What Will the U.S. Economy Look Like in 10 Years? Look to Greece

I've been reading quite a bit of handwringing over Greece in the UK papers, and came upon this piece from one of my favorite writers, Ambrose Evans-Pritchard, early this week. It was in the "to do pile" to put on the website, but I never got around to it. It appears with events in the past 48 hours, there is no time like the present.

As you read this, feel free to replace the word 'Greece' with 'America' and '2009/2010' with '2022-2025'. If not for the fact the U.S. still enjoys its role as the world's reserve currency, and has a central banker who has no qualms with throwing the savers of the nation under the bus to keep the mirage going, I would not be talking 2020s. The US is playing the highest form of poker... but on current course, it only appears when, not if, we're called out. [Nov 23, 2009 - NYT: Wave of Debt Payments Facing US Government] Think it's impossible? Tell me what you thought was impossible around April 2007.

• Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance. Euro membership blocks every plausible way out of the crisis, other than EU beggary.
• When the European Central Bank's Jean-Claude Trichet said last week that certain sinners on the edges of the eurozone were "very close to losing their credibility", everybody knew he meant Greece.
• The interest spread between 10-year Greek bonds and German bunds has jumped to 178 basis points. (it's jumped yet again, just since the article was published on the 22nd) Greek debt has decoupled from Italian debt. Athens can no longer hide behind others in EMU's soft South.
• "As far as the bond vigilantes are concerned, the Bat-Signal is up for Greece," said Francesco Garzarelli in a Goldman Sachs client note, Tremors at the EMU Periphery.
• The newly-elected Hellenic Socialists [PASOK] of George Papandreou confess that the budget deficit will be more than 12pc of GDP this year, four times the original claim of the last lot. (the United States of Debtors is now up to 13% of GDP due to "emergency measures to *save* the economy"... hmm, about 4x the normal range, imagine that) After campaigning on extra spending, it will have to do the exact opposite. "We need to save the country from bankruptcy," he said. (So the Keynesian theory no longer can work in Greece, even as it is "saving" the US)
• Mr Papandreou has mooted a pay freeze for state workers earning more than €2,000 a month. This has already set off an internal party revolt. "There is enormous denial," said Lars Christensen, emerging markets chief at Danske Bank. "They don't seem to understand that very serious austerity measures are needed." he said.
• Brussels says Greece's public debt will rise from 99pc of GDP in 2008 to 135pc by 2011, without drastic cuts. (US fast approaching 100% without taking into account unfunded liabilities of Medicare and Social Security, at current pace just the budget deficit should be 200% of GDP by the end of the 2010s... again, putting our head in the sand regarding he unfunded liabilites which DWARF the budget deficit)
• Modern economies have reached such debt levels before, and survived, but never in the circumstances facing Greece. "They can't devalue: they can't print money," said Mr Christensen. ("thankfully" we Americans can reduce the standard of living for our citizens by this action - all hail Ben)
• Greece has long been skating on thin ice. The current account deficit hit 14.5pc of GDP in 2008. External debt has reached 144p (IMF). Eurozone creditors – German banks? – hold €200bn of Greek debt.

Key point below... by being inside the Euro Union, Greece was able to borrow far below where it should have. Instead of taking advantage of that, and paying off debt or realigning the economy, it squandered it by doing even more fiscally irresponsible behavior. Sound familiar? Just switch the phrase "by being inside the Euro Union" with "by having the world's reserve currency"....

• Athens squandered its euro windfall. For a decade, EMU let Greece borrow at almost the same cost as Germany. It was a heaven-sent chance to whittle down debt. Instead, the country dug itself deeper into a hole by running budget deficits near 5pc of GDP at the top of the boom.

And now they are between a rock and a hard place, especially because they don't have their own central bank to "bail themselves out".

• Austerity may prove self-defeating, without the cure of devaluation. Greece risks grinding deeper into slump.
• .... the danger for EMU laggards is that the ECB will begin to tighten before they are out of trouble. It is German recovery that threatens to stretch the North-South divide towards breaking point.

Snap. Crackle. Pop.

• The EU can paper over this by transfering large sums of money to Greece. (works in America) But will Berlin, Paris – and London, also on the hook – feel obliged to bail out a country that has so flagrantly violated the rules of the club, not least by holding Eastern Europe's EU entry to ransom over Cyprus? That is neither forgotten, nor forgiven.
• During the panic last February, German finance minister Peer Steinbruck promised to rescue any eurozone state in dire trouble. He is no longer in office. The pledge was, in any case, a bounced political cheque even when he wrote it. Greece can assume nothing.

