Naive economics question re: public debt

Factual Questions
21

Picture Greece as a lazy husband who only does occasional odd jobs. Now picture Europe as the wife who works a good job and has a steady income.

The husband is able to borrow a lot of money because the lenders know that his wife will be able to pay off the loans even if the husband doesn’t.

Now the husband’s borrowed a lot of money and the wife is nagging him to stop borrowing any more money and get a regular job and start paying off the loans he has.

Now the husband might start thinking, “I’m getting tired of this nagging. I should just divorce my wife. That way the nagging would stop, I could borrow all the money I want, and I wouldn’t have to get a job. Brilliant.”

What the husband doesn’t realize is that if he gets a divorce, his problems will immediately become much worse. Without his wife’s income to back him up, he won’t be able to get any more loans and the people he already owes money to will show up and start threatening to break his legs.

That’s Greece’s situation. It shouldn’t be thinking about leaving the Eurozone. It should be worrying that it will be kicked out of the Eurozone.

22

You had me until here. So, creditors trust the U.S., the U.K., and Japan because if we get in a pinch we can hyperinflate our way out of trouble? The creditor loses in that sense anyways. So it does get paid back, but with units of currency now worth substantially less.

Why would a creditor see that as comfort? If anything I would like Greece better in that position because it CANNOT artificially weasel its way out of paying me back.

23

This is the problem with analogies. Parts of the wife’s body are the husband’s creditors, and the wife is only agreeing to keep up payments on the husband’s debts (to her) if he agrees to live outside in the dog kennel and eat a cup of rice per day.

24

This makes a lot of sense, was it this hard to switch over to the Euro? Seems like it was easy for all Europeans countries to abandon their national currencies and switch? Or is it a matter that the switch back is thought to be bad, while the switch to it was good? Is it about expectations?

25

Look at where the debt is. Most US debt is denominated in dollars and held by Americans, just as most Japanese debt is denominated in Yen and held by the Japanese. I believe (but can’t be sure) the same is true of the UK.

So, when I’m talking about inflating or deflating the currency, I was being somewhat inaccurate. I was actually trying to indicate the dollars value relative to other currencies. That MAY affect prices within the US itself but wasn’t the primary concern. And if your underlying economy is solid, you don’t need “hyper” inflation. It’s not like it’s a black and white choice between austerity and Weimar republic inflation.

So, if the US loses value against the Euro or the Yen or the Pound, most investors aren’t going to be affected much since they are largely unaffected by the relative value of their currency against others. And it helps the US trade deficit, since US products are relatively cheaper. Sure, the Chinese aren’t going to be happy, but them’s the breaks for their economic strategy. And since 80+% of the cost of Chinese made goods is actually American (distribution, corporate, advertising, etc), we have somewhat of a built-in buffer to a relative rise in the price of Chinese manufacturing.

Greek debt is held largely by France and Greece. If they lose the 1:1 peg, it all goes to hell. And allowing Greece to join the Euro zone was a mistake in the first place. While the underlying US economy has always been solid, that wasn’t the case for Greece. The assumption was always that they would somehow magically shore up the foundations of their economy after going to the Euro or somebody would always cover for them. That assumption was bad.

26

That’s a question, I suppose. Another question would be, what western economy has seen hyperinflation since before WWII?

Using the word “creditor” for someone buying a country’s bonds is an odd usage too. What are they going to do, foreclose?

In the real world, currencies fluctuate constantly. That’s reassuring, not a problem. It’s only the currencies that are fixed that worry others. China, for example, works it to its own advantage. Greece has no economic power and simply can’t do that. You’ve taken the great advantage of modern international economies and turned it upside down.

27

Not really true, but I believe there is some truth here. The Greek economy is heavily integrated with the world economy due to international trade and investment, so a Greek failure could potentially bring down Peruvian banks or send Canada into a depression.

What I believe is true is that the Greek public debt is denominated in Euro, a currency that Greece does not have sovereign control over. The US could, in theory, just print trillions of dollars and pay off it’s national debt (though, arguably, that would be a bad move economically). Greece CAN’T just print Euros.

28

People are far too quick to jump from “inflation” to “hyperinflation”. Printing money doesn’t automatically make you the Weimer Republic. The Federal Reserve has been printing large amounts of new money through its quantitative easing program over the last few years yet US inflation has consistently remained at historical lows, and is projected to remain low.

If a western country with control of its currency needs to make repayments on its debts totalling 0.5% of its GDP in a given month, and can’t make the repayments, they could print enough money to cover it without causing much extra inflation at all, let alone “hyperinflation”. But if Greece gets into that situation, it defaults into bankruptcy and everything goes haywire. Furthermore the control of the currency allows them the control of the central bank, which affords other enormously important extra protections, like a functioning lender of last resort, which is a massive problem in the Eurozone right now.

