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Jim A.

Greece

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I was reading today about the current economic troubles in Greece, which, according to the article (and the author is probably correct), could adversely effect the rest of Europe and, eventually, the world.

I am a complete ignoramus in the area of economics. But, when reading that article, I wondered: When it comes to the United States, isn't there something wrong--somewhere--when our own economy's condition or fate can be determined by what happens economically in another country? Is there something wrong with this picture? Or is that just the way things are?

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I was reading today about the current economic troubles in Greece, which, according to the article (and the author is probably correct), could adversely effect the rest of Europe and, eventually, the world.

I am a complete ignoramus in the area of economics. But, when reading that article, I wondered: When it comes to the United States, isn't there something wrong--somewhere--when our own economy's condition or fate can be determined by what happens economically in another country? Is there something wrong with this picture? Or is that just the way things are?

Currently the world financial system is rickety thing, a house of cards almost. So any major event that makes the players nervous may have some unpleasant effects for those of us who are not involved. The financial system is essentially a legal casino and what passes for investing these days is a high class form of betting and crap shooting.

ruveyn

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To answer your question, yes there is something wrong. The US is too much in debt, and a bank run in Greece could start a run on the dollar. This being said, the dollar is still considered much more solid than it really is, and a panic in Greece could just as well start a run *INTO* the dollar. Go figure.

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a panic in Greece could just as well start a run *INTO* the dollar.

Or into basic, inelastic commodities that would slow everyone that much more.

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... ... isn't there something wrong--somewhere--when our own economy's condition or fate can be determined by what happens economically in another country?
In very general terms, even under capitalism one's economic condition will change with the changing fortunes of suppliers and customers. Trade and division of labor are benefits; anything that disrupts these is a negative.

Today, the serious contagion will come from debtor to creditor. If Greece collapses, what happens to the debt that Greece owes to foreigners? Greece has already defaulted on a part of its debt, and some of the rest has already been written down. The impact will be big, but not catastrophic. The larger fear is not only that Greece will impact Europe directly, but rather that if Greece leaves the Euro, other countries may follow. Greece has already defaulted on its debt. If it leaves the Euro, it will probably also default on the rest -- paying cents on the Euro.

When this happens, what if Spain and Portugal figure that they'll do the same? Spain is big enough that it would cause a far more serious crisis. At some point, the trillions begin to add up! Thie main route of contagion is: money owed to foreigners (not just owed by the government, but also by citizens). When a debtor defaults, the creditor who was carrying that loan will take a loss if he has not already accounted for the lower payback.

In Greek's context, given the political situation there, the two likely routes are either for them are to leave the Euro or to have other countries give them aid. They will use the threat of the first to try to get the second. It is unclear who will blink first. This type of negotiating game is almost impossible to predict. If I had to guess, the rest of Europe will blink as long as Greece makes some type of pretense that it will do some austerity. Then, at some stage in the future -- the rest of Europe will finally boot Greece out.

Odds are the dollar will remain strong relative to other currencies as this drama plays out.

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If Greece pulls out, there goes it's currency. A Greek who had his Euros out of the country would be better off. Now imagine if you had lots of cash in banks in Spain, Portugal or Italy. You would want to move your Euros to the likes of Germany where they would no befall the fate of the Greek Euro, would you not? This action, this lack of confidence, would trigger a collapse of the banks which suffer the retreating funds. These latter countries would then face the same problem of Greece.

How they ever expected one currency to survive 17 types of governance, I can't figure out.

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One thing I am not convinced is that Greece will leave the Euro. Default on its debt, yes. But why leave the Euro? Greece doesn't export anything and import everything. They cannot reinvigorate their economy through devaluation, so why try & risk capital flight?

It's possible that other countries would want to kick them out, but the truth is that there are no rules for that in the EZ.

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Here's one mainstream view I suspect is popular if Greece:

No one knows precisely how much the Drachma would fall compared to the Euro if it was reimplemented, but guesses are all over the place ranging from 20-80%. No matter what, the decline will be substantial. Substantial enough that that bar on the right-hand side of the above chart will spike higher. And if some of the more extreme guesses are right (like the 80% guess) then we’ll see something more than substantial on the export side as Greece becomes ultra competitive. And perhaps more importantly, Greece will start printing money again. And that means an end to the austerity and a double whammy on the growth side – domestic government spending stimulus AND a substantial boost in foreign trade. For a country in a depression that would almost certainly mean nothing but economic improvement from these levels. It would be nearly impossible NOT to see a growth boom – “boom” from current levels.

But the more interesting part to me is not Greece, but the other countries. Dr. Krugman is right about Greece and their export growth. But is he also right about the potential collapse of the Euro? If Greece leaves and begins to see economic improvement I think rumors will shortly begin about the other periphery countries also leaving. First Portugal, then Ireland, then Spain, then Italy. We’re talking about a big big mess there. It’s an every man for himself type of situation that is the exact opposite of why the Euro was created in the first place. The Euro would essentially become core Europe and something resembling the D-Mark. And a higher D-Mark on all these other countries is something that Germany doesn’t want because that means a big decline in their export driven growth (and maybe even a credit crisis for their banks).

(Don't you just love this website's name?)

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It doesn't matter how price-competitive they are, as they don't produce much of anything at all. I'm not trying to be flippant, but I fail to see why Greece would benefit from a massive devaluation given its (lack of) industries.

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It doesn't matter how price-competitive they are, as they don't produce much of anything at all. I'm not trying to be flippant, but I fail to see why Greece would benefit from a massive devaluation given its (lack of) industries.

