Tuesday, June 30, 2015

Debt, a Society Killer

Borrowing money, by companies, individuals and governments, has been with a very long time, but formalized institutional lending traces its origins back to the Renaissance. “The history of banking begins with the first prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods between cities. This began around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders based in temples made loans and added two important innovations: they accepted deposits and changed money. Archaeology from this period in ancient China and India also shows evidence of money lending activity.
“Banking, in the modern sense of the word, can be traced to medieval and early Renaissance Italy, to the rich cities in the north such as Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, established by Giovanni Medici in 1397. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.”
Society struggled with debtors prisons, theoretically banned in the United States (although jailing people in lieu of fines smacks of ancient discredited practices), and other mechanisms of debt enforcement.  Bankruptcy notions are available in most countries, but you can still be jailed for non-payment in some nations still today (try ultra-modern Dubai for example). And then there is national debt.
Such debt defines contemporary living, but as Puerto Rico’s governor seeks a new form of bankruptcy for his territory’s debt (PR is part of the U.S.!) and as Greece nudges closer to leaving the Eurozone, markets around the world plunged. “And in China, the precipitous declines in its stock market were also a sobering reminder that stubborn problems lurked in the global economy.
“Stifling debt loads, for instance, continue to weigh on governments around the world. Greece’s government has repeatedly called for relief from some of its debt obligations, and Puerto Rico’s governor said on [June 28th] that its debt was ‘not payable.’ Both borrowers are extreme cases, but high borrowing, either by corporations or governments, is also bogging down the globally significant economies of Brazil, TurkeyItaly and China. And economists say that central banks and their whirring printing presses can do only so much to alleviate the burden.” New York Times, June 29th. We’re part of the problem, not in any dire straits right now, but we have a long history of national debt.
The United States began borrowing from its inception, but at over $18 trillion in national debt outstanding today, the United States is a highly leveraged country. “It all started with $75 million in loans made to the new United States of America during the Revolutionary War, and thus began the first American budget deficit. We managed to pay it back rather quickly and enjoyed several years of budget surpluses but the War of 1812 forced borrowing and once again we were back in debt—big wars tied to big deficits would be a recurring theme over the next 200 years.” SCPR.org. But at least being the world’s largest economy gives creditors some solace that their borrowings are secured. Not so Greece.
It is a nation of shopkeepers, farmers and small businesses… with government jobs and a few big companies along the way. To understand how desperate and backwards this economy truly is, ask yourself how many products made in Greece you have in your home? Even the yoghurt and feta cheese you might have is made here! The underlying economics just aren’t there. To get EU approval to become a Eurozone nation in 2001, Greece hired chi chi investment bankers to cook their books, making it appear that they were more solvent than they were. Greek tycoons have successfully avoided taxes by clever off-short schemes… or… by some accounts… but lying and bribing. And since Greek currency devaluation (the normal plight of over-leveraged nations) is not available in a pan-European currency, salary reductions, firings, pension cuts and other forms of austerity are the ugly substitute. How did this begin?
Greeks became “European” quickly almost a decade and a half ago, mirroring a lifestyle they could not afford with credit cards and other forms of debt. The government followed suit, not pursuing tax cheats while creating new social programs in increasing levels of populist politics. The resulting economic instability was horribly amplified as the recession that slammed the world more than a year later, gripped Greece in 2006 (and things have gotten steadily worse ever since). The European Central Bank, the Commission and the IMF itself came to Greece’s aid, pumping billions of loans in exchange for pledges of a severe program of austerity. A huge bailout was needed. Life in Greece went from horrible to much, much worse.
Greece is in default of billions of loans, and leaving the euro zone is increasingly likely. But still, creditors are demanding more cuts if more aid is to be had, less government spending, more austerity and higher taxes. It’s gotten so bad that even Greece’s traditional enemy, Turkey, has offered to step in to relieve some of the burden.
Life in Greece is truly awful these days, and if they are forced back to their old drachma currency, imports – like gasoline and heating oil/gas – will no longer be affordable. Greeks get to vote Sunday on the new “more austerity” plan offered by the EU, but it is a Hobson’s Choice. Accept more austerity, and things get worse, but at least Greece stays in that single currency that allows easier trade with the world. Reject austerity, ride deeper into default land with a new replacement currency that will hyper-inflate and might not be accepted by the rest of the world and ???
Looking at the daily lives of ordinary Greek citizens today, facing one of the highest unemployment rates (25.6%) in the Western world, life is awful. When they’re not lined up at the ATMs to draw their daily ration of EU60 (until the money runs out), most Greeks face a life filled with pain. Banks and the stock market are closed. The Guardian UK (January 15th) took a quick journey into the real portion of Greek life:
“‘I will drive you to the wound of Greece. It won’t take long.’ Tall, muscular and dark, Antonis is not a man given to hyperbole but he is, by his own admission, very angry. Now, staring into his rear-view mirror… there is no hiding how incensed he is. ‘What has happened to this country is a catastrophe,’ he fumes. ‘Our politicians, Europe, the IMF, they have stopped us having dreams.’
“The journey to the wound of Greece does not take long. For Antonis, a photographer with an eye for the unusual, it is not at the end of the pot-holed road we are driving down.
“It is everywhere: in the mamas and papas scavenging through the rubbish bins, the broken pavements and shuttered shops, the abandoned cars and derelict houses, the new poor who mutter to themselves on graffiti-stained streets. ‘It is the loss of hope,’ he says with a thump of his steering wheel. ‘I see it every day, a wound that will not heal. Please write that I, Antonis, hate this country, I hate everything about it.’
“For the 43-year-old, rage has been shaped by fate, one shared by over 1.3 million Greeks since their debt-stricken nation’s financial meltdown. In 2010, under the punitive effect of austerity – the price of the biggest bailout in western history – the Athenian photographic studio that employed him unexpectedly collapsed.
“Overnight, he found himself out of work, another statistic in the record number of jobless thrown up by a crisis born in Athens that has reverberated through every EU capital since. ‘Unless they are stupid, or rich, no Greek has children anymore,’ snarled Mavros who has been forced into the taxi driving business to make ends meet. ‘My predicament has denied me having the second child I always wanted.’”
So it is within this context – human misery vs. bailout pledges made without the ability to keep them – that Europe and Greece must build their future. And if Greece exits the Eurozone, the first such effort ever, can other nations be far behind? Would that be enough to unravel the imbalance between the Teutonic nations in the north and the less disciplined cultures of the south? Was the dream of a single currency folly from the inception? At 2% of the Eurozone economy, Greece’s impact on their neighbors, while not without serious ramifications, is hardly earth-shattering. But if Greece goes, who’s next? And the Eurozone shatters, trust me, the whole world will suffer greatly. Expect another big global recession.
I’m Peter Dekom, and the choices are hard, and Europe is not in a particularly friendly mood these days.

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