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Thread: Greek Debt - Postponing the Inevitable

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    Banned Eric Stoner's Avatar
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    Default Greek Debt - Postponing the Inevitable

    This is admittedly oversimplified but let's suppose I have an income of $30,000 per year. But I have credit card debt of $45,000 on which I am paying 16% interest. I also owe child support of $10,000 per year. There is no forseeable prospect that my income will increase any time soon. My child support might have to go up. Would anyone in their right mind lend me MORE money ? Can anyone see a way I could possibly stay solvent and avoid bankruptcy ?

    Well that is exactly what the EU has just done with Greece. Greek debt is already 150% of GDP. That's GDP where only a percentage is actual revenue the government can use to pay interest on its debt. ( I said my hypo was oversimplified. ) Rather than force a restructuring, the EU has just lent Greece ANOTHER $86 billion. Thanks in part to a few austerity measures, Greece's GDP is actually DECLINING . Yet, many segments of Greek society refuse to accept reality. In my hypo it is "child support" but for Greece it is pensions and other somewhat fixed expenses they foolishly ran up over the last two decades. The interest on existing Greek debt is averaging about 16%.

    Everyone knows that the only realistic option for Greece is to restructure its debt.
    Private holders of Greek debt are going to have to get used to the idea of trading high interest Greek bonds for lower interest new issues. Pensioners and other government beneficiaries are going to have to make do with smaller pensions. One part of Greece's problem are over a million people who retired at age 50 ! In a country where the life expectancy is well into the 70's ! Where Crete and some other Greek islands have some of the world's highest life expectancies !

    Everyone is watching white knuckled and trembling as this farce plays out toward its inevitable denouement. If Greece goes, can Ireland and Portugal be far behind ? And then, what about Spain ? How generous are the Germans (and other reasonably solvent EU members) willing to be ? They look at Greece's predicament and rightfully ask :" Vy do ve haf to bail out zose lazy Greeks ? "

    The U.S. has been going down the same path as Greece and the other PIGS. As Mel and I have been warning since we both started posting on these and related matters. While not as acute as Greece, our country has to fish or cut bait on bothits budget and its debt or we could easily end up at the mercy of the Chinese, EU and ( God Help Us ! ) the IMF. Our own debt is approaching 100% of GDP.
    Last edited by Eric Stoner; 06-02-2011 at 07:18 AM.

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    Banned Melonie's Avatar
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    Default Re: Greek Debt - Postponing the Inevitable

    If you look 'under the hood' it gets even scarier. In exchange for this latest round of loan guarantees to Greece, a provision attached to the loan was INTERNATIONAL enforcement of Greek tax collection !!! Another provision attached to the loan was INTERNATIONAL enforcement of Greek spending cuts ... meaning that the Greek equivalent of 'food stamps' and 'welfare checks' and 'gov't worker paychecks' are going to be cut even if the majority of Greek citizens vote against such cuts. This is not surprising since in the EU as a whole, the percent of population actually participating in the work force is significantly less than 50% ... and is arguably a major contributor to Greece's current debt problem as the majority of voters had no personal 'skin in the game' re the costs of voting themselves more generous gov't paychecks and benefits !

    Arguably this is also a first step towards a 'United States of Europe', with Greece and soon to follow Ireland and Portugal and potentially Spain quickly finding themselves in similar situations to residents of California, Michigan etc. i.e. paying higher taxes while receiving less gov't spending / paychecks / benefits at the same time. As to those non-Greeks or non EU citizens who would comment 'what does this have to do with me', the 'gold foil hat' crowd would tell them that there is an immediate effect on the US dollar's international exchange rate as a result of the latest Greek bailout ... which just made food, gasoline, and every imported item 3% more expensive in US dollar terms in the matter of a single day !!!