Comments

[Jasper M]

Quibbles:
2022 would be 13 years, not 10.
And I think you are granting the US of D too long a stay. The next 3 years will generate enough outrage to completely overturn the status quo.

2009 Nov 28 03:31 PM

[nobby73]

The simple truth is Greece should never have been able to join the single currency if the measurement of the Maastricht Criteria had included off balance sheet liabilities. Basically, the Criteria left room for countries who wanted to join ways to hit the targets, and if we were talking about being very close to the limit, you can understand why it may be pragmatic to do so. Simple put, it was a fudge, aided by some smart bankers who made huge profits on the back of it. Although they were not the first to fudge the numbers, they were the ones who had the most to gain in the near term and the most to lose in the end.

Inclusion in the Euro allowed them to gorging themselves on cheap credit as they deluded themselves they could maintain such standards of living with such a weak economy, they now face the trap of the Euro as they are unable to devalue or arrest the deflation. I really doubt the Germans will offer much, unless there is a sharp cut in the state largesse and when this happens, the country will descend into rioting and chaos. Some of the anger is misguided, the state cannot pay out as it does, but some anger, especially against the greed, laziness and corruption of the politicians, bankers and trade unionists is very understandable.

I often read that the Greeks do not worry too much as they feel they will find a way through this, but I am sorry to say my personal experience tells me their citizens are unaware how their economy has been hollowed out from the inside over the years. I have come across many situations where naive officials have been fleeced by devious foreign bankers, but in Greece's case, it was an inside job.

2009 Nov 28 03:53 PM

[Davewmart]

Dominos have a habit of falling rapidly once the first one goes.
Dubai is making everyone look very carefully at Sovereign risk
Jeremy Warner of 'The Telegraph' now feels that the rug may be pulled from the whole scene of massive borrowing against an assumed recovery.
blogs.telegraph.co.uk/.../

'Up until now, markets have assumed that the ruinous fiscal cost of addressing the financial and economic crisis was probably just about affordable to the major economies. That view may be about to be challenged.'

2009 Nov 28 06:09 PM

[The Geoffster]

Yeah, but Greece was kicking ass under Alexander the Great.

2009 Nov 28 07:50 PM

[Al-USA]

Greece was the source of Western Civilization, and civilized thousands of years ago when ALL of what is know western Europe where running around in rags of skin... Add to that recently living under the rule of Islamic Turkish overlords for hundreds of years well, yes, I'm sure a crisis of capitalism is something that the populace can imagine a way out of: with or without capitalism, as astute readers know.

2009 Nov 28 08:44 PM

[idx1]

Having grown up and lived in Greece until recently, I would like to take this opportunity and share with you that the public sentiment is one of outrage and dispair... You may already be aware of this considering all the rioting that took place last year. The election has recently given some hope, but patience is running thin.

I very much doubt that greece will manage to balance its economy from the inside. Instability along with complex and constantly changing laws for setting up a company deter foreign capital from investing there.
Another point inherently different from the US, is that there are so many people working for the government as civil servants. What makes things worse is that all these people never have to worry about losing their jobs - the most secure permanant job one can have is that of a civil servant, employed by the country on a public post (think teachers, doctors, local authorities, Tax authorities, urban planning officers etc). Permanant, till retirement, forget performance reviews... This 'I will have my job' mentallity no matter what has created one of the most counterproductive and corrupt civil services around... And as always fish stinks from the head, the top dogs (politicians, to regional politicians and any position with some sort of power) are involved in corrupted transactions of one form or another - Last year there was a slew of political scandals www.greeknewsonline.co... - en.wikipedia.org/wiki/... just to name a couple of them

Further to this, the political parties have been squandering the money always on a 4 year horizon... How would repaying debt ever look good, people 'wouldnt understand' the value of such a proposition... Political images are better built when they create jobs to service the burocracy of the goverment in the form of even more people to join the legions of the corrupt counter productive civil service workforsce.

As a chery on the icing spending on social policies as if it were a country with no debt on its balance sheets will also look good - I guess this second one may look familiar to the way america seems to be conducting politics at this point...

