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posted by King Minos in Money / Career

Greeks to Default, Leave EU?

May 14, 2012

This question is probably on the minds of many folks in the EU, the US, and around the globe. No doubt people, generally, are not really concerned with what happens to the Greek people, but they wonder if such an event might harm the broader economy, and perhaps hurt their own investments. Will it put the U.S. economy into a double-dip recession? Will the market crash, again?!

Ok, Ok! Calm down!

Greece has defaulted many times in its history; in fact, when it renegotiated its loans to the ECB, recently, it was technically in default at that point.

Nothing to worry about; happens all the time??!!

The King doesn't go that far ....

Instead, let's go over some basics. As far as foreign debt is concerned, countries never really go out of business. Nor do creditor nations come in and repossess valuable articles in the defaulted country. Their leaders constantly look at the financial and political costs of paying foreign lenders, and constantly evaluate whether or not re-payment of those debts is worth the pain and suffering caused by domestic austerity.

So WHAT does happen?

The Greeks might need to get new bankers and a new currency.

When they tell the ECB to "take a hike," then the Greek government will, at least temporarily, be cut-off from deficit spending. In the U.S., today, for instance, they say that for every dollar spent by the government, 40 cents is borrowed. In Greece's case, that'll mean their spending is retarded such that they can only spend out in amounts that match government revenues.

Of course, when the Greeks reintroduce their own currency, that ought to allow them to, in turn, devalue that currency such that Greek citizens can "get by," while foreign investors begin to consider Greek goods and services a bargain. Hence, a default now, might actually help the Greeks in the long run. Other than financially, it'd probably ALSO help rebuild national pride as a new generation of Greek leaders is spawned and held-up that no longer answer to their EU minders. They'll again control their own destinies -- for good or bad -- and the world will see the cradle of democracy returned to its good senses.

Ok, ok! What's that mean for the rest of us?

It might become a model for what other EU states (Spain, etc.) could similarly do. In fact, it probably will. Then you'd reintroduce popular democracies in the individual states. The Euro, per se, might strengthen over the long-term, as the financial basket cases finally go it alone. (If THAT did, indeed, take place, then the EU might strengthen, and begin to take on the role as the "safe haven" currency.) Or, it could crash if the Germans, for instance, decide, in turn, to reintroduce the Mark and allow the other guys to figure it all out on their own!

THEN. The bond vigilantes may come to the U.S. and our own government will adopt "austerity" where a much smaller percentage of each dollar spent is borrowed. Imagine, for instance, the economic impact of local, state and federal spending that cannot exceed -- by much -- the real revenues coming in to those governments!

The King is getting ahead of himself, probably!

But let's imagine the Greeks and Spaniards leave the EU, reintroduce their own currencies, and begin, again, to see growth. Well, when that becomes more settled, questions might begin to arise about whether or not U.S. borrowing and spending are sustainable. Is the U.S. STILL a good place to invest excess capital? Those questions, importantly, might accompany the realization by lenders and creditors that the Greeks and Spaniards, for instance, are making good economic progress and deserving of foreign investment, again! Then, instead of sticking capital in U.S. T-Bills as a "safe haven," they'd send it to other places for actual growth! That would cause U.S. interest rates to rise quickly!

The King doubts very much that California, for instance, might decide to quit the Union, introduce its own currency and effectively secede from the U.S. In other words, the federal government, in fact, is going to bail-out needy states. It probably has no choice.

More importantly, our federal leaders, including the President, will never admit their errors; they'd much rather inflate away U.S. foreign and domestic debt than admit they were wrong. (In Greece, however, THOSE sort of leaders are already out of power ...)

All This Doom and Gloom ...

Well, economies are always changing. If you look at the U.S. economy over the last 30 years you'd see a lot of growth in the financial sector and negative growth in manufacturing, etc.

The King imagines things might go back the other way such that what was in its heyday in the 2000's will go down; and the manufacturing and industrial capacity of the U.S. might be rebuilt. Of course, an alternative would see the EU patched-up, globalization continue apace, and the burgeoning income gaps in developed countries renew its inexorable progress.

In summary, the great credit bubble continues to collapse, and popular democracy continues its work on policy matters in regards to how to deal with that collapse. Those with money to lend are right to be more cautious in lending; increasingly they become frightened they might lose the principal and interest.

As rates rise to reflect the real risks involved in investing in a changed world, those with the capital are likely to see greater returns. Profligate and spendthrift corporations, public entities or even countries are likely to have shortened life spans; and the responsible and prudent are likely to regain their previous lead.

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