The Greek Debt Crisis As Harbinger of Things to Come

The crisis in Greece is not a sovereign (government) debt crisis. That’s the surface appearance of the problem. The below-the-surface struggle is about how bankers, bondholders, and speculators—together with their politicians in government—can offload the cost of the bad assets they created onto the Greek people.

The news reported in the western press is that big banker, hedge fund, private equity financiers from northern Europe, UK, and the U.S. are willing to lose 70 percent of the value of their existing bonds. But the fact is that a 70 percent reduction covers only 30 percent of the bonds outstanding for Greece that have become bad assets.

The reported Greek debt is somewhere between $300 and $400 billion. The current loan in question to Greece is about $170 billion. But the real Greek total debt is likely around $600-$650 billion. That’s just about equal to the total on hand for the entire European bailout fund—around $4 trillion to cover not only Greece, but Portugal (for another $200 billion), Spain and Italy (more than a trillion), as well as other economies also increasingly in trouble, such as Hungary, Austria, Belgium, and soon perhaps even economic stalwarts like Norway whose housing bubble is now about to burst.

In other words, the Greek and overall Eurozone debt crisis is far from over. If you want to see what a bona fide economic depression in the 21st century looks like, look at Greece:

• One out of two youth unemployed
• General unemployment in excess of 25 percent
• GDP collapsing
• Wages falling by 20-40 percent
• Pensions shrinking
• Jobs melting away at an increasing rate

Austerity is a doomed solution to a debt crisis. Austerity is a maneuver by bondholders and bankers to buy time, in the false hope that somehow so-called market forces will stabilize so that they won’t have to sell their bonds at a loss.

Greece today is a good example of how an economy cannot “austerity” its way to recovery. Cutting the income of those who are doing the spending is not a path to recovery—as Obama and Congress will find out in 2013. Already the $2.2 trillion U.S. deficit cuts mandated in 2011, which are scheduled to take effect after the November 2012 national elections, will slow the U.S. economy to less than 1 percent GDP growth. Those aren’t my numbers; they’re the cautious Congressional Budget Office’s numbers.

There are only three ways to get out of debt-driven, global economic contraction. One way is to generate inflation. Inflation reduces the real value of the debt. But austerity leads to deep recession and depression and a further collapse of prices (deflation) of all kinds, especially wages.

The second way to resolve a debt crisis is to grow the economy. That produces more income and tax revenues, which enable a paying down of the debt. But austerity means just the opposite of economic growth. The third way is to liquidate the debt; that is, let the bondholders and bankers take their losses. WYO

So far, policymakers have failed to achieve the former—growth and inflation—and will continue to refuse the latter—liquidation of bad assets—since liquidation translates into massive losses and likely bank defaults. So in the interim, bankers, bondholders, and speculators continue to make workers and taxpayers pay.

It’s not just Greece we’re talking about. The Obama administration’s three economic recovery programs since 2009 were similarly designed to buy time. The subsidies to states, cities, the unemployed, schools, and the like were designed to put a floor under the massive collapse of consumption that was occurring in 2008-09—but only for one year. After the year, the $300-plus billion in tax cuts passed in 2009—and the additional $802 billion in tax cuts in 2010—were supposed to kick in and result in business investment and job creation in the U.S. But it didn’t happen that way. Big corporations continued to sit on a $2.5 trillion cash hoard. Meanwhile, U.S. multinationals sit on a $1.4 trillion excess cash hoard stuffed away in offshore subsidiaries in order to avoid paying U.S. corporate income taxes. 

None of the above possible approaches to resolving a debt crisis— economic growth, reflation, or liquidation—is on the policy agenda in the U.S. and the Eurozone. In Europe, since late last year, the European Central Bank (ECB) has been delaying the crisis by flooding banks with a mountain of cheap loans—just as the U.S. Federal Reserve bank has been doing the past three years. In other words, the global capitalist banking system has been getting constant liquidity injections composed of zero interest loans and so-called quantitative easing —i.e., the Fed printing money to buy up bad assets from banks and lenders.

But the Federal Reserve has done a horrible job at reflating or growing the economy in the process. The trillions it has spent on bailing out the banks, printing money, buying banks and mortgage lenders’ bad subprime loans—at or near full purchase price instead of the 15 cents on the dollar they are worth—has resulted in the Federal Reserve spoon-feeding speculators around the globe and pumping up stock markets, real estate, currency speculation and volatility, oil and commodity prices, and financial securities in general. The money and credit from the Fed has not gotten to those parts of the economy that need it most.

The Fed is not broke. It can always print money. It’s just that Fed policy is itself broken. The bad assets are still there. The Fed and Congress have offset the bad assets on the private balance sheet and, in so doing, have mirrored those bad assets on the public balance sheet side. So it not only failed to remove (liquidate) the bad assets, it doubled them. Now the public sector has become as fragile as the banking sector. Liquidation is abhorred by bankers and bondholders as they don’t want their asset values reduced or expunged. They want the people to pay for the losses. And that is Greece today—and the U.S. by 2013 and beyond.

Z

Jack Rasmus is the author of Obama’s Economy: Recovery for the Few. His website is: www.kyklosproductions.com and his blog, jackrasmus.com.