How to Fix Greece (and the EU): Part 1

In this series, we apply socio-economics to solve the Greek crisis using the same methods we used to analyze Venezuela. In the end we will explain why the current solutions of austerity and high taxes are not the best solutions and that they are psychologically a relic of the mercantile way of thinking of an economy as a business, instead of, naturally, as a society, family, or group of friends. We will also make clear suggestions for Greece to solve its debt problem and for the EU to save its own interests and prevent the problem from recurring or even destroying the union.

As the 2008 Credit Crunch was said to have triggered the crisis, we set year 2009 as the central-point (when the effects would have been felt) and 2013 (the year with the latest data) as the last point of our Value-Trade analysis. To make a better trend analysis, we will set 2001 and 2004 as our starting points.

Greece 2013: High Demand, Low Trade

Greece - New Page

2001 and 2004: The relatively stable Population, Capital, Industry and Trade columns indicate that the country was in a good condition. However, the big rise in GDP in 2004 without a corresponding rise in Industry or Capital would probably indicate a bubble, of which its origin is not within the scope of our analysis.

2009 Industry (pink bar): Greece’s Industry column starts declining despite good employment, population, and trade, which is unusual. As this is the first anomaly, we will focus our analysis to its origin later.

2013 Demand: Population declines to below 11m, indicating around 200,000 people have either died unreplaced or left the country, which is unnatural as there has been no epidemic, leaving the cause to be man-made. As there has been no war nor extreme political change, the cause must be economic in nature since it first impacted Industry in 2009.

Capital: National employment sinks more suddenly and belatedly than industry, which hints that the cause is monetary. This is because employment is directly and immediately connected to wages or the paper money received by the worker. Industry, on the other hand, can pay or get paid with credit. A sharp decline in employment without high inflation indicates mass layoffs caused by the scarcity of money.

Trade: If the cause of decline of Industry of 2009 and Capital of 2013 is monetary, then the GDP must also drop significantly since all of it is made up of monetary or nominal value. The huge drop in deflated and undeflated GDP in 2013 supports this.

A fiscal problem exposed by a Monetary problem

Screenshot from 2015-04-15 17:07:56

This monetary problem must have started after 2004, but before the end of 2009. By looking at the money supply, we see that it declined in 2008-2009 and steadily after 2010. This is supported by other charts. It is true that the 2008 Credit Crunch started Greece’s initial decline in money supply just as it started those in the other countries which were exposed to it, such as Spain and Ireland. However, unlike Greece, the money supply of the latter countries were able to recover better as seen below.

Screenshot from 2015-04-15 17:47:38

Screenshot from 2015-04-15 17:45:05

So why was Greece unable to get money circulating again when Spain and Ireland were somewhat able to? Normally, industry will always attract money to it as long as it works well. Greece’s steadily declining money would indicate that its industries became so much worthless within a year or two that it stopped attracting money or circulating capital, which is impossible. If Greece’s industry, or land, labour, and stock, could not have become rapidly worthless, then what else in its GDP could have become worthless so quickly?

Answer: The spending done by the Greek government. 

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The Athens Olympics, 2004 and 2014. Keynesian projects bloat governments and attract the corrupt like sugar attracts ants

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Bubbles begin when nominal prices go far above real prices, in a mercantile effort to increase arbitrage for profit maximization. Like the return value of Greece’s spending, the return value US houses also fell rapidly very quickly.

A Legacy of Keynes

Ever since Keynes’ time, government spending has been advocated to stimulate economies, which previously was the task of the merchant class (those who live by profits: banks, merchants, and manufacturers). However, because of the doctrine of utility and profit maximization of the 19th century marginalists, this essential duty was only done when it was profitable. Otherwise, it shifted from the merchant class to the ruling class (governments or those who live by taxes), forcing its unnecessary attention. This attention or burden manifests as rising debt which it must then impose on its citizens. This also naturally breeds corruption as government officials find themselves in control of huge amounts of money for public projects.

Smith was Clearly Against Debt

Smith explained that debt is good for the merchant class, but bad for the ruling and working classes because it does not always increase the society’s productive capital and frequently drains it away through unproductive uses:

“In return for the capital they advanced, the creditors obtained an annuity in the public funds of more than equal value. This annuity replaced their capital and carry on their trade and business to a greater extent than before. However, this new capital which they bought or borrowed from other people must have existed in the country before. It must have been employed, as all capitals are, in maintaining productive labour. When it came into the hands of those who had advanced their money to government, though it was a new capital to them, it was not a new capital to the country. It was just a capital withdrawn from certain employments to be turned towards others. It replaced to them what they had advanced to government, but it did not replace it to the country. Had they not advanced this capital to government, there would have been two capitals in the country. There would have been two portions of the annual produce instead of one, employed in maintaining productive labour.” (Simple Wealth of Nations 5.3)

In the Greek case, the German and French banks (merchant class), for self-profit, had an interest in loaning unnatural amounts to Greece, while the corrupt Greek government (ruling class) had an interest in borrowing unnaturally also for self-profit. Of course, bankers know they are not supposed to give loans to irresponsible people, and governments know they are not supposed to spend on worthless projects, yet they do it anyway because it brings high profits for themselves. In the end, the victims are always the working class or those who live by wages, who had no say in it, and is a violation of their freedom against the oppression by the ruling and merchant classes:

“Restraining private people from receiving the promissory notes of a banker which they are willing to receive, and restraining a banker from issuing such notes everyone is willing to accept are violations of that natural liberty which the law should support and not infringe. Such regulations may be considered a violation of natural liberty. But those exertions of the natural liberty of a few individuals which might endanger the security of the whole society, should be restrained by the laws of all governments. (Simple Wealth of Nations, 2.94)”

Based on the chart below, Greece’s government spending, as a percentage of GDP, has been high since 2004 and highest in 2009, higher than Spain or Ireland.

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Screenshot from 2015-04-15 17:02:25

Screenshot from 2015-04-15 18:20:48

Screenshot from 2015-04-15 18:18:51

In short, Greece’s monetary problem, sparked by the 2008 Credit Crunch, exposed its fiscal problem: that its government was spending non-productively and unsustainably while banks kept on feeding it.

Austerity and High Taxes are Mercantile Solutions

In the next post, we will explain why austerity and high taxes, although good solutions for the German and French merchant class, are bad for the Greek ruling class and fatal to the Greek working class. Austerity can be seen as cost-cutting in a business, while higher taxes, as higher sales. These are solutions which would work well in a struggling business but not in a struggling society because the inherent nature of business and society are altogether different.

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