I believe the problem for Greece is deeper than just financial. It is also one of morals and legislation...
Likewise the US also faces a challenge other than balancing its sheets which is a task on its own.. Again one of morals and legislation but with a different focus, America needs to address the shift of internal wealth to the few financial elite that is backed by policies that facilitate this shift (looking at Mr Alan, Mr Ben, Fed, dark pools, high currency trading, high risk awarded with big fat bonuses)

To sum this one up, is recovery imminent for Greece? I dont think so... Not unless there is a major shift in mentality, a political cleanup, simplification of laws that would attract investors and a strict eye on finances. Easy right? Not

How about America? I guess the Fed believes it has the capacity to devalue the USD out of this mess... I can only hope for an alternate approach to be taken, with my simplistic thinking it would be, fix balance sheet by cutting down on imports and introducing more policies that will shift wealth back to the average american... What happened to the american dream, does it still live?

2009 Nov 28 11:10 PM

[mna]

I think the EU will have to assume the role of the IMF in this case. Greece will be given even more loans, in exchange for politically painful reforms. If they don't, the entire union is in danger of dissolving. The greek economy is small enough that a bailout is affordable. It's a small price to pay for the integrity of the EU.

The US, on the other hand... won't have any one large enough to bail us out if we get in trouble. If we do get to the same point as Greece... then hold on to your hats folks, it's hyperinflation time.

2009 Nov 29 01:36 AM

[socrateaz]

actually, When lessons are unlearned people are doomed to repeat them. Greece had thriving city states many times. The lesson learned years ago was democracy is not sustainable because people will eventually vote themselves favor. Leaders tend to abuse that by drawing wealth from the economy for selfish means. Political correctness will soon cause many nations to fall for the greed of the few will overwhelm the many. When fairness is concidered favoring somebody, a serious problem is in place. Does it?

2009 Nov 29 04:18 AM

[Davewmart]

Greece may be small enough that it could be bailed out, but if it comes to that Spain, can't be far behind, then Ireland....oh, and if it gets to that stage you can probably chuck in Italy, and the UK.....

2009 Nov 29 04:20 AM

[nobby73]

The financial situation in Greece may be so bad (especially the systemic fraud and corruption) that it would be more harmful to try and bailout than let it go down. A bankruptcy in Greece will not bring down the Euro or the EU, rather it may make the currency stronger. The single currency will not work if member nations think they can fiddle with the rules and then go begging for a handout when they run out of room. As we have seen with Dubai and Abu Dhabi, there is no reason why a richer neighbor should bail out a reckless nation. We are not talking about a country hit by some unexpected disaster, but rather years of underactivity, overspending and accounting trickery.

What we saw in Ireland was acceptance, contrition and resolve to deal with the problems. Greeks are utterly delusional, as they think they are all descended from Alexander or Leonidas and the rest of the world owes them for the gift of civilisation. These problems cannot be fixed in one epic battle, only through years of austerity and they will not accept it.


On Nov 29 01:36 AM mna wrote:

> I think the EU will have to assume the role of the IMF in this case.
> Greece will be given even more loans, in exchange for politically
> painful reforms. If they don't, the entire union is in danger of
> dissolving. The greek economy is small enough that a bailout is
> affordable. It's a small price to pay for the integrity of the EU.
>
>
> The US, on the other hand... won't have any one large enough to
> bail us out if we get in trouble. If we do get to the same point
> as Greece... then hold on to your hats folks, it's hyperinflation
> time.

2009 Nov 29 08:07 AM

[Venetian Poker]

You could say the exact same thing about the US, save for the "foreign" banker reference.

On Nov 28 03:53 PM nobby73 wrote:

> I often read that the Greeks do not worry too much as they feel they
> will find a way through this, but I am sorry to say my personal experience
> tells me their citizens are unaware how their economy has been hollowed
> out from the inside over the years. I have come across many situations
> where naive officials have been fleeced by devious foreign bankers,
> but in Greece's case, it was an inside job.

2009 Nov 29 08:22 AM

[DL1947]

What worries me the most about the US is not the present political leadership , they are totally hopeless . But my real worry is that the only existing credible alternative appears to be sound asleep ; I cant wait for someone in the GOP to stand up and lay out a plan ; no it seems that the plan for the next elections is simply to run on the time honored platform " we can do better " ; obviously they can , but it not enough .

I hope someone like Peter Shiff gets National stature fast or that someone with National stature starts talking like him ; otherwise it will be business as usual for some long time to come with very unpleasant results for the American middle class also for a long period .

2009 Nov 29 08:46 AM

[jimocarroll]

On Nov 28 07:50 PM The Geoffster wrote:

> Yeah, but Greece was kicking ass under Alexander the Great.

