Good morning Hank, it's Friday!
Good morning Hank, it's Friday you know in my hug bucket? Greece.
every time I see Greece just wanna give it a big ol' hug. I don't, however wanna give
them a 150 billion euro and therein lies a problem.
Okay, so I wanna to talk about sovereign debt today, but just to establish at the
outset that this is not a particularly political problem here the Chart of the
gross federal debt, by president as a percentage of GDP.
As you will notice, the fluctuations have nothing to do with whether the president
is blue or red. The same is true in other developed countries as well.
Okay so Hank, to begin let me tell you one of the great rules of economics. If you are
rich,
you have to be a idiot not to stay rich and if you are poor you have to be
really smart to get rich.
This is true for individuals but also true for countries. Fancy Pants countries
with Fancy Pants currencies have all kinds of advantages over developing countries,
including that we are able to borrow money cheaply.
In fact, because the Fancy Pants countries can borrow money so cheaply it actually
often makes sense to run a deficit.
And the reason for this is that in the long term our economy can grow faster
than the cheap cheap debt were requiring to pay for our economy to grow.
So that is not inherently bad for nations. The famous example of this is
that in 1945 the United States had a debt that was more than a hundred percent of it's
GDP.
And our deficit was more than twenty percent of our GDP and that level with
debt
immediately preceded the largest expansion of our economy in history. Also
the largest expansion of our waistlines in history.
Yes that's funny, we did get fat. So debt is not bad,
but debt that you can't repay is
very bad. The trick of Fancy Pants countries being able to borrow money
cheaply has always been that the market assumes that fancy pants countries are
basically
guaranteed to pay you back. And when I say the market assumes I mean the market
iassumed until two months ago.
When it realized that Greece fancy pants country with a fancy pants currency
maybe can't pay back its debts. What's interesting is that Greece is probably
technically in a better economic position that America was back in
1945,
but for a variety of reasons, some of them very legitimate the market is so that
Greece won't be able to pay back its debt, which in turn has led to new debt
being much more expensive, which has in turn made it completely impossible for
Greece to
ever pay its debt. You see, Hank, it's a circle, and its vicious.
That's where they got the term.This raises the possibility that fancy pants countries
with fancy pants currencies might not pay back the money we loan them,
which will probably raise interest rates for a lot of fancy pants countries,
which could lead via the vicious circle to more defaults, higher interest rates,
more defaults,
higher interest rates, I could go on like this forever. Which will be very bad, like
we would yearn for the days of 10 percent unemployment. All of which is complicated by
the fact we're coming out of a worldwide recession in the total economic output
in the world is smaller.
So there's less money coming in taxes but governments still need to spend
approximately the same amount of money
and for everybody that says the problem is wasteful government spending we aren't even close to a
a balanced budget. I mean the United States would have to eliminate both its two
biggest expenses, Social Security and Defense,
in order to even come close to balancing the budget. The only other way to shrink
the deficit would be raised taxes which is not generally seen as a good idea
during recession. So the problem with sovereign debt maybe not being as cheap
as it once was,
isn't the fault of any one political ideology, it's kinda everybody's fault.
So basically Hank, I don't want to alarm you, but I do think we should all buy
unicorn
pinatas and hide our valuables in them. Actually Hank the unicorn strategy
won't work because we have to keep loaning each other money,
and we have to figure out a way to loan confidently, like we did back in 1945.
That's where the EU the IMF are working so hard try to nail down a bailout plan
for Greece.
And if fancy pants countries can't continue to convince us that our money is as safe with
them as it is inside of a unicorn pinata they will lose the cheap money
privilege they have enjoyed for centuries.
And history tells us that once a stupid rich man gets poor,
he doesn't usually get rich again, unless he is Donald Trump.
Hank, I'll see you on Monday.
Hank, I told you I'd see you on Monday, that's your signal to stop watching but nerdfighters there is still
time to participate in our secret project click here for more info.
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