You should remember my propensity to explain national and international finance in simple supply-side economic terms. You may remember my 100 word lesson in economics explaining the role ofindividual economic liberty in increasing production of goods and services.
A financial crisis such as Greece's is the result of a nation consuming more goods and services than it produces. Greece's last few annual deficits, announced as 4% of its total annual production, now are thought to have been 12%. You may think that this government deficit of spending over taxation has little to do with the production deficit over consumption, but you would be mistaken. The government deficit, driven almost exclusively by transfer payments, drives consumption over production, increasing demand which can only be met by imported goods and services. Increased imports drive the trade deficit up and force increased borrowing from other nations.
Finance is about satisfying current demand with future production or vice versa, and it provides a way to cover trade deficits: borrowing from other nations. However, those nations' willingness to deliver goods and services now in return for promises to return that production later eventually wears thin. The process ends when the debtor nation, unable to refinance its massive debts, defaults on some or all of it. In the present situation the result can be a rippling financial collapse that goes round and round and comes out everywhere: Greece may refuse to pay Spain, who then can't and won't pay the United Kingdom, who can't and won't pay the United States....
So, as the end approaches for one country there may be an rescue effort mounted among neighbor nations to extend one last line of credit to the profligate one in return for a promise to cast aside the habit of profligacy. The European Union has made just such an offer to Greece, and Greece's government attempted to agree, but yesterday the unions of Greece called a general strike and went to the streets in riot. Today, no one believes that Greece's people will allow the agreement to be accepted.
When the proffered hand is spurned, the profligate one is left to pay in hard currency: the immediate money it can earn from its immediate exports. In effect, it must carry goods and services to the border and barter them on the spot for goods and services from other nations. The austerity program required is enforced by the lender nations' unwillingness to lend.
The result is that the profligacy can no longer continue. Consumed goods and services must come out of current production. Of course the public sector that has caused the problem produces little of value in the domestic economy and nothing exportable, so they are in no way part of the solution. They are nothing but a drag on the entire process of recovery. Unless the rest of the nation reneges on its promises to pay them their ridiculous golden pensions, and throws off its public sector's rent-seeking regulatory shackles then current production cannot grow to satisfy current demand.
There is no way out till the nation returns to productivity.
It is worthy of note that various states of our Union are marching down this bloated-public-sector death spiral: California, New York, and Michigan leap immediately to mind. As, of course, is now the United States of America, lead by our public-sector-favoring-and-favorite President.
