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Greece in 2015: When 2+2 Finally Doesn't Equal 8

Monday, June 15, 2015

We are about to find out what happens when an entire generation attempts to make 2+2=8.

The International Monetary Fund (IMF) - which is only the most significant of Greece's creditors - has withdrawn from negotiations over Greece's debt restructuring.  As the Wall Street Journal has reported, this basically signals to the Greek government that they will not be getting a 'better' deal than the one on the table.

We are not Greece - yet - but it is very important to understand what is going on here so we do not end up where they are.

Fully 80% of Greece's budget goes to government employee wages and retiree pensions.  That is 16% of their economic output on a year to year basis and will balloon to fully 25% if they do not reform this sector of their society.  These reforms are at the heart of the dispute.

To understand how they got there we first have to divide our life into three phases: we are a student, we are a worker, and we are a retiree.

The first and last of these stages requires government support, and even here in the United States we are largely in agreement on what that should look like.  We do not want our children in the workforce, so we provide for public education.  This, of course, requires taxpayer support.  And as we age we are less able to be productive in the economy as our health begins to fail.  Here in the United States we lean (a bit too much, though) on Social Security and Medicare, which are funded by taxpayers, for this last phase of life.  Indeed, when Social Security began after the Great Depression, part of the rationale was to provide incentive for older people to leave the workforce, opening up job opportunities to younger people.

We largely agree on the underlying idea that we take from the economic production of those in the middle to support those at the beginning and at the end.  But if we do agree on this, we then simply have to face the mathematical facts of life: there needs to be enough people in the middle producing in the economy in order for us to be able to support those on the other ends of this spectrum.

This is where Greece is in complete denial.  In Greece, a hairdresser is considered an "arduous profession" which allows a person to retire early.  This is an example of how language is abused to create the "magic words" necessary to end up with 50-year old retirees.  The tax burden necessary to support this kind of retirement benefit structure then suppresses economic output, constraining job opportunities for young people.  They (young people) then end up studying until they are 30.

And so you end up with 30 year old students and 50 year old retirees.  This is a math problem, and frankly it is a very simple one that does not require academic economists, central bankers, or any other form of 'experts' to understand.  There are simply not enough people between 30 and 50 to produce in an economy to support this.  And so the government has to do two things to keep this charade going: over-tax those between 30 and 50 and go further and further into debt.

Much has been made of the tax-avoidance of the Greek people.  But this is not a problem as much as it is a symptom of the problem.  The problem starts with thinking that money (the Euro) is a tool of the State. Having made that mistake, governments like Greece's think they can make 2+2=8 by way of creative monetary and fiscal policies.  Greece - and the rest of us - are about to find out what happens when mathematical reality finally overcomes political ambition.

Greece's political society looked to the Euro as a tool (cheap loans) to continue with their socialist political ambitions.  What they did not realize is that money is first a utility contrived by people to facilitate the exchange of goods and services.  In Greece, as part of the culture of tax avoidance, Greeks exchange "special coupons" that are accepted at places like grocery stores (instead of Euros).  They might as well just call those coupons Drachmas and get it over with already.

The Greek people (civil society) never exclusively adopted the Euro as money, and therefore Greece has never really been a full member of the Eurozone.  Greek political society wanted the Euro as a tool of political ambition.  If there was ever an example of how statist monetary policies, like that espoused by Paul Krugman, drive a destructive wedge between political society and civil society, Greece it is.

And we are about to find out how destructive those policies can be.

There are really only two paths to the same end: The current Greek government is going to cave and accept pension and government workforce reforms.  This will precipitate a political implosion, which will then precipitate a subsequent economic implosion.  Or negotiations will fail and Greece will default and leave the Euro, precipitating an economic implosion.

And the academic economists like Krugman will wail about how unnecessary it all is and how evil conservatives are for insisting on 'austerity'.  This will, of course, be complete nonsense.  Austerity is not what will implode Greece's economy.  Eventually, their economy will implode simply because 2+2 does not equal 8.

Another extension will not change this. "IOUs" - basically bonds with no maturity date and a zero coupon - will not change this either.  These IOUs will only further us along a path to the place where money itself loses its meaning.

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