Greece can default, tout itself as a cheap cheap tourist destination and hope to gawd that capital inflow (denominated in other, more worthy currencies) keeps the gears greased just enough to regroup and avoid outright rebellion.

Cuz' they got nothin' else.

Defaulting while staying in the Euro is by far the best option for most Greeks. They get out from underneath the debts various slick talking politicos and lobbyists, as well as gullible voters, have saddled them with, while still getting to enjoy the benefits of a currency likely to be fairly well managed by what will increasingly become German dictat.

Allowing the same slick talking politicos that led them to where they are now, to wrest control of the monetary printing presses by reintroducing drachma's, will simply change the manner in which they are taxed; from directly via a tax bill, to indirectly via inflation, and they will once again be left holding the bag.

This is a easy to understand explanation and solution.

Its the game of Russian roulette to these politicians they know there is a good chance the loaded chamber could turn up but they pray just not on there shift. With interest rates so low and money so willingly being given to finance this mess .
Who lends money for so long at so low interest rates to obviously broke governments, when the math shows you have a good chance of not making any money?
The money must not be there own so I really fear for our savings and pension plans etc.

Jslique said:

Quote:

The money must not be there own so I really fear for our savings and pension plans etc.

Jslique here is where I'm at on this. If I'm wrong I'm sure the guys will point out where. My take is that once you create enough debt, the debt+interest will exceed the amount of money in the system that can be used to pay off the debt+interest owed.

A large factor in this is that most of our money is not printed money but is electronic debt money which means that it is destroyed when you use it to pay off debt. That fact, which is so often ignored, totally destroys the 'velocity of money' argument because if the money is used to pay off a debt its velocity becomes zero.

So how does the system keep going? It has to have more new debt every year, which created more money, which is used to pay off last year's interest. When you get to where we are now and people will not take on more debt either the government's have to take it on or, the system collapses.

Do I have it right guys?

Flap

I don't believe it will help much if Greece returns to GRD, in terms of becoming competitive and growing exports. The idea of "devaluing your way to recovery" is bunk. Look at the facts.
Imports: EUR 45bn
Exports: EUR 18bn

Once you strip out funny accounting games on shipping (inflates both exports and imports) and that oil imports and exports are essentially a wash, as well as "re-exports", the "core" trade balance is about 11bn in Exports and 30bn in Imports.

Most of the imports are food and machinery to keep stuff running (e.g,. for their export market). Most exports are processed foods and minerals (they have communist-style Al smelters).

So, by re-introducing GRD, the import costs will immediately (most of it comes from the EU) get to about EUR 150bn as the market is pricing the "new" GRD at about 5x the old (ie five fold devaluation).
So unless they figure out a way to cut out imports drastically, their imports will be about half the GDP.
Which is fine, if they can fund it via exports. So let's look at that side for a moment.

Granted, all the exports will be cheaper, but the Greeks will just be selling the same volume at a lower price, ie., they can't produce more olive oil than there are trees. Plus they are dependent on the imports such as machinery, petroleum etc to make their exports work.

Making up a 3x gap in the trade balance with that situation is impossible. Iceland and (eventually) Argentina could pull off devaluations due to their strong export base.

Greece also can't stay in the EUR since no one will lend them money (in EUR) to cover their deficits. So the best solution is return to the GRD and the populace will have to live off the land, emigrate, or some other drastic alternative - confiscate the wealth of the off-shore (shipping) elite. The latter will cover all debts with a wide margin....

Karl, I disagree only because if Greece defaults and keeps the Euro, that the rest of Europe will keep on money printing without Greece getting any benefit of the money printing. Thus they would be subject to the future impending disaster of the Euro. Better to bite the bullet with their own currency now and put up with the upheaval once rather than have another upheaval of the Euro crisis smack them for round two. Your theory relies on government's to show common sense and discipline.

Savingsaretheway wrote..

The answer is that it's MUCH cheaper to bail out the banks indirectly by bailing out Greece than it would be to bail them out directly after letting Greece fail.

