Greenspan Says Greece Default ‘Almost Certain,’ May Trigger U.S. Recession
bloomberg.com
bloomberg.com
And setting interest rates below inflation really killed off the idea of anybody saving money (cash) in the bank only to watch it evaporate. Cursed Fed. Printing money like mad does help generate inflation, though, which helps keep labor costs (our pay) down by effectively handing workers a little pay cut every year.
You do realize that wages are adjusted for cost of living changes over time? (This is a gross simplification of the actual process, but the fact remains that wages are not constant in the face of inflation.)
Take a look at this please (using median wage here to make this more clear):
http://www.wolframalpha.com/input/?i=all+occupations+median+...
However, here is median wage too: http://www.wolframalpha.com/input/?i=all+occupations+mean+wa...
It is also worth noting that the average wage back in the '70s was roughly $8,000.00.
Edited in Response to Downvoting:
Inflation is caused by rising prices, and wages are one of these prices. Your wage is simply the price of your labor. In the long-run, wages are flexible just like all of the other prices. Admittedly wolfram|alpha does not have extensive historical graphs available, but I am not trying to write a book here.
If you are down-voting because you have not received a pay increase lately, then you should be aware of the fact that wages are usually a bit more sticky than other prices in the short run.
If you are down-voting this, I would appreciate engaging you in honest discussion about the point that I made above.
The parent post said that inflation gives workers a little pay cut every year. Painting this wonderful image of a worker sliding into poverty. This is demonstrably false. Yes, a 1% or a 2% rise in inflation will impact your real earnings, but wages are not a static process and they do reflect the actual costs of living changes that take place over time.
As an economist, I am constantly amazed by how poorly the press discusses inflation and how little most people know about what inflation is and how it interacts with other variables within an economy. Please read this pdf for some discussion on wages and price inflation:
https://www.clevelandfed.org/research/policydis/pd1.PDF
It is an academic piece, but it is one of my favorites for illustrating the interaction between wages and the greater macroeconomy.
Why couldn't you let your original post stand as you posted it?
The reason that I hang around HN is because I learn a lot by doing so. When someone down-votes something and then runs off, no one actually benefits in any way from that (unless the post that was down-voted was complete trash).
My extensive edit was an attempt to lure out the down-voters so that I could find out exactly where the wheels came off in the original post.
Looking back, I probably should have angled for a less confrontational tone in my edit, but I have a hard time getting tone across in these things.
You know, you spend less time typing each post than you would spend on a research paper or an email but more time than a text message. It is a challenging thing to get the tone just right. I much prefer face to face conversation any day of the week, but I like this place a lot.
The thing is that this is my first time actually not lurking on a site in nearly 10 years, and HN has its own unique culture.
Look, you've been on this site for more than an order of magnitude longer than me. Do you (or anyone else) feel like helping a newbie out:
When anonymous down-votes strike, is it better to reply to yourself, keep your edits small, or just walk away?
Some might argue that there's a qualitative difference between $160B/year when you owe $10T and $1.6T/year when you owe $14T.
> -- tax cuts solved that.
Did they? How much less revenue was collected?
Never confuse tax rates with tax revenues. The latter pays for things while the former has only a tenuous relationship with the latter. For example, the US got far more from rich people with low rates than it ever got with high rates.
I fail to see how a Greece debt restructuring would negatively impact the US economy except to cause a little more fear on wall street.
Also - anyone else notice that the only people who seem to give praise to Greenspan are his ex-colleagues in the central bank?
Is $41 billion at risk insignificant?
http://www.marketwatch.com/story/greece-poses-41-billion-ris...
Compared to my personal holdings, I'd be willing to consider even half of that amount significant. Send my bailout as a check or money order, please.
Plus the $41 billion number is just an estimate; the real total won't be known until all the derivative contracts are unwound.
Either way, it would be a mistake to dismiss a Greek default as irrelevant to us.
Out of the 700 billion TARP fund, only 51 billion remains outstanding (as of September last year), which is larger then the 41 billion number you were floating around:
http://online.wsj.com/article/SB1000142405274870343160457552...
I'm not saying all banks will be fine if Greece "defaults" (remember in this case "defaulting" implies restructed debt), but causing a US recession? Highly highly unlikely.
But even according to the article you posted, bank balance sheets are still weak.
Losing $41 billion (or more, possibly, given the nature of these derivatives) is not going to be good news for them.
While technically not in recession, the economy is not thriving, either, and so one blow like this may indeed push it back into recession.
Also, from the article, the banks have a drop in the bucket exposure to these loans, which isn't even reporting in their annual reports as a risk. The highest exposure bank seems to be half a billion on BoA's balance sheets, and like I said, it isn't like that debt obligation is just going to disappear.
There's a lot of FUD around Greece "defaulting", and like I said, I think the main impact area will be the stock market, not necessarily bank balance sheets or the economy at large.
What do you think default means?
It has happened before, most recently with Argentina in 2002, and with Russia in 1998, which triggered the LTCM crisis.
"The worst I've heard is that they will restructure the loans to extend pay back dates."
That is just default in everything but name.
The reason the so-called seven year Vienna plan has so much resistance is that ECB members know they'll never get paid back.
It is a credit agency's definition of "default", but it won't be as adverse as the money disappearing from balance sheets.
So far, all proposals to do that have been shot down by the ECB b/c even with longer and more generous terms, Greece is not in a position to service the debt, let alone repay it.
But the problem with your assumption is that the real economic damage occurs just immediately after a disaster.
The reality is that the actual economic affects of the Japan earthquake will only begin to really show in the next five years. With what is happening at Fukushima now, and the associated supply chain disruptions that are already filtering down the creek, there should be serious cause for concern.
I personally made a long term bet in the Japanese market shortly after the quake, but you can "bet" that it won't pay off for a long time.
These instruments are, by themselves, not particularly dangerous. What is dangerous is that there is generally no regulatory requirement for the people who are selling these contracts to actually have any money, which means that the people who are buying these contracts might be greatly understating their exposure. If there are large numbers of outstanding unbacked CDS, the situation is similar to what occurred with AIG in 2008. Because CDS are not exchange traded, we don't have a reasonable way of knowing how much risk is out there.
The Euro is in fine shape because investors don't expect to lose money on their Greek bonds.
What is the difference? Investors (and probably Greenspan) expect the Germans to bail out the Greeks and pay off their debts. So the Greeks will default and the investors will still keep their money.
The main problem in the whole situation is hiding the deal from German voters and taxpayers. Nobody wants to take responsibility for TARP.
The argument is that US banks hold a fair amount of european bank paper and that european banks hold a lot of greek debt. If the greeks default, then those european banks are in trouble, which puts the US banks in trouble.
We saw a variation on this at the beginning of the "great recession". US banks held too much Fannie and Freddie stock because the regulators gave it special status. When fannie and freddie went down, those banks became technically insolvent.
I don't know what triggered Lehmann Bros' specific problems, but when it went under, that caused problems for its counterparties.