published Thursday, January 19th, 2012

Greece's debt troubles look a lot like America's

Will the euro -- the dominant currency of Europe -- survive?

That's an open question, but there may soon be an answer.

Greece is enduring a debt-driven economic catastrophe that threatens to bring down the euro.

At its heart, Greece's problem is one of reckless spending. Its government, already burdened by heavy corruption, has long spent money the country doesn't have to prop up social welfare programs.

Eventually, the bill came due, and even a large bailout from the other nations of Europe has proved too little to rescue Greece -- as have much-belated spending cuts and other austerity measures.

In consequence, Greece faces the probability that it will default on its debts -- the first but perhaps not the only euro-using nation that is expected to do so. It's thought that if that is followed by a default in highly indebted Italy as well, it will bring down the euro.

A frantic new debt-relief effort for Greece is under way, but there is no certainty that it will succeed.

The ins and outs of European politics might not be of great interest to most Americans -- except for two things: First, our economy is closely connected to that of Europe, and Europeans buy many American-made goods. So economic weakness in Europe affects Americans directly. And second, the debt-related panic gripping Europe is in some ways a preview of what we can expect if we do not get our own spending under control.

We now owe more than $15.2 trillion, with plans by President Barack Obama and Congress to increase our so-called "debt limit" by an additional $1.2 trillion soon. There is little serious talk in Washington about really even restraining the rate of growth in spending, let alone truly cutting.

Do we want to continue down that path and sooner or later have to impose massive, sudden spending cuts and tax increases? Wouldn't it be wiser to rein in federal spending before we reach that crisis point?

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nucanuck said...

Yes, federal spending must be reined-in and to the degree it isn't, taxes must be raised. Most, but not all, of the developed world is suffering from some degree of the same desease.

Because governments gave banks free rein to create a wide array of highly leveraged debt products and then pretended that Credit Default Swaps were insurance to balance risk, we now have a situation where a relatively small banking failure anywhere, might well set off a chain reaction of banking defaults, causing economic Armageddon.

A Greek default could reverberate around the world, all because of CDS.

January 19, 2012 at 9:57 a.m.

Oddly bank failures in the Balkans contributed to the Great Depression too.

January 19, 2012 at 5:42 p.m.
rolando said...

Which one? This one isn't Great? Well, maybe not quite yet. We haven't yet reached the point of taking in each others wash...

January 20, 2012 at 7:35 p.m.
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