How about don't bail anyone out? Because the banksters have convinced the politicos and the cognoscenti of the West that sovereign survival hinges upon their survival. It's a lie, when in fact, the longer the Ponzi is allowed to run the more likely the exact opposite will be the case.

Flappingeagle wrote..

Jslique here is where I'm at on this. If I'm wrong I'm sure the guys will point out where. My take is that once you create enough debt, the debt+interest will exceed the amount of money in the system that can be used to pay off the debt+interest owed.

A large factor in this is that most of our money is not printed money but is electronic debt money which means that it is destroyed when you use it to pay off debt. That fact, which is so often ignored, totally destroys the 'velocity of money' argument because if the money is used to pay off a debt its velocity becomes zero.

So how does the system keep going? It has to have more new debt every year, which created more money, which is used to pay off last year's interest. When you get to where we are now and people will not take on more debt either the government's have to take it on or, the system collapses.

Do I have it right guys?

I used to think that, but I'm now convinced it's not true. The interest paid to lenders gives them a claim on the production of the borrowers. The borrowers exchange their goods and services for the interest money from the lenders, wiping out the remaining debt.

You're right that when a credit bubble pops, you do get a collapse in the quantity of money as debts are repaid, but as prices drop back to sustainable levels, it becomes more and more worthwhile for people to borrow it back into existence to buy reasonably-priced assets, and the economy recovers.

The system left to itself is sustainable, but there is a cycle of expansion followed by contraction. Hopefully each trough is at a higher level than the previous one due to improved productivity. Unfortunately, politicians and central bankers don't have the good judgement and popular support needed to allow the downturns to run to completion, and they try to "stimulate" the economy by providing artificial demand, which ends up with them creating a series of bigger and bigger bubbles until you get to a point of, well what we've got now.

Karl Denninger wrote..

Government can only force others to provide; standing alone, government itself produces exactly nothing.

Karl, I agree with almost all of what you say, but I'd just like to challenge you on a small point of disagreement. I think that government (if by that we mean the taxpayer-funded public sector) does produce things. For example, in the UK, the National Health Service and the majority of age 4-18 education is publicly funded and provided by people employed by the government. So health and education services are actually produced by the public sector.

There are of course debates about whether the government should be involved in providing these services, and about how well they do it, but I don't think it's true to say that government does not produce anything at all. What do you think?

No - thats a replacement of what would otherwise be privately provided.

And, of course, it is pretty much axiomatic that when gov't extracts taxes and pays the bureaucratic overhead to provide those services, the services provided by the gov't are fewer and/or of lower quality that what would have been provided by the private sector.

Further, once one adds in the effects of lower levels of accountability, entrenchment of bureaucratic fiefdoms, the elimination of reasonable opportunity to compete with (and thereby encourage improvements in) the gov't provided services, etc., etc., the gov't providing those services almost always represents a net loss to society as a whole.

Peterm99 wrote..

And, of course, it is pretty much axiomatic that when gov't extracts taxes and pays the bureaucratic overhead to provide those services, the services provided by the gov't are fewer and/or of lower quality that what would have been provided by the private sector.

A government only provides the services that its citizens don't want.

There's no reason to force people to pay for what they want because people are pay for the things they actually want every day. Therefore if force is necessary in order to get people pay for a service it must be the case that they aren't willing to pay for voluntarily so don't actually want it.

Striped-pad,

Karl's point that government by itself produces nothing means that funds must be collected via taxes or debt in order to fund whatever is provided. Your recognition that these services are provided through taxes proves Karl's point.

The problem of government providing services verses the private sector, is that government runs in a monopoly environment which is inefficient and lacks competition and profit motives to minimize cost. This results in delay or limiting health care, and pushing the cost into the future via debt issuance to balance budgets.

Generally government jobs pay more overall than than what it would have cost if the private sector had provided the service in the first place and thus you are screwed the more government provides for "free".