    As to less instantaneous effects, US export companies are not likely to have many future Greek ( or Irisn or Portuguese or potentially Spanish ) customers, as rising taxes in their own countries sucks up discretionary spending as well as capital spending by businesses. And the same US state analogy holds for the Germans and French who are 'paying for' this latest Greek bailout versus Texas, Florida etc. In both cases they wind paying more out in taxes while receiving nothing at all in return for their additional 'sacrifice' since the wealth transfer is a one way trip ! This will also translate into less money being available to German and French industries and consumers thus an additional drop in sales of US products exported to those countries.

    On a larger scale, Greece has proven that gov't debt issued by a 'first world' country can indeed go into default ... leading to a dearth of buyers for Greek gov't debt ( hence the second bailout ) thus massive interest rate increases i.e. over 10% interest on Greek gov't debt ... which will translate into business interest rates that are several points higher plus consumer interest rates that are MANY points higher. It should be noted that, while not reported much in US media, China just announced that it has been a net SELLER of US gov't bonds over the past quarter ... which is a first step toward a Greece-like interest rate scenario for US gov't debt in the near future. Well, providing that congress can find a way to pass a vote to increase the US statutory debt ceiling at any rate which would allow the US Treasury to print up and sell more US Treasury Bonds at all.

    China of course realizes that nobody is going to 'bail out' the US gov'ts debt problem ... and that unlike Greece the US will resort to 'destruction' of the US dollar in order to avoid full value repayment of it's debt obligations while technically avoiding a default ( something that Greece is no longer able to do since the Drachma disappeared and was replaced by the Euro - which Greece, Ireland, Portugal etc. like California, Michigan etc. are unable to 'print' themselves ). The non-destruction of the US dollar alternative for the US is to stop borrowing / printing additional money ( a foregone conclusion since at this point the FED was the only remaining major buyer of newly issued US Gov't Bonds ), and for the US gov't to either slash gov't spending or enact draconian tax increases ( or some combination of both ).

    And for better or worse, an increasingly vocal element of the territories whose increased taxes are being used to bail out other territories ... i.e. Germany and France versus Texas and Florida ... are calling for a breakup of the 'federal' union that is forcing the transfer of their tax money on a one way trip to those territories that need bailing out ... i.e. Greece and Ireland versus California and Michigan. This could get extremely interesting before all is said and done ... on BOTH sides of the Atlantic.

    ~
    Last edited by Melonie; 06-01-2011 at 02:18 PM.

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    Default Re: Greek Debt - Postponing the Inevitable

    Ireland is a rather unique case. Their problem is not the structural budget shortfalls as in Greece but rather the massive bailout of Irish banks by the government in 2008 and 2009.

    Btw, After I posted, Moody's downgraded Greek debt to "junk" status with chances of repayment rated at 50-50.

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    Thumbs up Re: Greek Debt - Postponing the Inevitable

    Quote Originally Posted by Eric Stoner View Post
    Ireland is a rather unique case. Their problem is not the structural budget shortfalls as in Greece but rather the massive bailout of Irish banks by the government in 2008 and 2009.

    Btw, After I posted, Moody's downgraded Greek debt to "junk" status with chances of repayment rated at 50-50.
    I read an article about Greece a few months back... was about a man traveling to a monastary, and in turn discusses Greek politics, taxes, and the way of life.

    I cannot find the article anymore, but it seems that very few Greeks actually pay taxes in the first place. With ideologies like these, calling Greece a "1st world" country would hardly be true.
    Isocrates: “Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress.”

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    Default Re: Greek Debt - Postponing the Inevitable

    ^^^ considering that 47% of US tax filers ... plus all Americans who don't file tax returns ... don't pay income taxes either, where does that leave the US in relation to Greece ?

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    Default Re: Greek Debt - Postponing the Inevitable

    Quote Originally Posted by Melonie View Post
    ^^^ considering that 47% of US tax filers ... plus all Americans who don't file tax returns ... don't pay income taxes either, where does that leave the US in relation to Greece ?
    53 percent is still much more than the amount of Greeks who do pay tax. I'm not siding against you here, but I'm not going to throw up the figure without being able to find the article.
    Isocrates: “Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress.”

