Below you may read Mitch Feierstein’s article as it was published at Huffington Post. A very interesting tale of two countries in the grasp of economic crisis.
It’s odd, life, the way it overturns your assumptions. You think that if everyone knows something isn’t going to work, they won’t invest a lot in trying to do it. You think if failure is going to be horrendous, people would take steps to avoid failure.
But it’s not like that in Greece. It’s not like that in America. And sure, Greece has walked a lot further down the path of perdition, but we’re walking the same path and it’s already too late to return.
Allow me to explain. When the euro was first invented, Greece wasn’t a part of it. Its inflation was too high and GDP too low. Its public debt unmanageable. Its drachma interest rates reflective of the country’s incapacity. Through the 1990s, drachma interest rates hovered in the mid- to high-teens, a fair reflection of the country’s capacity to destroy value. Investors who bought Greek government bonds, knew they were taking a risk. They didn’t expect anyone to come bail them out.
But the eurozone wanted Greece in. Greece wanted to be in. So it made a few, somewhat cosmetic, efforts to clean up its act in on January 1, 2001, Greece was permitted to join the eurozone, despite running a public debt way higher than the rules permitted. Wim Duisenberg, then head of the European Central Bank (ECB), commented that Greece still had a lot to do to restrain inflation and improve competitiveness. And so it did — though once you’d already handed out the big prize of euro-membership, you didn’t have any good way to enforce compliance.
So, inevitably, Greece went on being flaky. Because more people were now scrutinizing its accounts, it merrily fiddled them. (Among its fiddles, by the way, a huge currency swap deal engineered by Goldman Sachs.) Greece was a lousy credit, just as it was before, but somehow investors stopped noticing. Interest rates charged on its debt plummeted, just as public debt rose towards 175%.
When investors finally figured out that Greek bonds weren’t worth buying, a crisis ensued. That crisis has caused riots and arson in Greece. It has prompted savage austerity measures. It has brought about the suspension of democracy as the Greek president was ordered — ordered! — by France and Germany not to place a proposed bailout package in front of the Greek people in the form of either a referendum or general election.
We haven’t yet gotten to the crazy part, however. “Flaky Country Hits Crisis, People Riot” isn’t much of a headline.
So now for the crazy part. A second €130 billion ($172 billion) ‘bailout package’ has just been approved by European countries led by Germany. The terms of that deal are insanely complex. So much so, indeed, that they really need Lewis Carroll to describe them. A voluntary bond swap, where private sector firms ‘volunteer’ to take a 53.5% haircut on their assets. Huh? An ‘agreement’ is announced, even though the ‘deal’ still needs to be sanctioned by every eurozone parliament, many of whom are deeply skeptical. Oh, and the glorious result of all these efforts? Simply this: that Greece can limp by 2020 to a net debt position that’s every bit as bad as Italy’s is today. You know: Italy, the country that a couple of months back was widely regarded as bankrupt.
This is the logic of Wonderland, only without the happy endings.
Needless to say, market and political reactions have been deeply skeptical. It’s not a question of if this deal unravels, but merely when. According to a leaked report compiled by the IMF, European Union and the European Central Bank, Greek debt was more likely to be 160% by 2020, not the 120% promised. And debt levels were at just that 160% when the entire problem kicked off.
So much for Greece. Since its tribulations have little direct impact on American affairs, you’d think most Americans could largely ignore the crisis. The best thing about Greece has always been its ruins.
But that would be way too complacent. The IMF estimates that the United States will end 2012 with gross debt at around 105% of GDP. Which would sound scary enough — not quite Italy, but almost — except that the IMF’s total excludes $20 trillion of unfunded Social Security liabilities. And about $40 trillion of unfunded Medicare and Medicaid expenses. And another few trillion of unfunded state pension liabilities. And trillions of dollars in liabilities racked up by Fannie Mae and Freddie Mac. And of course you’d really need to add in something for our contingent liabilities such as the FDIC’s guarantee of bank deposits…
The blunt truth is that if you were to measure U.S. obligations with any degree of honesty, you would place the country at Greek levels of indebtedness or worse. Sure, we have still have control over our own currency. (At least we do if you think that ‘having control’ means running the money-printing presses until they smoke.) And sure, American business still boasts a slightly more heavyweight raft of firms than Greece can muster. But these are advantages that run only so far.
In the end, you can support a certain amount of debt, but every country reaches a point where too much is too much. We’ve reached that point. If you believe Boston University economics professor Laurence Kotlikoff, we’re already so crashingly bust that there only remains the question of how best to manage our impending bankruptcy.
These are questions which, despite the overwhelming financial mathematics, seem to have no traction in the current U.S. political debate. Yes, we have furious controversies over tax hikes and entitlement cuts, only those controversies seldom lead to any actual action. It’s as though we think financial gravity has no force. That we can outrun the earthquake.
The Greeks thought that too. They still, kind of, think that, as they debate their bailout packages that simply defer disaster.
But financial gravity always gets you in the end. The earthquake moves faster than you do. What we’re seeing in Greece now is our American future. Ponzi finance on a continental scale.
Mitch Feierstein is the author of Planet Ponzi and CEO of the Glacier Environmental Fund.