosperity into an economic crisis in 2008, brought on by manipulation of economic statistics by the government backed mortgage giants Fannie Mae and Freddie Mac and the removal of market competition allowing Fannie and Freddie to issue high risk loans without fear of failure.
Since our plunge into recession we have acted much in the same manner as Greece, repeatedly bailing out private companies branded “too big to fail” with tax dollars, and removing competition by nationalizing private industries from banking and mortgage to school loans and healthcare.
Over the past four years the United States has dramatically increased government dependency, setting records for disability and food stamp rolls. Under the Obama administration, just short of 15 million people have been added to food stamp rolls while total welfare spending has already exceeded $1 trillion dollars annually.
The country’s debt has increased by $5.63 trillion dollars leaving us over $16 trillion dollars in debt. For every $1 dollar added to the economy, this administration has added $3 dollars in debt. We have carried an annual deficit over $1 trillion dollars each of the four years Obama has been in office. Like Greece, much of the deficit has stemmed from entitlements and outrageous pensions and benefits packages cut over crony deals between elected officials and union leadership. Our debt has become such a liability that in September the United States joined Greece in having its credit rating downgraded.
Much like Greece, we have not complied with a budget. In fact, this administration has not even passed a budget since President Obama took office. Our country’s sluggish GDP figures (well below the 3.5% annual growth indicating an improving economy) indicate the poor jobs situation won’t improve anytime soon. So many people have given up hope looking for jobs the BLO actually dropped the unemployment rate down to 7.9%. The actual number of Americans whom now are without jobs totals almost 27 million for a REAL unemployment rate of 14.6%. The actual youth unemployment rate pushes 17%. Yet, for every ONE job created, 75 Americans have been placed on food stamp rolls.
The President’s signature achievement, Obamacare, hasn’t even kicked in yet and employers have begun involuntarily dropping employees down to part time to avoid the fines they would face under the law; potentially leaving up to 5.9 million Americans without benefits. Not that medical coverage would do Americans any good, as Bloomberg points out, the United States is looking at a doctor shortage exceeding 15, 230 primary care physicians alone under the new healthcare law.
Much like in Greece, austerity efforts to curb spending in the United States were met with strikes and resistance. Inflation is up, food and gas prices are way up, tuition and insurance preimiums continue to skyrocket, and household income continues to plunge.
November 6th, voters turned down Governor Romney’s policies to create wealth in favor of continuing President Obama’s policies of increases in taxation, entitlement spending, and borrowing. As we approach the fiscal cliff early next year, our government faces the same predicament Greece did. Experts widely agree, if the tax hikes and cuts to public spending are allowed to kick in, the country will likely fall in to a much deeper recession. Like Greece, the United States has reached the point of no return, and there is no indication that we will choose a different strategy.
Where does Greece stand now?
Headlines from USA Today (November 6, 2012): “Strike Hits Greece in Bid to Derail Austerity Plan”
With all of the “stuff” going on in my life right now, I don’t have time to read all that crap. Please sum up your banter in one paragraph.
“Our debt has become such a liability that in September the United States joined Greece in having its credit rating downgraded.”
The US government is monetarily sovereign unlike Greece. The credit downgrade for the US had little to do with our ability to make interest or debt payments. Greece, however is limited to using someone else’s currency and thus can have trouble making debt/interest payments. We will never have that problem since thanks to the Fed we can create debt at freewill which turns into money which can be used to pay our bills.
“Like Greece, the United States has reached the point of no return, and there is no indication that we will choose a different strategy.”
Actually, we are nothing like Greece other than our social programs which most countries around the world maintain. Instead we are more like Japan. According to Wikipedia, the official debt-to-gdp for the US is a 102%. In Japan it is 229%. Other than the occasional earthquake, typhoon, and radiation, we’re just like Japan. We’re becoming Japan not Greece.
My point is that you don’t go to a baseball game and try to apply the rules of football to what you are seeing. Nor should you do the same thing with monetary policy between countries. Fiscal policies are actually very similar, but what money is and how it is created is fundamentally different. Understanding these fundamentals goes a long way in explaining how things really work.
Note: I am not for government creating debt/money to make fake wealth. Only that to understand why you’re in the predicament you are in is the first step for creating a new paradigm. Also, you don’t fix a predicament like we are in. Instead, you replace it with something better.
Bryan, great job in exposing the problem of Greece.
Jon Tucker, comparing countries will always be less than exact but whether you pick Japan or Greece, or even Zimbabwe, the problems Bryan highlights remain true.
Just because US has monetary sovereignty (unlike the Euro) does not change the arguments. The US dollar is still subject to currency exchanges including gold; and such markets simply move away from the distortion the Federal Reserve is trying to create to encourage employment.
The social programs will vary from country to country and are subject to demographics. In mentioning Japan, you walked right in to the problem. Ben Bernanke and Paul Krugman are following the Japan example which has been a long stale economy and an aging population. As for social programs, these programs will vary from country to country. The larger the programs, the more burdensome they will be to a country’s economy.
The United States has put itself in a comfortable trap. People live over 20 percent of their adult lives on Social Security while labor is taxed 15 percent for entitlement programs. The left wing pundits and politicians blame it on two “unfunded wars” and “tax breaks for the rich” which are blatant lies about the major problem why the US is running annual trillion dollar deficits and has a debt larger than the US economy.
The exchange markets will punish the way the US carries out it’s finances. It is just a matter of time.
