Greece Can Default & It Will be Fine, but the US & Britain are Really Screwed | Hacker News Reader

Greece Can Default & It Will be Fine, but the US & Britain are Really Screwed

blindreason.org

31 pointsjboydyhacker24 comments

China, Spain, Portugal, France, Great Britain, the Ottoman Empire, and Argentina all defaulted on their debt. Some of those nations were Great Powers at the time of their default. If the United States defaults, it will lead to breadlines, but not to Armageddon.

In conclusion, calm down. Stop reading every blog post on the national debt. Stop pulling up every tired Mad Max reference you can muster. And certainly stop telling your neighbors to hide gold under their floor boards.

Your company might not be here in a few years, but the United States and the global economy probably will.

Very good advice. I started a social blog this weekend (www.financialpreparedness.com) to spread the notion that, while it's not a bad idea to prepare, the world is not going to end.

The quoted polemic, supposedly written by a Greek banker, doesn't make much sense. It starts off by describing Greeks as some of the world's richest people, then it claims that France and Germany are the problem (because their investment industry was looking for higher returns) and not Greece (which only took the money and misused it), and finally rejects the notion that Greeks will accept austerity because the money was actually stolen by the oligarchy that controls Greek businesses. If Greeks are so wealthy then they must certainly be able to solve the problem by increasing taxes and seriously pursuing evasion while cutting the bloated public sector. The actual fact is that the Greek government and large international banks have basically conspired to steal money from French and German taxpayers, and the average Greek on the street has joined the conspiracy by refusing to accept that the promises made to them by their government in terms of benefits and services were simply a fabrication that had no basis in reality.

They are making some attempts along those lines, which is interesting for a socialist government. There's a public-sector wage freeze, and significantly stepped-up attempts to go after tax evasion.

Fun fact: in 2008, the average Greek doctor reported less than €10,000 in income. If you were to make a demographic map of Athens based on official income data from tax returns, most of the wealthy suburbs would look like ghettos.

Hmm, except the oligarchy aspect at the end, I thought the analysis was cogent enough. I liked his points about the bailouts being a wealth transfer to baby boomers in particular. It basically boils down to a few claims. For why Greece is not the loser:

* A decrease in the amount our government is able to borrow will not hurt us very much. (This jives with your claim that Greece squandered the money lent to them.)

* Investors have short memories. They'll be knocking at our door again soon enough.

For why either baby boomers or the current generation do stand to lose:

* Bailouts represent a wealth transfer from the current generation, who will pay for them over time in taxes, to the baby boomers, whose investments are the ones being bailed out.

I'm not sure if his claims were about who was the problem so much as a pragmatic analysis of who stands to lose. I've always thought that when bankruptcy and default are options, the debtor is in fact the one that holds the power in the lender-lendee relationship, and this situation seems to lend credence to that view.

The goings on in America, where nobody is thankful for having been "saved" and where the economy is suffering the result of a misguided, short-term decision may push the French and German government to say "the Greeks don't deserve a bailout..."

So, a decision local to the US will push the French and German govs to withhold a bailout to Greece??? Also, the article never gives any numbers for Greek government debt held by the US or UK. All this, plus some bad numbers (see the post's comments) make me dismiss most of this.

If you read the Blogspot profile of the author of this article, it looks like he lives in the USA.

That said, he makes good points. I agree that the UK and USA are face the worse economic problems, but it may take several years. Here in the USA, our leaders will do anything to push problems into the future rather than working on them.

Lumping the US and UK together in the context of debt/gdp is misleading. The UK does, as the article suggests, have a nearly 400% debt/gdp ratio, but the US is "only" 95% debt/gdp.

I think, but don't know, that that 95% is federal only. Load in state and local governments and the US might be competitive with the UK.

Plus the Medicare and Social security financing debt, which, in a beautiful coup of financial engineering, is counted separately.

The biggest component to US debt is private.

Let me find some figures. Googling for us "total debt" private leads me to http://mwhodges.home.att.net/nat-debt/debt-nat.htm which claims a total US debt of $57 trillion. The site is sensationalistic, but I have no reason to doubt their numbers. Almost certainly they are going off of recognized published numbers from somewhere. That figure includes "all recognized debt of federal, state & local governments, international, private households, business and domestic financial sectors, including federal debt to trust funds". It does NOT include unfunded obligations like pensions and social security.

Wikipedia tells me that the US GDP is 14.2 trillion.

Dividing one number into the other gives me a 401.4% debt/GDP level for the USA. And since we only have the first number to 2 significant digits, we should round that to 400%.

Whether or not you agree with the conclusions in the email, the numbers quoted look accurate.

Uk government debt as a proportion if GDP is more like 55% http://www.statistics.gov.uk/cci/nugget.asp?ID=277

The author if the original piece seems to have several key stats wrong which undermines his arguments.

The author of the original piece said total debt, not government debt. Total means total, and includes things like all of those mortgages out there (many of which are under water).

