As we discussed yesterday, we often fail to recognize the ramifications of events from state to state, not to mention across borders or oceans. What's happening in Greece today may very well be a preview of what to expect in America tomorrow. In fact, it may help speed us along that path.
When sovereign debt becomes the status-quo of a country's leadership, they have just a couple of options. One is to print more money (inflation). Another is to raise taxes. This is exactly what we're seeing in Europe. And Greece is the country that's bearing the brunt at the moment (all of them are in one way or another).
In an effort to "help" Greece pay back the debt it's accruing, the EU-IMF demanded that they raise the VAT for food and drink from 13% to 23% this past September. Of course, everyone eats and drinks, so this is a no-brainer, right?
Wrong! In a country strapped for cash, the result was contraction. Rather than see a rise in tax revenues, a 7% drop was realized over the past year. Thus, in the face of draconian Keynesian policy foisted on the people of Greece, their deficit continues to be around 8% of the GDP.
The people of Greece are hurting. And it's an odd assortment of "their fault," "not their fault." On one hand, people are responsible for their own debt. Being a part of the EU has offered them opportunities to raise their standard of living. But too many of them became infatuated with easy money, pursuing debt like a drunk pursues the next drink. And they've paid a heavy price already, with over 60,000 small businesses bankrupt since last summer.
On the other hand, who can blame them? Easy money was thrust in their faces. They thought they could live in more luxury, so they did. And, thus, the failing of the European Union comes to the fore. Different cultures with different values and differing ways of thinking attempting to harmoniously embrace a mutual and interdependent fiscal policy was an unrealistic dream. And now, as the PIIGS can tell you, it's turning into a nightmare.
What happens when a country's deficit is 120% of their GDP? Is there any hope of recovery? Simply put, it's never happened. Eventually reality will be faced and, in one form or another, Greece will default. It might be through forgiveness of debt. It could be some form of bailout (who'd pay that?). Maybe they'll just face the music, start over and leave the EU holding the bill. But is that all?
The implications of this are huge. It would be devastating both economically and politically for Greece to default. While the European Bank, US Federal Reserve and other central banks have promised to keep Greece afloat, it has to end somewhere. And the people of Germany and France, not to mention other European countries, have become increasingly more vocal about the tab Greece is racking up.
Who can blame them? Think about it. How would you appreciate having to pay more taxes because a neighboring state had embraced irresponsible fiscal policies?
In case you've missed the irony, let's put it bluntly. Greece is in debt beyond anything they could possibly recover on their own. The EU is striving to help them out, but they keep beating the same drum; a drum that's resulted in continued fiscal suicide. Everyone is now holding the bill, including you.
The Federal Reserve, on the behalf of the benevolence of the US citizenry, has promised to help the EU through loans. If Greece defaults will the EU pay the Federal Reserve? If the EU defaults will the Federal Reserve simply write off the dollars it's printed in the name of the United States Treasury? Who foots the bill?
Make no mistake; the bed that Greece is lying in today is the very bed America is making. This is no different than the bank bailouts we've seen in the US. These austerity policies are crippling. It's a form of robbery that only a government - or government sponsored corporation such as the Fed - could possibly get away with.
The bottom line? As we've discussed, inflation. Higher taxes, openly and surreptitiously. Of course, a sudden retraction in the money supply could result in deflation. Could a default be written off in such a way? Which would be worse? It's hard to tell. But something has to give. And whatever gives will bring a great deal of strain to world economies; and the finances of millions of Americans. We'll do all we can to help you be prepared.
For your prosperity,
J. Keith Johnson
The Gold Informant