JimBowie1958
Old Fogey
- Sep 25, 2011
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Guest Post: You Don
That is the most concise summation I have seen of this problem yet.
Greece effectively has no money, and its only access to capital is continued bailouts. There are four options for the country being discussed:
1) Austerity. Not only is this politically unpopular, it causes social unrest. People wont stand for it nor will they be able to pay enough police officers to beat them back with batons. The populist uprising will squash any meaningful austerity plan.
2) Grow its way out. Not possible. When you count public and private debt together (roughly 260% of GDP), Greece is spending roughly 15% of its entire GDP just on interest payments. Thats an incredibly high barrier to growth.
3) Inflation. Ordinarily, governments would just print their way out but this isnt even possible right now because Greece doesnt control its own printing press.
4) Default. Result? Set off a chain reaction of banking failures and a derivatives meltdown. Utter financial carnage. Nobody wants to see this.
Germany is particularly focused on #4. Many German banks would suffer or fail as a result of a Greek default, sending a terrible ripple throughout the economy.
Its understandable that politicians want to avoid this scenario and are willing to pay a high price to do it. Hence the bailouts. But theyre completely ignoring the fact that the other options (growth, inflation, austerity) arent even possible.
That is the most concise summation I have seen of this problem yet.