A world in economic crisis

The Greek debt crisis

Posted in Greece, stagflation by Aussie on June 10, 2011

First of all, I want to express that I think it absurd that Østupid would contemplate “loaning” funds to Greece. The fact is that unless Greece introduces far reaching reforms they will never dig themselves out of the current hole and throwing money at the Greek government will not cure their financial woes. Greece is a Communist country, and those protesting are anarchists and Marxists. These are the people that are currently helping to destroy the Greek economy, especially with their willfulness and inability to accept that things have to change. The welfare system in Greece is one of the worst in the world from the point of view that there are not enough taxpayers because Greece allows people to retire at around the age of 45. This has to change in the future and the retiring age needs to be adjusted to at least 60 years if there is going to be any long term improvement in the Greek economy. I have previously highlighted where Greece is nothing more than a welfare basket case. This is why a country that is in ever greater indebtedness than Greece should not even be contemplating giving money for yet another bailout, where the debt is unlikely to be repaid. (I will write more on this when I have read through the available material).

Second, one solution being proposed has been nixed by the chairman of Europe’s Central Bank, Jean-Claude Trichet:

Germany’s finance minister, Wolfgang Schauble, wrote to Trichet, the IMF and his eurozone partners this week to propose a swap in which private debt holders would trade in their Greek government bonds for new ones, giving Greece an extra seven years to work through its debt.

But ratings agencies argue it might be impossible to conduct such a swap on a voluntary basis, while Moody’s warned a Greek default could impact the ratings of Ireland and Portugal, the two other eurozone countries that have had bailouts.

 

Jean-Claude Trichet, chairman of the European Central Bank, heightened the sense of disharmony at the centre of European politics after he warned that only a voluntary agreement among all parties holding Greek debt would get the ECB’s seal of approval.

Trichet added to the gloom when he also signalled a rise in euro base rates next month that will push up the cost of borrowing for Greece and other debt-laden eurozone countries. A quarter-point rise to 1.5% in July was deemed a certainty after Trichet said the central bank was in “strong vigilance” mode over inflation, using a code word to signal that a rate hike is probably only a month away.

Bond yields also jumped, with the Athens administration now expected to pay 25.08% interest over two years if it tried to borrow from the financial markets.

Investors had earlier digested the news that Greece’s crisis-hit economy expanded by a sickly 0.2%, down from a previous estimate of 0.6% – revealing the economy shrank at an annual rate of 5.5%.

Greece is expected to plunge back into recession this year as austerity measures bite, with the European Union and International Monetary Fund now both predicting a 3.8% contraction. Unemployment figures released on Wednesday showed that 16% of the Greek workforce is now jobless; among 15-24-year-olds, the unemployment rate is an extraordinary 42%.

From what I am reading, and I have no idea if I am correct, it would appear that Europe is in trouble as inflation starts to take hold. On top of that, the debt-ridden Greece has a very high unemployment rate, and it faces a massive 25% interest rate if it seeks to borrow on the open market. These are all of the indicators that point to stagflation.

Since the issue is really about stagflation, it seems to me that the wrong approaches and remedies are being pursued. This is probably because of the adherence to the Keynesian prescriptions. I suspect that if they were following the Hayek prescriptions that they would be equally stuck, because stagflation requires a different approach than the old Keynesian approach.

In all probability what is happening is that the flaw of initiating a eurozone in the first place is being highlighted. The eurozone seems to be leading the European economies down the toilet, especially when each of those countries are committed to the the Socialist aims of a welfare state.  In this situation it is innovation that is being stifled because private investment in corporations is being stifled as Government takes a larger slice of the money available for investment.

I think that what is required is a new approach that will link big government with the stifling of the rest of the economy. Until economists are willing to take the stagflation of the 1970s seriously they cannot deal with the current situations, especially when big government as well as Marxist ideas have contributed to the demise of world economies.

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