October 9, 2011

A Little More on Greece

How did Greece get into the situation that it’s in? Greece used its access to low rates that came along with the euro to borrow and increase the wages of government workers. Greek banks are going to go bankrupt not because they lent money to finance too many homes but because they lent money to the Greek government. Here’s a great example of some of their government waste: The Greek train system had €100 million in revenue and €400 million in salaries, with another €300 million in expenses. Further, A government-sponsored retirement plan for some 600 different "hazardous" jobs (like hairdressing and radio work) is available at 50 years of age. Population demographics alone make this intuitively insane – unless your country has huge reserves of natural resources that can be exported (like oil in the Middle East).

But Greece doesn’t have a positive trade balance, it has a negative trade balance. That’s not a good thing when your banking system is in shambles. Greece is likely to default no later than the end of this year (for all intents they have already done this). If Greece were an individual or a company, it would be in bankruptcy proceedings. It is now just a matter of time – and it is fast coming around. And when Greece does default, whether they leave the euro and go back to the drachma, they are in for a massive deflationary depression. At the end of the day, you either have to have "hard currency" to buy oil and medicine and other essentials, or find someone willing to loan you the money. Greece and Portugal and Spain do not export enough to make it through without some kind of devaluation.

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