Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

What You Should Know about Greece

Greece is all over the news these days, but unfortunately, the media is doing a mixed job of covering it. The U.S. media’s response to Greece has been to ignore it, while the British media is hyping it.

Not surprisingly, a lot of people are not familiar with Greece and have a poor picture of what is going on there. To give you a better idea of what is happening, we will start with the basics and move on to a little analysis.

What’s Happening in Greece, and Why You Should Care

Simply put, Greece borrowed more money than it can pay back. Basically, the Greek government attempted to create a modern welfare state with all the benefits without the modern economy to support it. Unlike Sweden or the United Kingdom, Greece lacks the tax revenue to finance a welfare state.

Instead of creating markets to generate the income to support the welfare state, the Greeks borrowed the money to pay for it. When the global economy was booming, Greece’s tourism-based economy created just enough wealth to meet the loan payments.

A familiar site in Greece family huddles in the street.
A familiar site in Greece family huddles in the streets of Athens.

When the tourism money dried up after the economic meltdown of 2008, Greece started borrowing money to pay the loan payments with. The only creditors it could borrow from were the European Commission, the European Central Bank and the International Monetary Fund (IMF). These lenders put some stiff terms on the loans, including the requirement that the Greek government pare back its welfare state.

Naturally, the Greek people did not like that very much, and in January 2015 they elected a leftist government headed by Alexis Tsipras of the Syriza Party. Tsipras’s platform was a simple one: end the austerity measures imposed by the creditors.

For the last few months Tsipras has been unsuccessfully trying to negotiate a deal with Greece’s creditors to avoid default. The negotiations failed, and by June 30 it became apparent that the nation was going to start defaulting on its debt payments to the IMF.

Why Greece Matters

Normally the default of a nation the size of Greece, which had a gross domestic product (GDP) of $241.72 billion in 2013, which is equal to .39% of the world economy, would not matter much. To put things in perspective, Walmart Stores Inc. (NYSE: WMT) has an enterprise value of $269.8 billion and reported a TTM revenue of $485.52 billion on April 30, 2015.


Countries like Argentina have defaulted before, but they are not part of the European Union and, more importantly, the Eurozone. The Eurozone is the group of countries that have adopted the Euro as their currency.

Greece’s default could damage the Euro and harm the European—mostly German and French—banks that have loaned the nation money. Economist Paul Stiglitz thinks that a Greek default could crash the French and German banking systems and send Europe into a depression.

If Greece stays in default, the Europeans will be faced with a choice similar to that of the parent of a deadbeat son that does not work. The choices are kick junior to the curb and hope he cleans up his act or keep giving him money and a place to sleep to keep him out of the gutter.

The Consequences of a Greek Default

The actual consequences of the default outside Greece will not be as great as you might think. Greece, as I noted above, is a very unimportant part of the global economy; the world and, for that matter, Europe could get along without it just fine.
The real results of the fallout will be political. A Greek default and exit from the Eurozone would be a huge blow to the prestige of the European Union. It would also do considerable damage by showing that the present international economic status quo is simply not working. It casts a lot of doubt on free market economics of the Chicago School and ideas like austerity.

Greece’s GDP has declined dramatically under the IMF austerity program, as Keynesian economists like Stiglitz have pointed out. In 2008 Greece had a GDP of $341.6 billion that fell to $321 billion in 2009, $294.22 billion in 2010, $289.99 billion in 2011, $248.42 billion in 2012 and $241.72 billion in 2013. The country appears to be caught in a sort of economic death spiral that it cannot escape.

A default could provoke major changes to the global and European banking systems and debt. One consequence could be to force the world’s two largest economic powers, the United States and China, which have stayed out of the situation, to get involved, perhaps by guaranteeing German and French banks so they do not fail or forcing new policies at the IMF. Another could be to simply write off Greece’s debts and allow nations to go bankrupt—something not allowed under the current system.

Greece and the Euro’s Future

There has been a lot of talk of Greece’s exit from the Eurozone, particularly from critics of the European Union.

Some economists, including Stiglitz and Alan Greenspan, think the country’s problems could be solved if it were to start printing its own currency—the drachma—again. Yes, that would give Greece a little more control over its economy but at a high price; the new drachma would be close to worthless and could spin Greece into hyperinflation. A big problem would be that average people would view the new drachmas as worthless and try to exchange them for Euros as quickly as possible, causing more money to flow out of Greece.