Tourism is a big potential earner and a cheap currency will bring the visitors.

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It doesn't matter how price-competitive they are, as they don't produce much of anything at all. I'm not trying to be flippant, but I fail to see why Greece would benefit from a massive devaluation given its (lack of) industries.

Tourism is a big potential earner and a cheap currency will bring the visitors.

Tourism has been a huge part of their economy forever. This breaks down into two classes: Those who come for the must-see sites and never, ever return, and the Spring Break-like activity that runs from May to October for 20-somethings. They already run pretty full, but obviously a cheaper currency will boost spending.

In terms of manufacturing, the idea would be that people with the relevant expertise and networks, domestic and foreign, would take advantage of the devaluation and expand operations in Greece. And with immigration patterns there -- from other Balkan states, N Africa and the ME -- jobs Greeks won't do can easily be filled by more eager people, helping the government provide for the vast number of Greeks that are now dependent on programs they were forced to "contribute" to their entire lives.

What I want to know is when they'll go after the vast oil reserves in the Aegean. I would think tourism is the main reason those reserves remain untapped (I don't take Turkish threats of military action should Greece drill without cutting Turkey in on the action seriously. )

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Switching to the Drachma and then devaluing the currency does not affect foreign-trade alone. It lowers the value of money, thus lowering the real value of all contracts expressed in nominal terms.It lowers real wages across the economy and it lowers the real value of loans held by creditors. Economies that are in Greece's situation are caught in an unreality. People are being paid wages they ought not be paid, creditors have not written down their loan assets. The classical solution to this is -- in the words of Andrew Mellon -- "Liquidate labor, liquidate stocks,liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system." If this is politically impossible, then the economy needs some other means of purging rottenness . The modern way is to devalue the currency, effectively using wealth re-distribution to take value from the competent, to ease the hurt of the incompetent. It's immoral, but just hanging around in limbo does not help anybody either.

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Greece tourism is at capacity. A devaluation would only have marginal effect here. Yes, a devaluation would make Greece more competitive for foreign companies but there are several reasons why I don't think it will work in this case:

1) Greece imports much of what it consumes so Greeks would feel huge pain right away for potential long term gain later. That's not the kind of trade off they've been known to make.

2) There's going to be major political risk in the mid term and that's going to be a deterrent for multinationals.

3) The current Greek culture is not attractive to multinationals. Bribes are everywhere, people don't often speak English and have an entitlement mentality, regulations and redtape are bizantine.

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The modern way is to devalue the currency, effectively using wealth re-distribution to take value from the competent, to ease the hurt of the incompetent.

Why is devaluation a redistribution scheme? Devaluation, like inflation, hurts most people living on a fixed income, in particular modest retirees and uneducated employees. Traders, highly educated people, stock holders, etc, are rather less impacted.

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3) The current Greek culture is not attractive to multinationals. Bribes are everywhere, people don't often speak English and have an entitlement mentality, regulations and redtape are bizantine.

Agreed. I don't expect any of this nonsense to work. I just think this is what the purported sophisticates think.

And I disagree with you on language issues. Mastering English and familiarity with at least one other major European language has more or less been the standard in major cities for at least two generations now.

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Red tape, "flexible" regulations and a tradition of bribing don't seem to prevent other nation-states from manufacturing affordable low-end products. Greeks won't work in a factory, but an incredible number of legal and illegal immigrants would. The problem for Greece and more and more nations caught in similar predicaments is that more favorable manufacturing environments are emerging.

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I wonder why the Greek Government doesn't sell assets, including land, to private individuals so that they can honour their bonds.

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Why is devaluation a redistribution scheme? Devaluation, like inflation, hurts most people living on a fixed income, in particular modest retirees and uneducated employees. Traders, highly educated people, stock holders, etc, are rather less impacted.
Yes, that's one form of redistribution. In addition, the way it plays out is like this: say that overnight all Greek banks are only obliged to pay out Drachmas. Suddenly, the Greek government's guarantee of bank-deposits is a promise in which people can believe again. They will get their money -- in Drachma -- up to the amount insured by the Greek government, and even over that amount for any bank that the government decides to bail out. A person who owns shares in a bank that might otherwise have gone under, benefits relative to someone who bought shares in a stronger bank. If the government wipes out the shareholders as a condition of a bail-out, the bond-holders of the weaker bank may be the ones being helped, etc. All these are forms of re-distribution. Some people are better off without any change in the size in the pie, so someone, somewhere is paying.

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I wonder why the Greek Government doesn't sell assets, including land, to private individuals so that they can honour their bonds.

They did a lot of that already, selling many Aegean islands to people all over the world.

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Why is devaluation a redistribution scheme? Devaluation, like inflation, hurts most people living on a fixed income, in particular modest retirees and uneducated employees. Traders, highly educated people, stock holders, etc, are rather less impacted.
Yes, that's one form of redistribution. In addition, the way it plays out is like this: say that overnight all Greek banks are only obliged to pay out Drachmas. Suddenly, the Greek government's guarantee of bank-deposits is a promise in which people can believe again. They will get their money -- in Drachma -- up to the amount insured by the Greek government, and even over that amount for any bank that the government decides to bail out. A person who owns shares in a bank that might otherwise have gone under, benefits relative to someone who bought shares in a stronger bank. If the government wipes out the shareholders as a condition of a bail-out, the bond-holders of the weaker bank may be the ones being helped, etc. All these are forms of re-distribution. Some people are better off without any change in the size in the pie, so someone, somewhere is paying.

Tic, tic, tic, tic, tic, tic, tic . . .

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