29

So what happens if Greece “defaults into bankruptcy”?

30

No, the Canadian banks are pretty much stable and not overexposed to too many foreign influences. We’ve had it pretty good here, all things considered.

The problem with Greece now is the Euro; The USA or Japan borrow money in their own currency. Part of the good faith of lending to those countries, in dollars or yen, is the belief that those countries won’t hyperinflate or default.

Greece is more like a US state or city. It borrows in a currency it does not control, nor does it control the interest rate or other details (like money supply). The US creates money because the central bank just says there’s more. A US state, like Greece, has bank accounts and lines of credit. If those run dry, it has no money. It can’ create it. If the Bank of Greece (whatever) declares that the government has an extra hundred billion euros and starts issuing promises to other banks, those promises are only as good as whether that bank can ultimately pay up.

It’s as if you go around writing cheques (or print your own US bills). Those are only good if people take them. When people say “no, give me real money” and you have none in your account, you are stuck.

Problems with reviving the drachma:
-as mentioned earlier, runs on the bank. If you knew the Bank of California was going to decree all deposits are in California Pesos instead of USA dollars and everyone knows the CP is going into the toilet within a month, what you do? Go out and get as much cash in USA dollars as possible. So the first thing to do is declare all accounts frozen. So as soon as there’s a hint it’s coming, everyone runs on their banks.
-the decree would also convert all debt to drachmas, and all incomes. However, that only applies to debts where both parties are subject to Greek law. They still owe all those bonds to foreign banks in euros. But they are now collecting taxes in drachma, wich now is worth pennies. Oil and all other imports are still denominated in euros, so cost 10 times as much in Greece.
-be prepared for any company that owes money to outside interests to go bankrupt.
-the banks and others who can will do the same as the runs on banks - convert all funds to euros ahead of the change, so they stay rich. When the drachma falls, suddenly they are 10 times richer. Expect the unprvileged locals to rebel in the streets over who got an unfair advantage in the conversion.
-if there’s a hint of the change, outside suppliers stop sending to Greek merchants except “cash on delivery”, so they don’t get stuck with drachmas or a bankrupt customer. If you want to buy a car (or any other valuable commodity), buy it now in euros, then make the payments after the decree in drachmas; but the dealer or bank still has to pay the factory in Germany in euros. so it goes bankrupt… Knowing this, business will grind to a halt until any uncertainty vanishes.

The moral is, if there’s a hint they drop the euro, it has to be done quickly and decisively.

How did Greece get into this messÉ As others said, the same way the US housing market did. A little stupidity and willful blindness on the part of the borrowers and lenders, a belief that the day of reckoning was long away, and refusal to believe that ìf things cant keep going on this way... they wont.

31

I am not sure how they are calculating this but gas is twice what it was three years ago and groceries aren’t far behind. The government changed the way it calculates inflation so historical comparisons wouldn’t apply without adjustments anyway.

In short they are rigging the books. Inflation is not low unless you are looking for a house and the bubble that just burst there was largely due to easy money and moral hazard where the government delinked the risks from the reward. Until the artificially created over supply clears the market I suspect housing will make the inflation figures look better than they are. These boom and bust cycles were much shallower and more infrequent before we changed our monetary system and the price of things wasn’t so much a political tinker toy.

At any rate I doubt the official inflation figure is any more accurate than the unemployment figure where the number of people who have given up hope of ever finding a job are not counted in the figure the press typically cites. In short, you can’t look at just one number to get the whole story.

About the only thing in our favor is that since the whole world is inflating the money supply we are not doing as poorly as would be the case otherwise… until the whole thing collapses. That is another reason people fret over Greece. They are afraid it is but the first domino and that the PIIGS will soon follow. If that happens then the Euro is done. And if that happens… The one thing the modern system of banking is meant to do is put off any collapse as long as possible. Unfortunately that will likely mean it is as big as possible.

So people aren’t buying US debt because it is sound but rather because it is slightly less worrisome than the alternatives. For the time being that is good enough. As a long term plan it is hard to think of worse.

32

Japan is a special case because almost all of its debt (indeed very high) is internally owned. Something like 95% (maybe even more, can’t remember the exact figure) of the Japanese debt is owed to Japanese citizens or Japanese companies.

So, it’s a bit like you owing a lot of money to your wife and children. Banks wouldn’t care much about it.

