The Greek drama has entered its final act, after lingering on far too long. There was never any doubt Greece couldn’t repay its sovereign debts. Debts that, until now, were counted as assets on the books of its lenders. Living by the motto, In Central Planners We Trust, the Greeks forgot to ask, “What could go wrong?” They — and the world — are about to find out.
Calls for debt relief that began in Greece are arising across Europe — a debt jubilee, if you will. (Here in the U.S., similar calls are being made by powerful Democratic politicians, starting with a trillion dollars of student loan debt to finance expensive college educations of dubious value.) Since debtors always outnumber creditors, debt jubilees can become overwhelmingly popular when times get tough.
But debt relief is always and everywhere matched by asset destruction. One can argue the assets were already destroyed, so debt relief merely forces lenders to acknowledge reality. Cry them no tears. In a just world creditors who insist on lending to dubious borrowers deserve to taste the discipline of loss. But when governments use toxic bonds on bank balance sheets to magically manufacture money, the evaporation of those underlying assets has secondary consequences.
When default or debt relief strikes — it makes no difference which — the pyramid of manufactured money must either shrink or the impaired assets must be replaced. (For example, if you write off all Greek debt, the European Central Bank has negative equity.) If panicked fear of deflation causes these impaired assets to be replaced with freshly minted fiat money via an orgy of quantitative easing, a vicious circle arises that eventually causes money to lose its value.
We call this hyperinflation, a process that is well underway even if it’s not yet reflected in consumer inflation indices. But in time it must be, and many who thought they were saving for the future will ultimately learn that their money was funneled to deadbeats. The freshly impoverished will then be forced to join the growing line of said deadbeats seeking handouts. This can only exacerbate the demographic time bomb that would be threatening aging democracies anyway, even if central planners hadn’t embarked on a fit of monetary madness.
This is where totalitarianism enters the picture.
Large scale institutionalized corruption is only sustainable under a totalitarian political system. It requires a ruthless elite, an extensive bureaucracy deployed to do their will, a monopoly on violence to crush opposition, and just enough meritocratic social mobility to quell thoughts of revolt by the masses. The Ottomans may hold the record, making it work for six centuries, but they were hardly alone.
But the Ottomans did not have to deal with the specter now haunting the European Union, starting with Greece. I am speaking of a global financial market warped beyond recognition by easy-money government policies that punish thrift and distort millions, even billions, of individual investment decisions. Think of it not as a powerful dragon but as an enormous swarm of bees that can surmount any wall, seep through the cracks of any barrier, penetrate any inner sanctum, and shift directions at a moment’s notice. When placid, the bees can be very productive. When alarmed or angry, watch out. In time, that swarm will consume the other European debtor nations before crossing the Atlantic to ravage America — the most profligate debtor nation in history.
When the global monetary system unraveled in the 1930s, precipitated by the collapse of stock markets inflated up by an orgy of leveraged speculation, it led to fascism in Europe and a U.S. experiment in socialism called the New Deal that turned what could have been a short recession into a 15-year depression. And, oh, there was that war unpleasantness. From this experience in failed economic intervention we have apparently learned … nothing.
Eight years ago a pyramid of easy money inflated a mortgage bubble that nearly melted down the world financial system when it burst. Bailouts, phony accounting, and even more frantic money printing coupled with artificially suppressed interested rates created a thin illusion of recovery. This inflated another asset bubble in stocks, real estate, art, and other alternatives to productive investments. Meanwhile, profligate governments went on a borrowing binge in thrall to the siren song of Keynesian demand stimulation.
None of this worked. The entire house of cards is now being threatened by an ugly return to reality. Today it’s Greece. What comes tomorrow is anybody’s guess. But Greece should come as a warning, with a government led by an unwieldy coalition of far left and far right parties whose regard for the rule of law and economic freedom is tenuous at best.
The lesson for the rest of us is clear: If the market is not allowed to administer its bitter medicine to one and all, writing off bad sovereign debts, liquidating malinvestments, and rationalizing prices and wages, and instead the world’s democracies insist on maintaining the illusion of prosperity, they won’t remain democracies for long.
