An Experiment in Scotch

"I write to discover what I believe." Michael Lopp on Twitter

Can Civilization’s Birthplace Become Its Funeral Pyre?

Over­reach­ing head­lines aside, the Euro­zone is a bit of trou­ble. Greece has been bailed out in an attempt to avoid a sov­er­eign default. Those in the know think the Greeks are unlikely to be the last coun­try in the Euro­zone to require a bailout and the con­di­tions the IMF are expect­ing Greece to con­form with are likely to have unin­tended far-reaching con­se­quences that we can’t pos­si­bly under­stand at this point. A lot of peo­ple I talk to seem to be of the opin­ion that the Greeks got them­selves into this mess and that bail­ing them out serves lit­tle pur­pose. This is prob­a­bly true though for rea­sons far more com­pli­cated than that.

A guest post over at Naked Cap­i­tal­ism out­lines 11 points sup­port­ing the idea that the Euro­zone will likely break down over the Greece bailout. One of the key points revolves around a basic account­ing prin­ci­ple: if one entity has a deficit, some other entity must have a sur­plus. Fis­cal account­ing is essen­tially a zero sum game and this is very impor­tant in the Greek case. When think­ing about this, it’s impor­tant to real­ize that Greece, being a mem­ber of the EU, does not con­trol its own sov­er­eign cur­rency. Thus, for Greece to run a deficit, there had to have been com­plic­ity from within the EU, specif­i­cally from Ger­many. It’s the fis­cally con­ser­v­a­tive Ger­mans ben­e­fit­ing from their strong export dri­ven econ­omy who pro­vide the oppor­tu­nity for the Greek gov­ern­ment to run a deficit.

This part about sov­er­eign cur­rency is impor­tant. His­tor­i­cally, coun­tries that con­trol their own cur­rency have been able to inflate their way out of debt, at least to some degree. In Greece’s case, the coun­try is unable to do this because their cur­rency is the euro and is out­side their con­trol. There­fore, they essen­tially have two options: default or bailout and accept the dra­con­ian retrench­ment terms the IMF is demand­ing. As the arti­cle above men­tions, it is unlikely that these terms are cre­ated with the con­sid­er­a­tions nec­es­sary regard­ing the sim­ple account­ing fact above, e.g. if Greece suc­cess­fully imposes finan­cial aus­ter­ity mea­sures on its peo­ple (a HUGE if at this point, one that isn’t get­ting enough atten­tion), this nec­es­sar­ily means that the export soci­eties of Ger­many and other Euro­zone coun­tries will retract due to the cut­backs in spend­ing in Greece and others.

On top of that, these aus­ter­ity mea­sures will likely have a defla­tion­ary effect on the Euro­zone. The bailout of Greece is aimed at gov­ern­ment debt and the aus­ter­ity mea­sures are aimed in the same direc­tion. Based on the same sim­ple account­ing con­cept I talked about above, if Greek gov­ern­ment debt oblig­a­tions are reduced through aus­ter­ity mea­sures, the Greek pri­vate sec­tor will see their debt oblig­a­tions grow lead­ing to more pri­vate defaults and less growth in the Greek econ­omy. Short­sight­edly demand­ing to lower gov­ern­ment debt with no con­sid­er­a­tion of the inter­con­nect­ed­ness of the gov­ern­ment and pri­vate sec­tor spend­ing will lead to fur­ther pull­backs and lack of growth in Greece.

In the end, the issues that we are see­ing with Greece and the like illus­trates sev­eral prob­lems with the Euro­zone as it is cur­rently exist­ing. If the Euro­zone col­lapses, as the arti­cle seems to think pos­si­ble, the ram­i­fi­ca­tions will spread out over a much big­ger area than just Europe. My crys­tal ball is cloudy when it comes to the results of a Euro­zone col­lapse but I can’t help but think it will be highly detri­men­tal to our coun­try as well. We should watch care­fully how things play out in Europe since it’s quite pos­si­ble we may have to deal with sim­i­lar cir­cum­stances in the near future here at home as prof­li­gate states like Cal­i­for­nia begin to encounter the same issues the Greeks are run­ning into.

1 Comment

  1. i have to admit to both igno­rance and hubris at this moment. i both do not under­stand the issue at hand fully and yet would claim that those claim­ing to have wis­dom about it are fools.

    greece is in a heap of trou­ble; on this we can all agree. but greece’s run­ning a deficit, at least from my per­spec­tive, does not mean any­one else must nec­es­sar­ily be run­ning a profit. let me explain.

    the world econ­omy, how­ever intri­cate and through what­ever ratio­nal­iza­tions, oper­ates fully within an arti­fi­cial con­struct at this point. in the absence of any­thing to back up wealth con­cretely, the world econ­omy is reduced to noth­ing more than the­o­ret­i­cal num­bers. there has been so much talk about the world econ­omy expand­ing and con­tract­ing, but think about it: rel­a­tive to what? it’s the fuck­ing world. there is no rel­a­tive mea­sure. and there can be no absolute mea­sure, because the ruler is always going to be theoretical.

    that estab­lished (at least in my admit­tedly some­what scotch-addled brain, with a hat-tip to the site itself and a hearty thanks to the boys at lagavulin), the very idea of account­ing equal­iza­tion can be called into ques­tion. just like entropy can con­tract within a sub­sys­tem with­out vio­lat­ing the sec­ond law of ther­mo­dy­nam­ics due to the macrosystem’s exis­tence, so can greece run a deficit with­out any­one run­ning a profit. in fact, it is the­o­ret­i­cally pos­si­ble for the books not to bal­ance at all because a debt has been incurred against a his­tor­i­cal bal­ance that never actu­ally existed. the world econ­omy expanded beyond what it should have, and now bal­aces are owed, but to whom? the books do not nec­es­sar­ily need to bal­ance. after a while, one begins to won­der who owes whom since no one actu­ally owned any­thing in the first damn place.

    some­times it’s all just num­bers, and we are delud­ing our­selves and per­pet­u­at­ing a dan­ger­ous myth to sug­gest oth­er­wise and behave accordingly.

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