Give Default A Chance

“Jove does not give all men their heart’s desire.” – Homer, The Iliad

The Measures Are Killing Us

Last week, following several shots of ouzo, the Greeks took to the streets of Athens.  There, while attempting to surround Parliament, they were greeted by riot police with clubs and tear gas.  Things got ugly.

A Big Fat Greek Bailout is needed quickly or the Hellenes will default on their debt.  But attached to the bailout will be austerity measures requiring the Greeks to get their act together.  Current proposals have the hoi polloi throwing bricks and burning trash cans.  From what we gather they want bailouts…but don’t want to pay for them.  Reuters explains…

“Around 5,000 protesters from the Communist group PAME marched into Athens’ central Syntagma square [on Saturday] — where demonstrations turned violent earlier this week — chanting ‘the measures are killing us!’”

“We are not planning to leave unless they take back the measures,” said Costas, a 22-year-old student who has been camping on the square since the beginning of the month.

Yet, with a debt projected to rise to 170 percent of GDP by 2013, even with a bailout and austerity Greece will never likely be able to repay their debt.  So why even try?

More on this in a moment…but first…

The Ugly Side of Debt

When interest rates are in a long slow decline – like U.S. Treasuries over the last 30 years – debt is easy to manage and idiots appear to be financial geniuses.  Over time, as interest rates decline, debts can be refinanced and serviced at lesser amounts.

But sometimes interest rates don’t go down.  Sometimes they do the opposite…they go up. That is the ugly side of debt.

For example, on June 13th Standard and Poor’s cut Greece’s credit rating to CCC from B.  By last Thursday, yields on Greece’s two-year note hit a record of 30.32 percent and Alan Greenspan said a default by Greece is ‘almost certain.’  By comparison, the yield on two year U.S. Treasury notes is at about 0.38 percent.

Obviously, Greece will not be able to pay 30 percent interest on a two year loan for long.  Under such a crushing debt load it should only be a matter of time before they throw in the towel and stiff their creditors.  Yet, for whatever reason, the European Union and the International Monetary Fund are determined to bail Greece out.

Over the weekend there were talks of a new $170 billion bailout to float Greece through 2014.  By Monday the plan had changed to just 12 billion euros in emergency loans.  Greece has two weeks from yesterday to approve austerity measures in exchange for the loot.

Why bother, we wonder?  All this will do is delay the inevitable.  Plus, regardless of if Greece is somehow miraculously able to get its act together, we think it is remarkably unjust that future generations will be saddled up with the back breaking debt of their spendthrift parents.  Below we offer a modest alternative…

Give Default A Chance

When the central banks, be it the European Central Bank or the Federal Reserve, give the governments of bankrupt nations cash bailouts they are not helping the people…they are hurting them.  They are enslaving them, and future generations, to financial serfdom and reliance on foreign welfare.

By papering over the debts of nations governments don’t immediately get what they deserve.  They are not booted out of office for spending money they don’t have.  Moreover, the exact opposite happens.  Those officials that take action to reduce spending to be in line with economic output are voted out of office while those that make promises on the backs of the unborn are invited back to do it some more.

Government in the western world these days is a game of kicking the can down the road.  Put off dealing with something today so that others can deal with it tomorrow.  Yet after years and years of this, the can has gathered so much momentum the whole world financial system is in peril.  And the only solution to the debt problem governments seem to have is to pile on more debt…making for a worsening problem down the road.

While the European Central Bank hasn’t asked us for input on the matter, in the spirit of constructive mischief we offer the following short, simple proposal… Give default a chance.

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” were the advice of then Treasury Secretary, Andrew Mellon, at the onset of the Great Depression.

The callous words of Mellon fell on deaf ears.  The government attempted to bailout the economy and succeeded in turning a downturn in the business cycle into a 10-year economic depression.  Today Europe, and the U.S., are repeating the same errors, doubling down on their mistakes, and upping the ante for a far more serious crisis sometime in the future.

Tough love, not further enabling, is what’s needed.  The EU and the IMF should tell the Greeks to drop dead.  The rioters, the Greek government, their creditors…the whole lot.  By doing so they will be helping them.  By bailing them out they are hurting them.


MN Gordon
for Economic Prism

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