Tuesday, January 17, 2012

Greeks, don't give Merkozy and the rest of the world a KITA!

This article by Kevin Drum describes very nicely why it would not be very prudent for Greece to "piss off" (words of Keven Drum) Merkozy and the rest of the world.

Let me add a couple of numbers because there are still those who insist on giving Merkozy (and perhaps even the rest of the world) a KITA, returning to the drachma and then living happily ever thereafter within one’s own means. Before you do that, please think where you are going to cut out 29 BN EUR of expenses abroad because that is the annual amount, on average for the period 2007-10, which Greece spent more abroad than she earned abroad (“current account deficit”).

Now you could cut out 14 BN EUR which were spent on interest because you are no longer going to pay interest to foreigners. That still leaves you with 15 BN EUR of offshore expenses which you have to cut out.

You could, of course, cut it out of imports. They were 54 BN EUR and after taking out 15 BN EUR, you can still import 39 BN EUR. Bear in mind, however, that this would be the level of imports you had in 2004. How many cars, motorcycles, smartphones etc. did you import in 2004? It will be a lot less now because the oil which you have to import cost a lot less in 2004 than it costs today.

Since the Euro (from 2001-10), Greece has spent 197 BN EUR more abroad than she earned abroad. That is about 40% more expenses than income. That number includes interest but you cannot take out this interest because, without it, Greece could not have had any debt and without debt Greece would not have had a standard of living. Instead, Greece would have had exactly what she will have if those who want to give Merkozy and the rest of the world a KITA get their way.


  1. Kleingut

    I am impressed by your short pithy arguments.

    One element of context that I would like to draw to the attention of your readers is that the American deficit. Whilst the US economy is substantially bigger than Greece - so is its deficit.

    You mention that Greece has ramped up €1/5trillion in ten years. The US is now ramping up four times that much in the space of just one year. Neither seem capable or willing to deal with the fundamental problem.

  2. Your point is correct and I have published quite a bit on that. A couple of the more important posts are linked below (Warren Buffett’s tale about Thriftville vs. Squanderville tells it all!). If you read German, you will find in that post statistics about the US current account deficit.

    Yes, the US is on a huge scale what Greece was/is on a small scale. In Greece, the problem really started with the Euro about 10 years ago; in the US it has been going on for 3-4 decades.

    Alan Greenspan, who then knew everything about everything, once wrote an article why the US current account deficit was sustainable forever. Well, any first-year student of Economics would flunk the course saying that. A current account deficit is only sustainable as long as the deficit country has enough domestic wealth against which foreigners are prepared to extend credit or which assets foreigners are willing to buy. The US has a lot of both; Greece is now running short on both.

    Greenspan probably meant that the US had enough wealth to finance the current account deficit forever. Warren Buffett would warn that there is no such thing as forever.

    The real scary thing about this is the following: for several decades now, the consumption-addicted and fear-no-debt American consumer has been the major locomotive in world economic growth. On one hand, the rest of the world should blame Americans for living/spending so irresponsibly. On the other hand, they should thank them for it!


  3. I cannot disagree! I have been reading around your site with interest.

    Quite honestly I could wish that people like you worked in places like London - where it seems that speculation is the only legitimate way to make a profit these days.

    As to the Americans spending too much - that is their problem. China will thank them for giving them an industry, at only $4 trillion dollars (what America owes China in treasuries, or thereabouts) is cheap at the price. To my mind, Germany will agree with that sentiment.

    It is a pity that the Americans did not invest in the way that the Germans did. The American deal with China could easily have been a win-win situation just as Japan has with China. The latter is good for everyone.