The Mother of All Bubbles: Huge National Debts Could Push Euro Zone into Bankruptcy

[sysop]

Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it. By SPIEGEL staff.

http://www.spiegel.de/international/...692666,00.html

[barryschatz]

"The economy has to grow, so that the government can collect enough tax revenue and thus reduce its debt. The trick, in other words, will be to save money while at the same time expanding aggregate output."

Only private enterprise expands output. Government consumes output. Any money government manages to save (i.e., not consume) will be left in the hands of the private sector to expand output.

Woolly assumptions like this one are largely responsible for the Greek tragedy and those which will shortly follow.

[BTraven]

Originally Posted by barryschatz

"The economy has to grow, so that the government can collect enough tax revenue and thus reduce its debt. The trick, in other words, will be to save money while at the same time expanding aggregate output."

Only private enterprise expands output. Government consumes output. Any money government manages to save (i.e., not consume) will be left in the hands of the private sector to expand output.

Woolly assumptions like this one are largely responsible for the Greek tragedy and those which will shortly follow.

But in situations like now where enterprises and people do not want or are not capable of investing and spending money the government must do it for them. Saving money in the recession makes the situation worse.

[barryschatz]

Originally Posted by BTraven

But in situations like now where enterprises and people do not want or are not capable of investing and spending money the government must do it for them. Saving money in the recession makes the situation worse.

So where can government find the money to spend? You seem to believe that government owns the money factory. Consider the distinction between money and currency. Whenever government prints more currency, money is devalued. This is simply legalized counterfeiting.

The beneficiaries who first receive the newly printed currency (this will be the banks, of course) benefit from spending it quickly while, say, 2 apples cost a euro. Their spending puts the freshly printed currency into circulation. Then everybody notices there are a lot more euros than before (i.e., supply has suddenly increased) and, as with any sudden supply increase, the thing being supplied suffers a decrease in its value. With money devalued, 2 apples now cost, say, 2 euros.

In Zimbabwe today this is understood by everybody. In the Wiemar Republic this was understood by everybody, but that was 90 years ago. As the saying goes, "Those who fail to learn from history are condemned to repeat it."

Government borrowed too much during the good times so it could live beyond its means. The eurozone countries have badly flouted the 3pc debt limit, including Germany. In the fog spewed by the politicians' blame game, it must be remembered that those who controlled the purse strings caused this mess. Now you suggest that they carry on doing the same, borrowing their way out of the problem created by borrowing too much, tempting sovereign bankruptcy, hyperinflation, Weimar redux?

Your wish shall be granted.

[BTraven]

Originally Posted by barryschatz

Government borrowed too much during the good times so it could live beyond its means. The eurozone countries have badly flouted the 3pc debt limit, including Germany. In the fog spewed by the politicians' blame game, it must be remembered that those who controlled the purse strings caused this mess. Now you suggest that they carry on doing the same, borrowing their way out of the problem created by borrowing too much, tempting sovereign bankruptcy, hyperinflation, Weimar redux?

Your wish shall be granted.

Fortunately, there is no rule which decisively says that a country overindebted therefore the psychological aspect decides whether a state can be regarded as trustworthy or not. In order to calm the markets the 3 percent rule was introduced. It seems, however, that nobody could imagine that such a rule could be an handicap since every violation will be interpreted distrustfully by analysts. And there is not even a paper which scientifically reasoned why we need such a rule. More tomorrow.

[BTraven]

Originally Posted by barryschatz

The beneficiaries who first receive the newly printed currency (this will be the banks, of course) benefit from spending it quickly while, say, 2 apples cost a euro. Their spending puts the freshly printed currency into circulation. Then everybody notices there are a lot more euros than before (i.e., supply has suddenly increased) and, as with any sudden supply increase, the thing being supplied suffers a decrease in its value. With money devalued, 2 apples now cost, say, 2 euros.

In Zimbabwe today this is understood by everybody. In the Wiemar Republic this was understood by everybody, but that was 90 years ago. As the saying goes, "Those who fail to learn from history are condemned to repeat it."

Concerning your example – despite the money central banks have printed to keep the economy running there is no inflation yet because ordinary people has not been given the money. The money provided have hardly reached normal consumers. I only know one measures where money was made available directly to customers – it is the car scrappage scheme. The “new money” circulates in the banking sector. As long as bankers do not speculate on raw materials I cannot see how they could cause an inflation.