Greece Could Happen Here

Unless Americans become serious about controlling their growing debt, their future will look very Greek.

Eli Lehrer in a recent post argued that a crisis similar to the one that Greece faces now is unlikely in America because the U.S. has strong fundamentals, much lower debt than Greece, Americans work hard, the Fed can manipulate the dollar and the U.S. government has more political legitimacy.

Of all the points the only one that works in favor of Lehrer’s argument is the ability of the U.S. to manipulate its currency. Being able to devalue the dollar gives America a more politically safe way of managing a debt crisis. Nevertheless such a tool might mitigate a crisis but might not be able to halt many of the negative consequences.

At this point the Greek crisis becomes relevant to the United States. The Greek government is not any less legitimate in the eyes of its citizens than the American one. Greece has been using the parliamentary system for many decades and the public is quite used to it – so much so that the Greeks don’t like the idea of making it more representative. The government is as legitimate as the Clinton presidency was (he never got a majority of Americans voting for him) or the first Bush presidency (which came second in the vote count) or the filibustering U.S. Senate.

Greece used to be very productive as well. In the 50s it was only second to Japan in economic growth and in the 60s and 70s with a fast developing tourism industry it experienced high growth as well. Greece’s debt in 1981 was 31.2% of its GDP, a number that would be desired by even the most responsible nations today.

Greece in the 80s started to do what America commenced in the 2000s under Bush and now the Obama administration: transferring income from future generations to itself with a vengeance. The most destructive effect of debt wasn’t the magnitude of the debt per se but the socioeconomic consequences and the revolution in social norms and expectations. When I was starting primary school in the early eighties young people wanted to open their own business. When I was finishing high school near the mid-nineties young people were dreaming of a government job. It was a change so roundabout but universal that only in retrospect one may realize the rapidity of its progress.

As debt was financing the dependency habits of the general population it was also creating an infantilized political class that was unable to govern and manage any crisis effectively, be it natural, diplomatic or political. Whatever the political costs of a mismanaged crisis, the government always expected to be able to recover by throwing money in some new government handout.

Debt growth had the effect of robbing society of the ability to deal with the consequences of a debt crisis, leaving on the one hand, a society pretty sclerotic in its expectations, and on the other, a political class exceedingly incompetent when it comes to governing.

So yes, Greece is not able to manipulate its currency. This is a major disadvantage. Nevertheless, the situation could have been manageable or at least have had a reasonable hope for success if Greece had not made it so difficult for itself.

As the global sovereign debt bubble gathers more attention by the day, issues like that will become central in European politics. European political classes and societies might find themselves awfully lacking in dealing with a dramatic swift change in expectations about sovereign debt. A revolution in investors’ confidence and perception could expose the ominous contradictions and inadequacies of the European welfare model that has been decades in the making.

The American governing majorities seem very eager to follow the European path while ignoring the consequences of such a choice. Not only will they make America vulnerable to present financial crises but they will also create the conditions for almost certain mismanagement of future ones. If there is no change of the present course the future may look very Greek.