The Greek Experiment

According to New York Times reporting concurrent with the bailout of Greece, the President of the United States advised leaders of Germany and France relative to the European Union/International Monetary Fund (IMF) decision. The Times cited unnamed senior Administration officials who stated that President Obama’s “experience” in brokering big deals was brought to bear (i.e. through his involvement in various U.S. economic stimulus packages and corporate bailouts); Obama’s encouragement to “think big ideas” allegedly helped lead to the trillion dollar deal via a “special purpose vehicle” (essentially a form of Eurobond issue).

The end result of the weekend negotiations was to postpone the sovereign debt crisis of one of the so-called “PIGS” of Europe (Portugal, Ireland, Italy, Greece and Spain). Any one of the other countries listed, plus France and the United Kingdom, which is outside the Union, could represent the next European sovereign debt crisis to make headlines. That is because all of these nations are built on the welfare state model where everyone tries to live off everyone else. Monetary inflation serves the purpose of postponing crises as they arise although each one signals the potential of an impending greater disaster. The rising debt must eventually be repaid. Declining productivity and an orientation to consumption in welfare state systems keeps the process of economic decomposition going for an indeterminate period, that is, until inflation no longer has the desired deferral impact.

The Greek Petri dish will warrant watching, although the view of market participants is clear; gold bullion is setting new price records and equity markets are in correction. In essence, the bailout of Greece involves the printing of additional currency by the European Central Bank to purchase debt issues from Greece. Conditions precedent set by the deal brokers were meant to impose fiscal austerity on the Greek public sector. Some aspects of the austerity measures involved, for example, extension of the mandatory retirement age for workers from 53 to 67, cutting civil service salaries, freezing pensions, and raising taxes. When the Greek parliament passed a slate of these types of measures the protests accompanying the deliberations soon turned more violent and people were killed. This is a hint of the logical consequence of the welfare state model: violent revolution or dictatorship, or some combination of the two as the system runs out of victims to exploit.

Printing of additional currency is monetary inflation, which will postpone the current crisis by putting money and credit in the hands of favoured beneficiaries in the political economy of Greece. These spenders will continue in their old habits leading to further general increases in the level of prices. Inflation is a stealth form of taxation destined to exacerbate the already tense situation involving a bloated public sector, fat labour unions and low levels of productivity. There is no one left to bleed to maintain the welfare state.

 Dare I ask who will come to the rescue of the U.S. when its creditors have had enough of such big ideas? A recent IMF report estimates that when all U.S. debt is considered in making the calculation, the ratio of national debt to Gross Domestic Production (GDP) approaches 100 percent, rivalling the dubious statistics of such nations as have already been mentioned, plus Japan, another Western democracy in fiscal trouble. That suggests that every dollar expended in the economy is a borrowed dollar. When China, for example, decides that it can no longer invest so heavily in U.S. treasuries and the short-term interest rates are forced up despite best efforts of the Federal Reserve, what will the impact of spiking rates be for the heavy load of short-term debt? Will Americans, like their welfare-state compatriots in Greece, take to the streets protesting loudly and violently that they want to have their cake and also eat it?

U.S. politicians have long demonstrated that they do not have the moral integrity to face the reality of out-of-control spending and so the most likely consequence will be inflation of the U.S. money supply. The results are unlikely to be pretty. Many individual U.S. states have economies of a magnitude that rival or exceed the GDP of European countries. The combination of federal, state and municipal profligacy has led to a contingent debt load and “off budget” liabilities that can have only one result when the printing presses start humming regularly—hyperinflation-induced austerity. Given current economic conditions, which have no solution in reality but the slashing of government spending accompanied by wholesale deregulation, the main consequences will be rapidly rising price levels. Savings, such as they exist, will be wiped out or reduced in their ability to satisfy consumptive demand or to supply capital for investment that few will be daring enough to make in any event. Everyone will be forced into making do with less. And, what about the desperate millions of unemployed Americans who currently cannot expect to find a good employment opportunity for years at current rates of growth and job creation? Soup lines will be back and will get longer. Violent crime rates will be higher. A dictator may arise.

Just as the cradle of Western civilization has become very much uncivilized indeed by its deterioration into welfare state practices, so will the Western democracies become ever more dangerous places for the individual to try and pursue his values in life, no longer as independent of political tyranny. The people will gain nothing by violent protests as in the laboratory example of Greece; people will need to take personal responsibility to fend for their economic existence. More importantly, the people must come to understand why the historical opportunity for civilization to advance has been so stupidly squandered—over just the last century or more—by the regression to political tyranny contained in the legacies of such systems of political organization as feudalism, socialism and dictatorship. The welfare state is in essence, simply a variation on a theme.

©Copyright 2010 Edward Podritske

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