Realistic Greek Solutions

Even a sovereign government with a nonconvertible fiat currency and flexible exchange rates has constraints. In a real world situation an economy has to pay for its imports by producing goods and services sold on world markets, and be considered solvent if it wisges to borrow.

In the abscence of increased exports, printing fiat currency to finance deficit fiscal poicies, or alternatively attempting to continually increase government borrowing, will inevitably fail. The former proceedure leads to inflation and devaluation. The later generates demand that hasn't been earned. This leads to a failure of creditor confidence, high-interest rates, the refusal of financial markets to lend, and ultimately devaluation when importers are forced to pay cash.

In both cases, inflation will result, despite the presence of unused resources. The presence of unemployment, and unused resources, in no way excludes inflation when available resources or manpower skills, lack the flexibility required to match the structure of demand.

Evidently, a better use of all available resources is needed if the Greek economy is unable to produce or pay for the goods and services it requires.  This can only be achieved by restructuring consumption and production, including moving manpower resources to more productive activities.

Simplistic deficit financing cannot  expect to make full use of Greek resources and reduce imports if the present consumption patterns are continued.   In the absence of fiscal prudence solutions cannot be expected, particularly  when unbridled fiscal deficits are used to continue financing private consumption, salaries, pensions, government services, etc.  and that necessarily limits the range of realistic fiscal policies available.

Unrestrained use of fiscal and/or monetary policies would continue to draw in imports that will be difficult to pay for in the absence of increased exports  (and where do they come from if current spending patterns are maintained). Borrowing from increasingly reluctant foreign sources, needing to be convinced they can be reimbursed, would be very expensive or unlikely. Devaluation strategies increase the relative cost of repaments and imports, thus contributing to inflationary pressures.

The illusory, solution is to believe a continuing an gradual depreciation of the sovereign fiat currency will free policy makers from fiscal reatraint. But that policy would inevitably fail as lenders at home and abroard will require repayments in appreciating currencies, the dollar or perhaps the euro. 

I admit, making the assumption that the Greek ecconomy is not perfectly flexible.  But, that changes little. Inflationary conditions and devaluation will inevitably result from fiscal policies that fail to recognise that even sovereign governments cannot get a gallon out of a pint pot.

Link
http://www.project-syndicate.org/commentary/sinn31/English#comments

No Automatic Bailout for Greece

Europe should ideally avoid the automatic bailout and the transfer systems of confronting financial difficulties.  Both strategies would require a strong sense of community backed by powerful political and financial institutions.  The level of regulation and high penalties required by such systems would be impossible to apply to a bnkrupt state.  You cannot meaningly fine a bankrupt, particularly one runnig a Ponzi sheme.

The better solution for the longer run is to make it clear to the PIGS that bankruptcy is a real possibility.  And lenders at high-interest rates should realise that they receive high rates to compenste for high risks of default.

Financial markets, European politicians, and the Greeks all have to learn that Greece can be allowed to go bankrupt in the interest of protecting the wider Eurozone, just as the United States can allow a great bank, large company, or a state to go bankrupt without threatening the dollar.

As German Chancellor Merkel has realised, it cannot be good to simply rush to rescue profligate Greeks without imposing strict regulation and penalties.  The difficulty is that it is meaningless to fine a bankrupt, particular one runnig a Ponzi scheme.

Unfotunatley, in part due to the ignorance exhibited by the financial markets, lenders, politicians, and Greeks the possibility of bankruptcy has not been properly understood.  Perhaps less surprisingly, lenders of high risk funds receiving high interest rates as a compensation for the higher possibilitiy of default, now believe that Eurozone states should guarantee repayments.

There is little moral justification to assit Greeks or those who financed their irresponsible expenditures.  The only real reason to assist Greece is the level of short run collateral damage that may be inflicted on other members of the Eurozone if Greece does go bankrupt.

Links:
http://www.project-syndicate.org/commentary/sinn31/English#comments

Greeks and their Lenders Unfairly Attack Resposible Helpers

The Greek government appears to have been running a Ponzi scheme. A Ponzi scheme remainss an immoral/criminal Ponzi sheme whether it is run by an individual, a company, or a soverign state. Inevitably a Ponzi scheme damages all those who are involved directly or indirectly. One solution adopted, in the case of individuals responsible for running such fraudulent schemes, is to jail them!

Unfortunately it is difficult to imagine such a resolution being applied to the Greek politicains, electorate, and their bankers; all responsible for the Greek crisis. Nevertheless, many innocent parties are going to suffer as a consequence of their irresponsible behavior. Germany's Chancelor Mrs Merkel is right to insist that help must be extended only on a basis that prevents a repetition of such profligate spending.

Any satisfactory resolution for the Greek crisis must also convincingly demonstrate to all who might evisage running Ponzzi shchemes, ie 'living on tic', that there is no 'good fairy' duty bound or obliged, to bail them out.

Those involved in financial markets should note that Greek bankruptcy does not necessarily involve Greece leaving the Euro zone or the European Union. Such suggestions can only be made by those with a complete ignorance of the facts. California or Detroit, could go bankrupt wuthout being forced to leave the US dollar zone or the the United States.

Foolish lenders of funds at high-interst rates should remember they are being paid a premium to accept the risk of default. Irresponsible borrowers are selling their future prospects, leaving little for the next generation. Eventually the chickens come home to roost and the participants deserve little sympathy.

Unfortunately it is the bystanders who risk being hurt, having to pay the bills, and clear up the mess. And judging by the current demonstrations in Athens those bringing assistance, and insisting on responsible Greek behavior, are going to recieve no thanks from Greeks. Indeed Germany, likely to have to pay most, is receiving much unfair criticism from financial markets and from those who would like their foolish loans to be immediately guaranteed.

Perhaps, to demonstrate their commitment to community spirit the Greeks could start by recognising Macedonia's use of  an entirely appropriate name.  Community efforts require two-way efforts, reciprocity,  to have any chance of success.