N.J. should pay close attention to Greece, where a trillion bucks ain’t quite enough

BY ROY NERSESIAN

COMMENTARY

A trillion bucks is a lot of money. A stack of a trillion $1 bills, each 0.0043 inches thick with no air space between bills, is 68,000 miles high, about one-quarter of the distance to the moon. Make the stack of $100 bills and it is only 680 miles high.

The Greek economy is in trouble. It was caught in a lie to the European Union about the state of government debt and deficits. The lie took the form of off-balance sheet financing that sank Enron. The deal was put together by the same investment bankers that wiped Enron off the map. Now they can add Greece to their ex-client list, but what the heck, they still got their bountiful bonuses.

The essential problem with Greece, the home of democracy, is democracy. When a portion of the population votes as a single bloc, then politicians do not have to pursue a majority vote. Take Florida as an example. Let's say the vote is roughly split between Republicans and Democrats and the Cuban community in Miami votes as a bloc. It doesn't take long for presidential contenders and gubernatorial candidates to figure out that if they can get the vote of the Cuban community, it doesn't matter how the rest of the state votes. Thus politicians can stay in office by appealing to a minority of the electorate who vote as a bloc. San Francisco is another example. Europe is another. The size of the population who receive generous entitlements in all their various forms vote as a bloc. This makes running for office relatively easy — just promise more than you can deliver, and you're in office. Deficit budgets and endless borrowing take care of the fiscal side of things. Deficits and borrowing add to economic activity even though little good comes from it. The problem with Greece and other nations is that they do not have a domestic currency that they can inflate into oblivion. They must do their borrowing in a foreign currency over which they have no control. It's the same story for California, New York, and New Jersey: the Greece, Spain, and Portugal of America.

As some of you may remember, Greece was short $60 billion which rapidly grew to $140 billion and finally ended up as a $1 trillion loan package put together by the European Union and the IMF (which we help to fund). The money was not just for Greece, but other European nations tottering on the edge of a financial precipice from overly generous and grossly underfunded entitlements. All they had to do was agree to get their fiscal house in order. Indeed President Obama was on the phone with his Spanish counterpart urging him to accept fiscal responsibility in order for the financing package to be put in place (does anyone see irony here?).

With a trillion dollar package in place, one would hope that the crisis would pass. But apparently not: the Euro has hit a four year low. Remember when the dollar was to go the way of monopoly money and dollar holders like Iamanobody of Iran dumping his dollar holding for euros — ah, sweet justice! Not only is the euro falling out of bed, but gold is climbing to new highs. This is a very dangerous development because this flight out of euros for gold can have a pernicious effect on other paper currencies, like ours. And as an aside, oil has fallen from nearly $85 to $70 per barrel, a sign of a slowing global economy.

If Greece, Spain, Portugal, Ireland, and Italy must balance their budgets and pay down debt, a deflationary spiral will set in as the entitled class gets less in free gifts and the productive class pays more in taxes. We see it here in New Jersey. State workers are going to be laid off — their loss of salary dampens economic activity as they no longer have discretionary income to spend. State aid to education and to municipalities is being cut which means hikes in property taxes. Higher taxes mean less discretionary spending for everyone in New Jersey and another fall in economic activity. Even though huge wads of money are being created out of nowhere, the impact is not inflationary, but deflationary. Debt repayment is going to strangle the West — there is no conventional way out — we have to start thinking outside the box.

The other matter of concern is that the German people do not see why they have to bail out the profligate Greeks or anyone else who spurns fiscal responsibility. The future of the German government is tied to the trillion dollar bailout. France belongs in the same camp with the Germans. Let's see how well the Germans and the French stack up against the Greeks. ¹

Clearly Germany and France have every right to criticize Greece for fiscal irresponsibility. Maybe this is why the euro is falling — the recognition that entitlement-time is over for all of Europe, not just Greece and Spain. Falling economic activity is in store for the whole continent and deflation will destroy the euro as euro denominated debts default. It is not a pretty picture, but that is the picture being painted by those selling euros and oil and buying gold.

¹ Website: Http://buttonwood.economist.com/content/gdc?source=hptextfeature

Roy Nersesian, a resident of Maplewood, teaches at the Leon Hess School of Business at Monmouth University in West Long Branch and also at the Center for Energy and Marine Transportation at Columbia University. He has authored several books, the last on Energy for the 21st Century published by M.E. Sharpe.