New Greek Debt Deal: Why Again Is This A Good Idea?
/Big news: the Euro parties have reached yet another kind of sort of semi bailout deal for Greece, enough to avoid immediate default and calm the markets for -- how long this time? A few months?
Here is a report from the Wall Street Journal on the terms of the deal and reaction from various quarters. The details ($51.7 billion of new money unlikely ever to be repaid; new "austerity" measures that Greece "really, really" promises to put into effect this time; a discounted exchange offer for certain outstanding Greek debt) are unimportant. Supposedly, it's all about meeting some debt-to-GDP target in 2020. Does anyone believe that that is real? (By the way, these debt-to-GDP numbers are of the fraudulent cash in cash out variety, when of course the government of Greece is mostly in the pension/insurance business and has real liability numbers that are a large multiple of the published numbers and almost impossible to find. See the previous post.)
But why are they doing this? Is anything about it a good idea? This is another one of those issues on which the conventional wisdom is completely unanimous and my view is just 180 degrees different. And I think that my view is just so obviously, glaringly right that I can't even think of the counterargument.
The conventional wisdom: The various Euro parties (Eurozone countries, ECB, IMF) need to do what is necessary to bail out Greece sufficient to avoid crisis and save the Euro.
My view: The worst possible thing that the Euro parties can do is continue to provide tide-over bailouts to Greece and other irresponsible Euro countries. This course of action only prolongs the crisis and makes each round of it worse than the previous one, while multiplying the cost for the paying parties and rewarding the bad actors in the irresponsible countries. The best thing that could possibly happen would be for the other Euro parties to make a clear statement to the irresponsible parties that bailouts of any sort are not on the table, and you are welcome to stay or leave as you choose.
My starting proposition: A sovereign who issues fiat currency and has the ability to borrow and pay his debts in his own fiat currency, will eventually (and in all likelihood, quickly) debase and destroy that currency and steal substantially all the wealth of the population.
Discussions of the economic success of the United States rarely even notice an aspect of the design of our Federal system that was probably unintentional but I believe of tremendous importance. Namely: the large majority of the functions of government were to be carried out by the states, but the control of the currency rested with the Federal government. Thus, the main functions of government were provided by entities with no ability to issue their own currency, or borrow in their own currency.
It didn't take very long for the states to try to behave irresponsibly. Many of them overborrowed in the 1830s, and defaulted in the early 1840s. The Federal government did not bail them out; did not even seriously consider it. The states could only extricate themselves by getting spending under control and doing consensual deals with creditors. They learned their lessons; many passed restrictions on incurring debt and balanced budget amendments. And thus we had a settlement that made largely impossible the great plague of human history, that the sovereign overborrows and then debases and destroys the currency and with it the accumulated wealth of the population.
That has worked extremely well all the way into my lifetime. Today, it appears that the lessons of history have been forgotten. At the state level, many politicians have figured out that they can evade debt restrictions and incur very long term debts in the form of pensions that are not recorded on balance sheets, whose magnitude can be effectively hidden from most voters, and that can be used to buy votes and political contributions from concentrated blocs of public employees. The promises are far along toward bankrupting many of the states, but the politicians who put the promises in place will be long gone when the promises come due.
Meanwhile at the Federal level, the Federal government is no longer a small part of total government spending, but more like two-thirds of the total. Constraints on printing money, mainly the so-called gold standard, were gradually weakened and then finally eliminated by the 1970s. The "independence" of the Federal Reserve, never strong to begin with, has diminished into nothing. And, of course, spending is exploding at Ponzi scheme growth rates. Watch out!
So Europe, again without even seeming to notice that this was the essential benefit of the structure, set up a U.S.-like monetary system with the currency-issuer not controlled by any sovereign, and the sovereign countries giving up the right to issue their own currency and thus likely to be forced quickly into default and spending constraints if they behaved irresponsibly. Within not too many years, a number of the participants behave irresponsibly, and the structure works exactly as it should, backing the irresponsible spenders right into a corner.
And the conventional wisdom unanimously agrees on the right thing to do: Bail them out, bail them out, and bail them out again. In other words, give the lowest common denominator sovereigns the ability to force the debasement of everyone's currency for the benefit of their own favored cronies.
So the history is: On the one hand example after example of sovereigns who debased their currencies and destroyed the wealth of their citizens. On the other hand, the sole example, as far as I know, of the United States, where a structural inability of the sovereigns to borrow in their own currency led to an initial sharp contraction, then a quick recovery, followed by nearly two centuries of economic boom. unprecedented in human history. Which do you choose? Perhaps the first may seem to make sense if you believe that it is the government's moral duty to take on all downside economic risk to all citizens.