Tuesday, November 24, 2009
Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess! ... If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.Yoohoo! Mr. Nobel! Greece would like a word with you:
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.And that's the real point here. Unlike Greece, we can devalue and print money, but the cost is rampant inflation.
Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.
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. 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 ...
Communist-led shipyard workers have already clashed violently with police. Some 200 anarchists were arrested in Athens last week after they torched streets of cars in a tear gas battle.
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. It is a striking contrast with Ireland," he said.
Brussels says Greece's public debt will rise from 99pc of GDP in 2008 to 135pc by 2011, without drastic cuts. Athens has been shortening debt maturities to trim costs, storing up a roll-over crisis next year. Some �18bn comes due in the second quarter of 2010 (IMF).
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.
For now things have gone well; today's bond auction was stellar for the United States. But with mountains of debt due for rollover in the next 12 months our luck had better hold. How will SEIU and AFSCME react when the government has to freeze government workers' wages while paying $700 billion in debt service in the 2019 budget?
Peter Boettke tells us of Tom Sargent's observation that before every inflation, there is debt.