May 11, 2010
Greece: A Preview of Things to Come
"Angry youths rampaged through the center of Athens, torching several businesses and vehicles and smashing shop windows. Protesters and police clashed in front of parliament and fought running street battles around the city," reported the Wall Street Journal last week.
No, this is not a report from a war zone. It is merely a scene from anti-government protests that have engulfed the land of Hellas.
What's happening in Greece is this: The Greek people are angry because their government pledged to make cuts in social spending.
It is not that the Greek government is inherently stingy. Quite to the contrary, the Greek government has been one of the most generous when it comes to paying for social goodies...so much so that for years it spent far more than it could really afford. Fox News correctly observed that "Greece lived for years beyond its means, borrowing money and spilling red ink to finance excessive government spending, offer socialized health care and provide lavish wages for federal workers."
Things, however, came to a head last year when the country's budget deficit reached 13 percent of GDP and its national debt ballooned to 113 percent of GDP. Faced with these figures, investors lost faith in the government's ability to service its debts. To compensate for the risk of further lending, creditors began to demand high interest rates on Greek bonds. With the source of cheap funding dried up and unable to raise enough cash, the Greek government found itself on the brink of default.
Broke and humiliated, the Greek government applied for aid to other members of the Eurozone. Not willing to let the whole monetary regime go into seizures, they promised a bailout of 110 billion euros. But the funds would be disbursed only if the Greeks agreed to bring spending under control. Not having any choice, the country's officials agreed to a package of austerity measures. Then all hell broke loose. According to the Wall Street Journal,
[H]ooded protesters smashed the front window of Marfin Bank in central Athens and hurled a Molotov cocktail inside. The three victims died from asphyxiation from smoke inhalation, the Athens coroner's office said. Four others were seriously injured there, fire department officials said.
It is something of a paradox that the Greek people still demand money even though their government is flat-out broke. Even the blind among them should be able to see that the state simply does not have the funds to meet the citizens' demands. The country has only debts that it cannot pay. After years of profligate spending, Greece has gone bankrupt.
Perhaps the most disturbing aspect in all this, from our point of view, is the fact that America's finances are almost as bad as those of Greece. Lest you think it an exaggeration, consider these numbers. Last year our budget deficit reached a record peacetime high of 9.9 percent of GDP. Despite the fact that this was supposed to be a one-off contingency necessitated by the crisis of 2008, federal spending is accelerating.
In the proposed Budget for Fiscal Year 2011, the Obama administration projected that this year's deficit will reach 10.6 percent of GDP. This may come as a surprise, since the mainstream media have largely chosen not to publicize this disturbing fact. You can, however, easily see it for yourself by clicking on this link. It will take you to the budget's summary tables. The first table is labeled S-1 and called "Budget Totals." There you can see the figure in the third row of the table's lower section. Also note that the table is tucked away toward the end of the long document (page 146 out of 179). So much for the promised transparency.
The situation is equally dire when it comes to our public debt. The present size of the American economy is just above $14 trillion. As of this writing, the total public debt of the federal government is nearly $13 trillion. This means that it currently constitutes more than 90 percent of GDP. Worse yet, the federal budget is poised to expand steeply in the months and years ahead. In a report the International Monetary Fund prepared last month, the agency estimated that the U.S. debt would jump to 110 percent of GDP by 2015. In light of this, the IMF issued an urgent call on the U.S. government to "move beyond health-care reform to restrain its yawning fiscal deficit."
Stark as the IMF estimates are, the figures are understated. Given our current pace of borrowing, it now seems likely that our national debt will breach the critical 100 percent milestone early next year. The 110-percent mark will be then reached by the close of 2013 at the latest. And this does not factor in increased spending on health care, which will occur as a result of the recently passed health care reform bill.
It is important that we keep in mind that these numbers refer only to the outstanding public debt of the American federal government, which is only one part of the government's total obligations. A far greater portion of our national debt is made up of unfunded liabilities inherent in entitlement programs, which, according to the Dallas Federal Reserve, amount to some $104 trillion.
When we consider all these numbers, we will quickly realize that our government's balance sheet looks rather similar to, if not worse than, that of Greece. In any case, it is patently obvious that like the Greek state, the American federal government will not be able to make good on its obligations.
Regardless of how fiscally irresponsible the U.S. government is, however, it -- unlike Greece -- can never be forced into outright default. This is because it controls the currency in which its financial obligations are denominated. By virtue of this fact, it can create new dollars at will to meet its schedule of nominal payments. Greece, on the other hand, is a member of the Eurozone, and as such, its debts are issued in the currency of that jurisdiction. And since Greece does not control the European Central Bank, it cannot print euros at will. Once it runs out of cash and cannot borrow anymore, Greece must inevitably default.
Even though the ability of the American government to inflate the currency may initially seem like a convenient way out, the practical consequences will be essentially the same as in the case of Greece. In the final analysis, inflation is only default in disguise. Its net result is that creditors and beneficiaries of government programs invariably receive only a portion of the promised value. In other words, there will be cuts, and given the amount of inflation that is likely to occur, those cuts will be steep indeed.
As in Greece, this will make many people angry, and protests will take place at which more money will be demanded from a bankrupt government. And since the government will not be able to oblige in real terms, those protests will turn into riots. Given the depth of our over-indebtedness, the fiscal disaster for which we are headed will inevitably translate into social breakdown. It will be the Rodney King riots writ large across the country. What we are seeing now in Greece is a preview of what is eventually bound to transpire in the United States.
But there is one important difference. Because arms possession is illegal in Greece, its productive citizens and their property are at the mercy of the looting mobs. In America, on the other hand, we can arm ourselves to protect our lives and belongings. Availing ourselves of the rights of the Second Amendment is thus one of the most prudent steps we can take in preparation for the impending fiscal and societal turmoil.