GreeceFire Out? I Don't Think So...

The idiocy coming from the EU reeks of desperation:

“For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”

Continuing...

Prodi, 70, who headed the European Commission from 1999 to 2004, will teach at the China Europe International Business School in Shanghai. He said budget deficits are “a general problem for almost all the wealthy countries.”

No, really?  You mean having the government be responsible for half of GDP is a problem, when everything that they actually obtain has to come, in the end, by taxing the citizens inside their borders?

The euro has weakened 5.8 percent against the dollar this year as concern Greece will struggle to finance its deficit eroded confidence in the European currency.

“Europe is more than happy,” said Prodi. “For the benefit of the European economy, the decrease of the value has been absolutely positive.”

Bah. 

As in the United States, European nations more-or-less index their entitlement programs to inflation.  And like the United States, they hold most of the costs of these programs off their balance sheet, where that indexing is not visible (directly) to markets, never mind that those are promises for tomorrow, not today.

It is here that the theories of all those so-called "economists" who claim that we "benefit" through currency devaluation by "inflating the debt away" have their thesis run head-on into a brick wall.

In the United States, for example, our "forward liability" for those entitlement programs is somewhere between $60-100 trillion, depending on who you ask.  The on-balance sheet public float of the debt is about $8 trillion.

So let's assume we try to double that over the remainder of the decade (as the economists believe we both must and will) the only way to make that able to be carried is to devalue the currency through money-printing - "monetization", if you will.

But doing so, because of the indexing in these entitlement programs, causes their forward costs to explode.

Let's take an example and run the "forwards" on it.  We will assume that the "current" cost of a set of entitlement programs is $5 trillion, but it is to be delivered in 30 years.  If the forward implied inflation rate is 2%, as Bernanke claims is the "goal" (1-2% annually) then the 30-year forward implied cost of this program can be easily calculated since it is simply the compound growth rate over that time. In this case, that program has a "forward" (or "as delivered in 30 years") cost of $9.06 trillion.

But now let's assume we decide to "inflate away" the debt as "suggested" by the IMF (and on which point, I might add, Bernanke was grilled in his last testimony before Congress) by raising the inflation target to 5%.  That's not all that bad, right?  It's only three more percent!

Well, except for one small problem - that inflation rate drives the delivered cost of this entitlement from $9.06 trillion to $21.6 trillion, well more than a doubling, and what's worse is that this additional cost totally destroys any "savings" in debt payment ability that would otherwise be generated by attempting to inflate away the "on balance sheet" debt amount.

In the case of the United States, of course, the forward cost is already $100 trillion.  Attempting to "inflate away" our $8 trillion (today) of public float, or the $17 trillion that the CBO says we'll have by 2020, would cause that $100 trillion to explode upward.  Indeed, simply trying to get "a bit of relief" with a 5% inflation policy would more than double it, and an actual attempt to inflate it off over the course of ten years (which would require approximately a 7% inflation rate) would cause that $100 trillion forward liability to balloon to more than $300 trillion.

With that it should be obvious that any attempt to play "inflate it away" will simply never work.  It will and must cause the immediate detonation of all forward-promised social entitlement programs, and when you have placed half or more of the population at the time in a position of effective dependence on those programs attempting such a foolhardy path of action is guaranteed to lead to the total destitution of half or more of the populace.

Since it is an essential certainty that a population so-impoverished will inexorably rise in violent revolution there is a clear argument that can be made that any such suggestion or policy, whether made publicly or "in the dark of the House Cloak Room", is in fact a violation of US Code, Title 18 Chapter 115 Sec2385, which provides in part:

Whoever knowingly or willfully advocates, abets, advises, or teaches the duty, necessity, desirability, or propriety of overthrowing or destroying the government of the United States or the government of any State, Territory, District or Possession thereof, or the government of any political subdivision therein, by force or violence, or by the assassination of any officer of any such government; or

 

Whoever, with intent to cause the overthrow or destruction of any such government, prints, publishes, edits, issues, circulates, sells, distributes, or publicly displays any written or printed matter advocating, advising, or teaching the duty, necessity, desirability, or propriety of overthrowing or destroying any government in the United States by force or violence, or attempts to do so; or

 

Whoever organizes or helps or attempts to organize any society, group, or assembly of persons who teach, advocate, or encourage the overthrow or destruction of any such government by force or violence; or becomes or is a member of, or affiliates with, any such society, group, or assembly of persons, knowing the purposes thereof—

 

Shall be fined under this title or imprisoned not more than twenty years, or both, and shall be ineligible for employment by the United States or any department or agency thereof, for the five years next following his conviction.