It has taken them two years, but finally we're hearing what I've said -- in one form or another -- about Greece and its options.
On Friday afternoon, Constantine Michalos, president of the Athens chamber of commerce, sat in his office – around the corner from where protesters were hurling chunks of marble at riot police – and contemplated what was once unthinkable: that Greece would default on its debt and then be forced into a messy exit from the euro.
Greece should default.
It does not, however, need to exit the Euro. That's a separate decision and one that is not a foregone conclusion.
The usual argument is that if Greece exits the Euro and brings back the Drachma, its own currency, it can then devalue it and thus make itself "more competitive." The problem with this meme is that it springs from a false premise -- that the denominator of one's currency somehow controls its purchasing power.
Nope. It's simply a denominator.
Let's take two currencies. One has 10,000 units outstanding. The other 20,000. Both groups of citizens produce with equal capability -- that is, one hour of labor by citizen #1 produces the same number of gallons of gasoline, flatscreen TVs, cups of coffee or medical procedures as are produced by citizen #2.
The external value of both citizens' labor -- that is, the value in international trade -- is exactly the same.
It thus does not matter whether you have 10,000 or 20,000 units of currency as the citizen living in the nation with the 20,000 units will have twice as many units, but each will buy only half as much. His standard of living will not change.
What Greece is trying to evade is the fundamental mathematical truth that most western nations are currently trying to evade -- the unfortunate (but very real) fact that government cannot promise more in services than it takes in via taxes. That is, the percentage of a nation's GDP that comprises redistribution is what has to be negotiated between government and the people, and then that percentage of redistribution must be paid for with current receipts via taxing someone.
This is all government does. It is all government can ever do. There are those who argue that government should "provide for people" but government is incapable of doing that. Government can only force others to provide; standing alone, government itself produces exactly nothing.
Many have claimed that a default would be "disastrous" for Europe and indeed the entire world:
That view is by no means unanimous among Greece’s creditors. François Fillon, French prime minister, on Friday had a stinging rebuke for those who would consider it. “To put in play the default of Greece is completely irresponsible,” he told broadcaster RTL.
Stéphane Deo, European economist at UBS, warned that a Greek default could wreak havoc across the continent, including bank runs.
What's actually disastrous is promising people things you can't pay for. This is what both Europe and the United States have done. This is what must stop, and if it requires default and disorderly recognition that people have lent money with no reasonable expectation of ever being paid back, so be it.
What politicians should do is go to their respective people and tell them the truth -- We have made promises we cannot keep using money we don't have. You must choose to either pay much higher taxes to bring what you give to government in line with what you demand government pay out, or what government pays out must be cut to conform to what you pay in. At the same time you must accept that the GDP, and thus standard of living, you have become accustomed to was not in fact possible, as it was not purchased with your labor but rather with ever-increasing promises to pay tomorrow -- a mathematical impossibility.
There are no other options, because all other forms of attempted manipulation of the facts are nothing more than a geometric series of debt that cannot be sustained on an indefinite basis.
All government deficit spending does in fact is devalue everyone's standard of living. That is why our standard of living here is going down, why real inflation-adjusted household income is declining and why "printing" or "devaluing" or other similar machinations have always and must always fail. Government deficit spending is in fact nothing other than a tax dishonestly applied across the entire economy -- that is, across everyone, rich and poor -- that damages the actual available purchasing power of the people.
That Greece has been backed into this corner is both no surprise but is also an opportunity -- if we act now. Yes, Greece should default. But in doing so both Greece and the rest of the Western World should and indeed must bring government revenue in line with spending -- whether that is done through massive tax increases or massive cuts in spending is the proper and indeed only topic of debate.