33

Note that there is a big difference between devaluing a currency and inflation. If a country devalues its currency, it’s entirely possible that the cost of a burger stays more or less the same, people earn the same salary, etc. But imports get more expensive and exports get cheaper (and hopefully easier to sell).

With inflation, everything, local or foreign, gets more expensive. People will want raises to cover it, etc.

Greece can’t devalue the Euro.

34

This argument is just plain ridiculous and easily proven to be so.

In 2009, both food and energy prices experienced MASSIVE drops. Were we then worried about deflation? I ask because if we include those prices, we experienced deflation only a few years ago.

If you’re going to argue the Fed (not the government) is cooking the books, at least be consistent in your own arguments. Apparently, it’s not ok to call it deflation when energy and food prices are involved (because it’s not “really” deflationary) but it’s ok to term it inflationary (because it is somehow then double-secret quadruple inflation).

35

And yet you have the entire internet at your disposal to find out.

All the information is available in a single pdf Chapter 17. The Consumer Price Index (Updated 06/2007).

The short answer is that 13 categories of goods, each with dozens of specifics, are measured through interviews with thousands of people. Then a lot of math is applied. See the many appendixes for the full listing.

That’s why a rise in price in one easily noticed good, like gasoline, does not drive the entire basket of goods.

Or, to use a short answer again, the real world is more complicated than the world inside your head and the government responsibly measures that entire complexity instead of your ridiculously simplified version.

36

Oh, I saw this after I wrote the above:

The unemployment figure does include those people, as we’ve explained in a thousand earlier threads. Again, the Bureau of Labor Statistics has a page for people who are exactly as confused as you are.

37

At any rate, capitalism, and a monetary system in general are just plain bad. We use and waste our resources in pursuit of this fake commodity that, in reality, does absolutely nothing for human survival. Capitalism is bad because it creates competition, and competition creates people stabbing each other in the back for monetary gain, and worse of all, makes people create really cheap crappy products to try and sell theirs over their competitors. This usually results in products designed to break, creating waste and unnecessary use of resources. GDP is great example of just how ridiculous a monetary system is. GDP states the more products and services consumed, the better our state of living is and thus a “healthier” economy. But wait a second, whats an economy again? Oh yea! “careful management of resources to avoid unnecessary expenditure or waste; thrift” “sparing, restrained, or efficient use, esp to achieve the maximum effect for the minimum effort”. Sooooo… lets gets this straight… the faster and greater rate we consume products and services (ultimately resources) the better our GDP is, so the better our economy is doing, which means our quality of life is good. Huh… but last time I checked our planet doesn’t have unlimited resources, you know, the things that actually support human life. So the fact that we waste, at exponential rates, our resources in pursuit of a fake make believe commodity that does absolutely nothing for our survival…doesn’t seem a little backwards to anybody. The whole concept that people study and debate this make believe commodity makes me laugh, and the fact that our whole culture is based upon it makes me want to vomit. I can’t wait for social and economic collapse so we can mulligan this shit.

38

MonoDextrose, this is getting well beyond the topic in the OP. If you wish to debate capitalism itself, please open another thread in Great Debates. Let’s drop this line of discussion here.

Colibri
General Questions Moderator

39

The question was monetary related. I said something monetary related, I didn’t ask how to fix a broken head gasket on a car. Forum nazi if you ask me

40

Kind of reminds me of Churchill’s comments about democracy - the worst system, except for all the rest.

There’s a massive, massive amount of study of economics. We may think that “put 2 economists together, get 3 completely different opinions”; but in fact a lot of the value of economics is that it can tell us how things operate.

I think Monodextrose is complaining more about our (over)consuming society. But - this issue, and problems like Greece, and unemployment rates and inflation and investment and planning - these are all social/psychological issues. The money works the way it’s supposed to. It’s politicians featherbedding for votes, awarding massive pensions to their constitutents and to keep noisy unions happy, that has lead to the Greek problem.

(Someone on TV the other day dragged up the comment from one Greek minister - their railway has more employees than riders; it would be cheaper to shut down the railroad and send all the passengers by cab. )

If anyone is really to blame, it’s also banks that lend money without due dilligence. The system is structured to pay the necessary bonuses, from the bank president on down, for the anticipated profit on loans; but no structure in place to claw that money back if the deal turns out a few years later to be much less profitable…

This kind of reminds me of the old story about high-tech companies that paid bonus on the volume of product shipped by quarter. Some companies allegedly shipped empty boxes, bricks, etc. the last few days to make bonus for the quarter. Dealing with the fall-out did not happen until the next quarter, and apparently did not result in bonus clawback.

You reward people for bad behaviour and guess what happens?