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    Default Re: Greek Debt - Postponing the Inevitable

    53 percent is still much more than the amount of Greeks who do pay tax
    That's 53% of US residents that must FILE a tax return who pay income taxes versus 47% who file but don't. Of course, this does not account for all of the other US residents who do NOT FILE a tax return at all ... either because they are unemployed and collecting social welfare benefits, incarcerated, disabled etc. All in all, in terms of US residents, significantly less than 50% actually have to pay income taxes. THIS is a trait shared by Greeks ... i.e. that if a voting majority of citizens face absolutely zero personal negative economic consequences by voting for higher social welfare benefits / higher gov't salaries etc. then their gov'ts are going to continue raising social welfare benefits and gov't salaries ... regardless of the ability of the voting minority of actual taxpayers to pick up the tab !


    from

    (snip)"Greece Compared to US

    Many countries have restrictions and requirements on doctors, nurses, lawyers etc. Greece carries the idea to extreme.

    According to Keep Talking Greece "closed professions" include beauticians, drama and dance school instructors, bakers, antiques dealers, insurance agents, insurance consultants, employment consultants, diagnostics center staff, translators, divers, cameramen, driving school instructors, cab drivers, tourist bus drivers, newspaper stand owners, electricians, sound technicians, private school owners, tobacco sellers, gun manufacturers and sellers, hairdressers, private investigators, port workers, real estate agents, lifeguards, carpenters, financiers, opticians, auditors, movie/theater directors and even car mechanics.

    Restrictions will be lifted July 2. That is a much-needed maneuver, and the same applies in the US as well.

    Many states have prevailing wage laws and other restrictions that have nearly the same effect as the insanity in Greece(snip)

    Ending Restrictions on 130 (snip)"Closed Professions" is a badly needed reform. However, the near-term effect will be lower wages, lower benefits, and increased competition.

    Increased competition needs to happen in the US as well, with public unions kicking and screaming every step of the way. The SEIU, like the Greek unions, don't want reform at all.

    Regardless, the US desperately needs to reduce red-tape and open up competition for jobs in education, in garbage collection, in prisons, in health care, in all government work.

    Unfortunately Keynesians and politicians alike want results now, and when it doesn't happen now, they clamor for more stimulus, even though stimulus is a problem.

    Fed's Misguided Tactics

    Compounding the problem, the Fed fights wage destruction with policies that encourage speculation and debase the dollar but don't increase wages. The result is repetitive asset bubbles and debt that cannot possible be paid back.

    Wages have not gone up, nor have housing prices, nor has employment, yet the Fed persists with failed policies that slowly destroy the middle class.

    It's a nasty brew. In many ways the US has more in common with Greece than most realize, especially when it comes to public unions and lack of competition for protected government jobs.

    Interestingly, self-serving extortionists compared the public union protests in Madison to freedom fighters in Egypt.

    As I pointed out in Public Union Protesters More Like Greek Extortionists than Egyptian Freedom Fighters; Unions Under Fire in Wisconsin, Ohio, Tennessee; Student Idiocy, comparing SEIU protests to freedom fighting is sheer lunacy.

    The Gimme, Gimme, Gimme "Better Way" Chanting Mob looks more like the Greek public union extortion than it does anything else.

    Our cure is simple. Pass national right-to-work laws, scrap Davis-Bacon and all prevailing wage laws, and end the Fed.

    Dissimilarities

    Bear in mind Greece has other problems that are not comparable, so does the US. For example, the US has untenable military spending and a health-care system that is the most costly in the civilized world.

    Greece is in a currency union with no fiscal union. Greece has no way to devalue its currency or set interest rates. Greece has few exports while the US is a huge exporter that simply imports far more than it exports.

    Thus, I do not want to imply the US is Greece. I simply highlighted one area that is more similar than most think.(snip)

    ~
    Last edited by Melonie; 06-04-2011 at 02:45 PM.

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