Looking at http://en.wikipedia.org/wiki/List_of_countries_by_external_d... I see that UK debt to the rest of the world is 365.44% of total GDP. It is not hard to believe that the internal debt within the UK to (meaning debt held by people, organizations, etc within the UK to itself) would be somewhere north of 35%. That would make the total UK debt over 400%. In another response I've pointed out that the total US debt is almost exactly 400%, so that quoted figure looks correct.

The interpretation may be an entirely different thing.

It's a little difficult to pin down the numbers right now because everything has changed so much in the last year. But 95% vs 400% is definately utter nonsense.

This IMF paper (http://www.imf.org/external/pubs/ft/spn/2009/spn0925.pdf page 35) from Nov 2009 projects US and UK government dept for 2010 to be 94% and 82% of GDP respectively.

The US and the UK, in spite of the many differences, have one important thing in common. In both cases debt is almost exclusively denominated in domestic currency. So neither of the two can default outright as long as there is enough energy left to start the printing presses. Any default would come in the shape of inflation.

as long as there is enough energy left to start the printing presses

Intuitively this makes sense but in reality it is not practical. As soon as investors hear the presses crank up (metaphorically speaking) they can predict what's coming and will dump all their US debt, driving up interest rates and forcing a deep[-er] US recession. Politics will then correct this before the USA becomes Northern Zimbabwe.

I'm not worried about the US becoming Zimbabwe at all (northern or otherwise). But under extreme circumstances, when the alternatives are to default outright or to inflate the debt away, the latter will always be preferrable for a country indebted in its own currency. It's not an option for other countries, so I think it's a useful distinction in spite of the issues you correctly point out.

After you figure out the difference between total debt and government debt, you can look for my other comments that show that the quoted 400% figure is indeed reasonable.

The figures are apples and oranges. I have no doubt that you can get to a reasonable number of 400% for some form of debt. But if you do that you need to do something similar for all countries you compare.

What makes you think that people don't do something similar for other countries?

I don't have direct access to the necessary statistics, but based on the figures at http://en.wikipedia.org/wiki/List_of_countries_by_external_d... and guessing that most of Greece's debt is externally held, it is looks like Greece's total debt load should be somewhere in the 50-60% range. That looks a lot better than 400%. And fits perfectly with the article's contention that the Greek government has a debt problem, but the rest of Greece does not.

The list you point to includes only external debt and combines private and public debt. What that says is simply that US and Japanese citizens borrow at home whilst many others borrow abroad. It's a reflection of the size of a country's debt market and says absolutely nothing about the likelyhood of a government defaulting on its debt.

The list I pointed to is simply the first thing I came across that could be used to estimate the total indebtedness of Greece. You are right that it is not a direct measurement of total debt. You are also right that total debt is not a direct measurement of government debt risks.

However one thing that total debt is good for is seeing how much total weight the economy as a whole is carrying from accumulated debt. From the point of view of the economy it doesn't matter that much who holds the debt. After all money lost to interest is lost just as much whether it is an individual paying direct interest payments or the government raising taxes to pay its interest payments. And besides, debt can quickly change categories. For instance in a credit crisis private debt can suddenly become public debt instead. (In a recent PIMCO article Bill Gross pointed out that in credit crises over the last 300 years that public debt tends to approximately double.)

By any comparison with history or other countries, a 400% debt to GNP ratio is very high. It might not spell automatic disaster, but it suggests some rocky times ahead.

I do agree with much of what you say. What I'm taking issue with is using external debt as a proxy for the total debt load affecting an economy. Large countries with a large domestic debt market will always look better in that comparison even though the actual debt load may be exactly reversed.

I think a much more useful comparison would be to ask what share of personal and government income has to be used for debt servicing and what the trajectory of that number is.

If I had a better source to estimate total debt from for Greece I would have used it. But that was the best that turned up in a couple of minutes of Googling.

You are absolutely right that the debt servicing number is a much better thing to use. It not only handles obvious things like different interest rates for different entities, but also subtle ones like preventing double-counting of securitized debt. (In securitization a pool of debt is sold to a company created for the purpose that immediately issues bonds which sum to the total debt modulo trivial operating expenses. Thus securitized debt shows up as both personal and corporate debt.) But that information is harder for a random internet user like me to get at than total debt numbers.

But better thing to use or not, it is harder for me to estimate the total cost of servicing the debt. I'm just a random person on the internet and don't have direct access to any of the data. And besides, total debt is what the original article used, so an apples to apples comparison talking about what was in the article should use total debt.

"total debt is what the original article used, so an apples to apples comparison talking about what was in the article should use total debt."

I agree that total debt or some proxy for it should be used for the comparison, but the numbers on the wikipedia page you linked as well as (apparently) the numbers in the article are _not_ total debt. Not even close. These numbers show only external debt.

That excludes almost all US mortages, it excludes almost all US and Japanese government debt, whereas for other countries it includes almost all debt that anyone, private or public, has taken on. That's why comparing these numbers says absolutely nothing about the total debt load an economy has to support.

External debt does matter in some respects, it just says absolutely nothing about total debt, which is what you say should be compared. It's not just a little bit off. For instance, Japan's government is indebted to the tune of more than 200% of GDP. Yet, external debt of Japan as a whole, including private and public debt, is just 35% of GDP according to that wikipedia page.

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