Perhaps. But look at the mess the Greeks inherited from him.

2009 Nov 29 09:02 AM

[Ferdinand E. Banks]

Greece too. Where will it be next? I had a wonderful vacation in Greece a month ago. On the basis of the economics I teach and study, I couldn't see anything wrong - and if it was wrong, I think that it can be repaired if the people there don't start bitching and moaning like many Americans seem to be doing these days. Of course, maybe they are right to do so, although I can't understand how anyone who could support Mr Bush and Co could find something wrong with President Obama and his team.

2009 Nov 29 09:07 AM

[steveusa]

Davemart:
excellent logical thinking with implications for the near future


On Nov 28 06:09 PM Davewmart wrote:

> Dominos have a habit of falling rapidly once the first one goes.
>
> Dubai is making everyone look very carefully at Sovereign risk<br/>Jeremy
> Warner of 'The Telegraph' now feels that the rug may be pulled from
> the whole scene of massive borrowing against an assumed recovery.
>
> blogs.telegraph.co.uk/.../
>
>
> 'Up until now, markets have assumed that the ruinous fiscal cost
> of addressing the financial and economic crisis was probably just
> about affordable to the major economies. That view may be about to
> be challenged.'

2009 Nov 29 09:23 AM

[ECONOMICS 101]

Johnathan Vrozos has also spent some time in Greece for the last 30 years.
Having family members in political occupations he has seen it from the inside.
Having spoken to one this morning.
"THINGS WILL GET WORSE , MUCH WORSE BEFORE THEY (IF) GET BETTER"
They want their DRACHMA printing press back AND they will use the threat of Bankruptcy to get it if they don't get bailed out.
"it will become a who blinks first challenge".
The EU is not stupid, neither is PASOK.
They are each other's prisoners and they BOTH know it.
Greece is only 10 million people+/-, small enough that some form of TARP will rescue them in exchange for something.
EU cannot afford to be seen as losing it's members, because then watch out for the EURO fall!!
Politics created this mess and politics will resolve, it's too bad we have to watch it like a bad B movie.

On Nov 28 11:10 PM idx1 wrote:

> Having grown up and lived in Greece until recently, I would like
> to take this opportunity and share with you that the public sentiment
> is one of outrage and dispair... You may already be aware of this
> considering all the rioting that took place last year. The election
> has recently given some hope, but patience is running thin.
>
> I very much doubt that greece will manage to balance its economy
> from the inside. Instability along with complex and constantly changing
> laws for setting up a company deter foreign capital from investing
> there.
> Another point inherently different from the US, is that there are
> so many people working for the government as civil servants. What
> makes things worse is that all these people never have to worry about
> losing their jobs - the most secure permanant job one can have is
> that of a civil servant, employed by the country on a public post
> (think teachers, doctors, local authorities, Tax authorities, urban
> planning officers etc). Permanant, till retirement, forget performance
> reviews... This 'I will have my job' mentallity no matter what has
> created one of the most counterproductive and corrupt civil services
> around... And as always fish stinks from the head, the top dogs
> (politicians, to regional politicians and any position with some
> sort of power) are involved in corrupted transactions of one form
> or another - Last year there was a slew of political scandals www.greeknewsonline.co...
> - en.wikipedia.org/wiki/...
> just to name a couple of them
>
> Further to this, the political parties have been squandering the
> money always on a 4 year horizon... How would repaying debt ever
> look good, people 'wouldnt understand' the value of such a proposition...
> Political images are better built when they create jobs to service
> the burocracy of the goverment in the form of even more people to
> join the legions of the corrupt counter productive civil service
> workforsce.
>
> As a chery on the icing spending on social policies as if it were
> a country with no debt on its balance sheets will also look good
> - I guess this second one may look familiar to the way america seems
> to be conducting politics at this point...
>
> I believe the problem for Greece is deeper than just financial. It
> is also one of morals and legislation...
> Likewise the US also faces a challenge other than balancing its sheets
> which is a task on its own.. Again one of morals and legislation
> but with a different focus, America needs to address the shift of
> internal wealth to the few financial elite that is backed by policies
> that facilitate this shift (looking at Mr Alan, Mr Ben, Fed, dark
> pools, high currency trading, high risk awarded with big fat bonuses)
>
>
> To sum this one up, is recovery imminent for Greece? I dont think
> so... Not unless there is a major shift in mentality, a political
> cleanup, simplification of laws that would attract investors and
> a strict eye on finances. Easy right? Not
>
> How about America? I guess the Fed believes it has the capacity to
> devalue the USD out of this mess... I can only hope for an alternate
> approach to be taken, with my simplistic thinking it would be, fix
> balance sheet by cutting down on imports and introducing more policies
> that will shift wealth back to the average american... What happened
> to the american dream, does it still live?

