Editor’s note: This article was mainly composed with the help of Dr. Andreas Maheras of Hays, who has dual citizenship in the United States and Greece, and is currently in Athens, Greece.
The Greek debt crisis is rapidly unfolding as these lines are written and the repercussions from Sunday’s referendum (7-5-15) are still unknown as the country is struggling to find its place within Europe having being financially ravaged by years of malfeasance. As of this writing, the Greek banks have been closed for over a week, cash is getting more and more rare, and taking care of the daily business is getting increasingly difficult. However, no matter how the crisis may eventually be resolved, the problem in Greece is clear. Its governments spent some 40 years making promises it could not honor. Add a bit of rampant corruption and embezzlement and you have a recipe for disaster. Since the crisis was underway in 2009 and until now, Greece had no option but to borrow money in the order of over 300 billion Euros (c. 340 b. dollars) to cover its deficits, and then ran out of money to pay even the interest on the loans. By 2015 it was obvious that the debt was unsustainable and, as part of the Eurozone, Greece cannot simply print the money to make good on its promises.
It seems that the United States has been moving in the same general direction, with the significant exception that the United States can and does print the money to make good on its promises, as the dollar is still in great demand in times of uncertainty. The question here is whether the United States is immune to a similar crisis like the one we are now seeing in Greece. Can a government overspend and borrow forever and never be asked, by the lenders, to deliver? It may be a mistake to think that the financial laws do not apply to the United States.
The echoes that come from Greece tell us that balanced budgets matter. A country can get away with overspending for a while, but eventually its creditors want to see signs that the government is able to make the interest payments on its debt. Sensible tax and spending policies are a must.
The echoes further tell us that when confidence in the economy is questioned, people react accordingly. Greek businesses and citizens withdrew billions of Euros from their accounts in the weeks and months leading up to the referendum. Could it happen in the United States? We did come close in the inflation of the 1970s, when everyone wanted to
exchange dollars for gold or other commodities, and more recently with the financial crisis of 2007-08.
It is also known that austerity imposed at the wrong time can ravage an economy. Although Greece got into trouble because its socialist government made promises to labor that it could not deliver, its creditors made things more difficult by demanding austerity with big cuts in pensions and in other government spending, along with big tax increases. Those demands only slowed the Greek economy, raising the unemployment rate to over 25%, resulting in less in tax collections and more demand for government unemployment payments.
Those echoes do tell us that economic growth is the only way out. For example, the economy of Greece depends heavily on tourism, and the current closing of the banks and the limit in cash withdrawals has reduced Greece’s largest source of revenue. If cutting back won’t solve the economic crisis, then the government must focus on stimulating growth in order to generate tax revenues.
Quite important, those echoes explain that politics and economics don’t mix well. Politicians need to get re-elected and that means literally “buying” votes by being generous to the voters with the voters’ own money. As British Prime Minister Margaret Thatcher once said: “The problem with socialism is that you eventually run out of other people’s money.”
Tim Schumacher represents Strategic Financial Partners in Hays. [email protected]
This article is provided for personal financial information and is not to be construed as financial advice. The view and opinions expressed are those of the author and not necessarily those of the affiliates he represents. Schumacher is a Registered Representative of, and Securities and Investment Advisory are offered through Hornor, Townsend and Kent, Inc. (HTK) Registered Investment Advisor, Member FINRA/SIPC. OSJ Branch office: 130 Springside Drive, Suite 100 Akron, OH 44333 (330) 668-9065. Strategic Financial Partners is independent of HTK. HTK does not offer tax or legal advice.