This could boost Greece’s economy because foreign tourists’ spending power would be far greater in the country. Yet it would make it difficult for Greece to import commodities or manufactured goods because it simply could not pay for them. One result could be two banking systems: one for the rich and one for everybody else in Greece. Something like this is already in development in Argentina, where the rich bank in foreign currencies, making them exempt from inflation, while everybody else banks in the local money, making them vulnerable to inflation.
Another problem is that modern payment solutions such as Bitcoin make it easy for almost everybody to move money outside the banking system. Something like this is already going on in Argentina. That gives a few mostly young and tech-savvy people the ability to cash in via speculation. It also makes the economy more dependent on the market and even more vulnerable to the boom and bust cycle.

Total Economic Collapse

My guess is that exiting the Eurozone would lead to total economic collapse in Greece. The nation would become an economic basket case with no functional economy. Any efforts Tsipras would make to revive the economy would probably fail, opening the door for the rise of extremist political parties and possibly dictatorship.

Although, such an exit could boost the Euro’s value considerably because that currency would no longer be weighed down by Greece. Dumping Greece would make the Eurozone stronger, but it would provide Europe with the problem of a third world nation in its midst.

The value of alternative currencies like Bitcoin could also be boosted because the Euro would be discredited in some people’s eyes. There would also be more demand for alternatives to traditional currency. Bitcoin is a real wild card here because it gives Greeks a practical alternative to both the Euro and whatever paper their government might try to foist upon them.

The Future of Greece and Europe

The effects of a Greek default outside of Europe would be limited, although it would shake up the world’s financial system. There are several possible outcomes in Europe, none of which are very good. The most likely scenarios are:

Scenario #1: Greece leaves the Eurozone and revives the drachma, which would mean hyperinflation and a sort of third world economy in Europe. This might open the door for economic development, but it could mark the return of the kind of poverty not seen in Europe since the 1950s or earlier.


That sounds like a recipe for social and political unrest and crime, possibly leading to dictatorship; perhaps Greece’s future will be as Cuba in Europe, a poor nation where a dictatorship keeps a lid on unrest. One result could be the end of democracy in Greece; because democracy is a luxury for middle-class nations. This would also mean that the EU would have to establish a border with independent Greece and station troops and customs inspectors, perhaps to keep out hordes of Greek refugees fleeing total collapse.

Scenario #2: The Eurozone kicks Greece out, but Greece keeps using the Euro. This could create a sort of economic Wild West in Greece. That would spur a lot of economic growth, but it would be chaotic and problematic. One big problem would be shortages of currency, which would favor the rich and speculators. Another would be the creation of a massive black market and the return of the barter economy for the poor. A real problem for Europe here would be if Greece keeps swinging back and forth between drachma and Euro, which could happen. Another problem is that a modern welfare state would be unsustainable with such an economy; it would create third world conditions; such as shanty towns and possibly starvation in the heart of Europe.

Scenario #3: Europe keeps Greece as a sort of ward of the state. The Europeans simply admit that Greece’s economy is not working; write off the loans, and start underwriting the costs of Greece’s welfare state.

Europe would become like the United States, where wealthy states like California effectively cover the costs of poorer ones like West Virginia. That would probably necessitate a Europe-wide tax, perhaps a Robin Hood tax or a value added tax (VAT), which would be a tough sale politically; just imagine asking German factory workers to pay higher taxes to support the Greek pension system.

Another problem here would be that the European Union would need to have a level of control over the Greek welfare state (i.e., setting pension rates and determining benefits). In other words, we would need total reform of the European Union in order to implement such reforms; Europe would have to switch to a federal system similar to that in the United States.

In the U.S. Congress, each state gets two Senators; which allows small states like Vermont to counter the influence more populous ones like Texas have in the House, where representatives are elected by population. That might be a tough sell for larger countries like Germany, which are used to dominating the Union.

Default Will Change the European Union Beyond Recognition

My prediction is that scenario number three is the most logical outcome because nations like Germany want to preserve what they have now—quite a bit of influence over Greece, which is better than no control. The interesting aspect of the situation will be if Greek politicians will accede to the situation. My guess is they will; because they need European money to cover their benefit payments, and keep buying votes. Greece will end up like West Virginia or New Mexico: a poor region of a larger and more prosperous country.

I also predict that the Greek mess will have little influence on the U.S. economy. Instead, it will initiate major reforms that will change the European Union beyond recognition. One wonders if that entity will collapse or if it will reform itself, much like the United States did during the Constitutional Convention of 1789, which was also triggered by a financial crisis and default.