2009 Nov 29 09:49 AM

[forestgunk]

Points made and taken...well done!


On Nov 28 11:10 PM idx1 wrote:

> Having grown up and lived in Greece until recently, I would like
> to take this opportunity and share with you that the public sentiment
> is one of outrage and dispair... You may already be aware of this
> considering all the rioting that took place last year. The election
> has recently given some hope, but patience is running thin.
>
> I very much doubt that greece will manage to balance its economy
> from the inside. Instability along with complex and constantly changing
> laws for setting up a company deter foreign capital from investing
> there.
> Another point inherently different from the US, is that there are
> so many people working for the government as civil servants. What
> makes things worse is that all these people never have to worry about
> losing their jobs - the most secure permanant job one can have is
> that of a civil servant, employed by the country on a public post
> (think teachers, doctors, local authorities, Tax authorities, urban
> planning officers etc). Permanant, till retirement, forget performance
> reviews... This 'I will have my job' mentallity no matter what has
> created one of the most counterproductive and corrupt civil services
> around... And as always fish stinks from the head, the top dogs
> (politicians, to regional politicians and any position with some
> sort of power) are involved in corrupted transactions of one form
> or another - Last year there was a slew of political scandals www.greeknewsonline.co...
> - en.wikipedia.org/wiki/...
> just to name a couple of them
>
> Further to this, the political parties have been squandering the
> money always on a 4 year horizon... How would repaying debt ever
> look good, people 'wouldnt understand' the value of such a proposition...
> Political images are better built when they create jobs to service
> the burocracy of the goverment in the form of even more people to
> join the legions of the corrupt counter productive civil service
> workforsce.
>
> As a chery on the icing spending on social policies as if it were
> a country with no debt on its balance sheets will also look good
> - I guess this second one may look familiar to the way america seems
> to be conducting politics at this point...
>
> I believe the problem for Greece is deeper than just financial. It
> is also one of morals and legislation...
> Likewise the US also faces a challenge other than balancing its sheets
> which is a task on its own.. Again one of morals and legislation
> but with a different focus, America needs to address the shift of
> internal wealth to the few financial elite that is backed by policies
> that facilitate this shift (looking at Mr Alan, Mr Ben, Fed, dark
> pools, high currency trading, high risk awarded with big fat bonuses)
>
>
> To sum this one up, is recovery imminent for Greece? I dont think
> so... Not unless there is a major shift in mentality, a political
> cleanup, simplification of laws that would attract investors and
> a strict eye on finances. Easy right? Not
>
> How about America? I guess the Fed believes it has the capacity to
> devalue the USD out of this mess... I can only hope for an alternate
> approach to be taken, with my simplistic thinking it would be, fix
> balance sheet by cutting down on imports and introducing more policies
> that will shift wealth back to the average american... What happened
> to the american dream, does it still live?

2009 Nov 29 09:56 AM

[iconoclast2]

Perhaps we Americans really NEED a generation of hard times to re-learn how to be good stewards of opportunity. We can learn not to fritter away our country's resources and our personal health after we again understand what being productive means. I look to our greatest generation (the 75 to 95 year olds) for guidance.

2009 Nov 29 09:58 AM

[americanincanada]

I am not sure about the occasional references to the "greed of the few". Democracies have a problem with the "greed of the many". Hence the growth of unfunded entitlements and the wide spraying of cash when times are good. When times are bad too, it seems. The problem in the US with the GOP is that common sense ideas about the economy get rolled in with banning gay marriage, showing Arabs and Afghans the right way to live, and bombing Iran.

2009 Nov 29 10:01 AM

[PANAMA JACK]

I am truly sadden by this hole mess, but I'm sure some of us saw it coming.
There is a utube video that all of you should see, if you haven't already
seen it, it's a must. It's about 2hrs an half long.(THE FALL OF THE REPUBLIC).
Maybe the end is not what we taught it was going to be.
It could be the end of freedom as we perceived it.
In GOD WE TRUST, GOD BLESS AMERICA.

2009 Nov 29 10:22 AM