Thanks for the reply Jon. You are correct that the US differs from Greece in the sense that they are monetarily sovereign; however, there are some important similarities I attempt to point out. Like Greece we overspend (mostly on the public sector), run huge deficits, don’t follow a budget (we haven’t had one to follow the past 4 years), gov’t, sponsored companies like Freddie and Fannie have cooked the books, removed competition with bailouts of failing companies, we have allowed government takeover and intrusion of many of the formerly private sectors of our economy, our debt levels have reached a point that interest on our debt has become the fastest growing portion of our budget. The White House projects an increase of 14.% in interest debt over the next ten years, far ahead of any other category (the next closest is medicaid at 8.5%), and even our credit rating was downgraded just like Greece. With over half (62%) of our federal budget spent on entitlements (healthcare, welfare, social security) and federal spending growing 12 times faster than median income we will likely continue to need more and more on entitlements…we mirror Greece.
Yes, unlike Greece we can just print more money but because we spend and behave like Greece (fiscally), we will meet the same consequences. You are correct that it could possibly be through a different path. Maybe quantitative easing is used until our money worthless but in the end, we all end up in the same spot. Yes we can create debt and use it to pull in revenue, but eventually that runs out as well. Atlas will shrug.
All that being said, I understand your point. We may be more like Japan than Greece, but in the end we all end up in the same situation no matter how we got there. And certainly the factors I named above play an enormous role in that. We MUST cut spending, and I agree with your point, we can’t keep creating wealth either.
* we can’t keep creating fake wealth.
Bryan–You bring up a good point about the interest payment. For a good analysis of that, see the Grace Commission under Reagan. In it, it was discovered that taxes pay the interest on the debt and little else. (At least from an accounting perspective.)
As for QE making our money worthless, see Levi’s post here: http://www.politicalinsidersreport.com/2012/11/09/one-nation-under-china/. As long as countries around the world need US dollars for trade, we can continue printing money. This is simply exporting our inflation on to the rest of the world.
Back to taxes and borrowing… If the US didn’t tax or didn’t borrow would it be out of money? No. So why do you pay taxes? You do so because the IRS has guns. And with that, the US government creates a demand for US dollars (besides the oil trade.)
Taxes work to regulate the supply of dollars in an economy. The Fed tries to do this when it raises interest rates causing a person to borrow less which reduces the creation of new money and thus stops inflation (an increase of money/debt in an economy). The concern is that the Fed cannot raise interest rates going forward since our interest payment would be much too high and we can’t produce enough (tax) to pay the interest payment. Instead to fight inflation, taxes must go up which reduces the supply of money. Remember, since taxes don’t pay for anything, and to reduce inflation you must reduce the supply of money, that is all that taxes can do. The accounting may appear that it is going somewhere in a budget, like to pay interest, but in actuality taxes don’t do anything but reduce the supply of money. (What will be interesting to watch is whether the Fed decides to raise interest rates and thus the interest payment goes up for which we may not be able to cover the interest payment with taxes for accounting’s sake. Once that happens, no investor would buy our debt. And at that point, the Fed will be the sole buyer of government debt, if it isn’t already. Much more could be discussed about that.)
That’s monetary policy.
Fiscal policy is entirely different. Spending like Greece is a problem, but it doesn’t have the same impact to us via our different monetary policies. Again, we’re more like Japan. If you want to see what the next 10 to 20 years (or even longer) will look like here in the US then just take a look at Japan since 1990. The fiscal policy where the government does more work than the private sector is a problem.
What I’ve talked about in these two comments are not meant to say the government can and should do whatever it wants since it has an unlimited supply of money. Quite the contrary. What people need to understand is that the government will do these things unless we stop it. Does a government with unlimited resources increase your individual liberty and freedom? Hardly. It has an unlimited resource to make brown shirts and green fields for marching where the only thing we learn is that the government has the final authority to which we shall worship. That’s where we’re headed. Change the predicament we are in. Don’t tweak it. That won’t work. But before you can do that, you need to know the rules they are playing. Don’t apply your rules to their game.
How bout the reason we are failing is greedy bankers.
Greedy bankers are not the problem (part of it, yes). They have been around since the birth of banking. Greed has been around since the birth of man. The person in the mirror is more of the “why”. Having a large government is more of the “why”. If the Federal government had little power as outlines by the US constitution, nobody would be throwing money at it in order to bend the ears of the puppets who occupy the seats of “power”. The “why” is because a majority of people believe the political theatrics are real, behind the covers remain the same philosophy… the obsession and lust to obtain and exercise power. A tyrant does not care if needs to be called Democrat or Republican — he’ll choose whichever vessel is the path of least resistance. Don’t fall for the theatrics, they’re just distractions.
THe Greek default happened before in 1893.
Thank you for the reply Mr. Panagiotopoulos, and for the link to your research. Very interesting.
https://88ff984d-a-62cb3a1a-s-sites.googlegroups.com/site/vasjpan2/Home/greekdebt.pdf?attachauth=ANoY7cqb_lheCSwIX_O66-89DuK2Mf_Kxtkd69BmABfyJEoVh1lczdGr7pXGbB7Q6e6YK_mEDmdbjcVPPvYf1EWVzHjG2Vv2PzxhgMi0pBcQ4667qgpf52Olwy2V20OR8CpNGvY3vhuN2iIEPtnapYlnqzP2VC0Pcyd1ORJL87IrQxwGK-f10GIVmVmwpDJ6rZ7R5_plCrk3NmfUqilNq5npf-5XkqlF-A%3D%3D&attredirects=0