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Video transcript

So let's review the situation that has been emerging in Greece. And then dig a little bit deeper as to their options. So as we saw on the last video, Greece was spending a lot more than it was bringing it in tax revenues. So it was running these deficits. And year after year, these deficits we're piling up. And the national debt was increasing. And to make matters worse, Greece actually tried to cover this up for many years with some accounting shenanigans because there were some European Central Bank rules about how much debt you could take on. And so it was trying to not trigger those rules while still being able to take on more debt so that it could fund this spending right over here. But then, in the last few years, it became clear. The shenanigans were cleared up. And when they were cleared up, one, it made people realize, wow, that was kind of shady what they did. But on top of that, they had a much larger government public debt burden than people thought. And the combination of the two-- the combination that this country was actively trying to not make its obligations to be transparent to the markets, and on top of that, that this debt burden was so huge, it made people wary of whether the country would actually be able to fulfill its obligations. So trust. Investor trust. When I talk about investors, I'm talking about the people who would invest in Greek bonds. So, essentially, the lenders to Greece. Their trust went down and they expected higher interest. So they expected higher interest from the Greek government. And that made things worse. Now, not only did they have to keep spending on all of their entitlements, but now the cost of funding that existing debt that they already and any new debt that they had to do to keep spending at that rate, the cost of that debt itself went up. And that only added fuel to this ballooning debt problem. Now the last video, we explored a couple of options. In particular, we said, what about austerity? What about the situation where you just really, mainly, you could try to increase your revenues or slash spending. But people really try to focus on the spending side. What if we really just try to slash the spending in a very severe way? Really just cut straight to the bone? Well, there's a couple of problems there we thought about. One problem was that it's not popular at all. It's not popular at all. And then the bigger problem was, is you're already in a recession. You're already in a recession. And this could make the recession more severe. And frankly, it was not popular. It's never popular. But it became-- even as we move now in 2012-- it's even less popular because Greece has already gone through a couple of rounds of this austerity. This is not a new problem. They've been bailed out in small ways. And I'll talk more about what a bailout is. But as part of that package, the people who've been billing them out says, look, if we're going to give you something. If we're going to use some of our own taxpayer money to help you out, you've got to cut your spending. But what's happened in every round of austerity so far, is that helped slow the economy even further. That recession kept deepening and deepening. And it's comments sense that it would. If the government stop spending in a big way, it slows down an already slow economy. Now, the other thing that you might be saying, why doesn't Greece just stop paying its debt? Why doesn't it just default on its debt? So why doesn't it just default? Say, hey, we're a country. I'm sorry, investors, that you had to take a loss here. But we're just not paying any more. Well, the problem is, it has a situation where it's spending more than it's bringing in. And its obligations are all in the Euro. It does not have its own currency. And so, if they were to default on their debt-- obviously, the people who lent the money will be very upset-- and there's no way that they're going to lend more money to Greece. And if they don't lend more money to Greece-- if they don't lend more Euros to Greece, Greece is not going to be able to continue spending Euros the way it has. It's promising all of the pension, retirees, the unemployed insurance-- it's paying all those obligations in Euros. And if they default, they're not going to be able to borrow more Euros to do those obligations. And, once again, it'll be a very fast and violent austerity because there wouldn't even be the money to fund that. You would have this very drastic, almost, shut down of the government. So this right over here is not a good option. Now to start exploring the third option, and this is the option that it seems likely that Greece might have to go in, let's think about what Greece could have done if it had monetary independence. If it had its own currency. So just remember, this is completely hypothetical. Greece did have its own currency, the Drachma, before it joined the Euro. But let's think about what it could have done in this situation, if it actually did have its own currency. It's not cut and dry here because Greece was actually able to, and historically, borrowed very cheap rates because it was part of this Eurozone. But let's just think about it, if it was in this situation, what it could have done if it had its own central bank. So this is some of the stats from our last video. And if it had its own central bank-- and let me make this very clear. This is all hypothetical. Greece does not have its own central bank right now. All of the Eurozone countries-- the Euro is printed by the European Central Bank. It's not by any one country. But, hypothetically, let's say that Greece does have a central bank. So Greek Central Bank that prints it's own-- let's call it the New Drachma. And so that Greek Central Bank, in this type of a situation, could just start printing Drachma. And, essentially, use that Drachma to buy government bonds. So it could buy government bonds. So it's, essentially, printing that money. And when it buys government bonds, its lending it to the government. It lends to the government. And so the government could spend on entitlements. Government could spend on all of its various obligations. Now that might seem very convenient. Essentially, one part of the government, or something pseudo associated with the government, prints money, essentially lends it to the government, funds its obligation. But the immediate thing you might say, well, if you just print currency like this Willy-nilly, won't this right over here lead to inflation? And the simple answer is, it probably will. But that actually might be the solution if you're in a conundrum like what Greece is in. First of all, inflation might not be so bad. Right now, the country's in a deep recession. So there's all this extra capacity. So you might even have a little bit of a price cushion. And, just in general, the inflation rates aren't alter dramatic. They're not super low, but they're not super high either. So you might have to worry about a hyper-inflationary situation. But on top of that, the government probably wants a respectable amount of inflation. It might not want 100%, 1000% inflation. But it might like 10, 20, or 30% year inflation. And to think about that, think about the idea, in this hypothetical Greece, all of its obligations would not be in Euro, its obligations would be in the Drachma. And so you can imagine a world. So let's think of a hypothetical Greece. And I'm going to use hypothetical numbers just to make things more simple to understand or to do in our heads. Let's take this hypothetical Greece-- it could be Greece or really any country. And let's say it has a GDP of-- let's call it 100 of its currency. Let's say 100 Drachma as its GDP. And let's say it has entitlement obligations-- and this is all on an annual basis-- of, let's say, 10 billion of its currency, of its Drachma. This isn't the situation in Greece. All of its obligations are in Euros. But let's just think about the situation. And let's say that on top of that, it has debt obligations-- so the total debt. The total value of debt. Let's say that it was-- I don't know-- another 150 billion of its currency. If you were to inflate-- let's say you inflate over a couple of years. So inflation occurs. And let's say you have 100% inflation over a few years. But in real terms, your GDP doesn't change. This is really just more of a thought experiment. So then, in real terms, if you have 100% inflation but you're producing the same amount, the nominal value of your GDP will now be 200 billion. It's the same amount of goods and services, but everything now costs twice as much. So you would value it at 200 billion. If you're inflation adjusted, it would still be at 100 billion. The good thing-- and it's very seldom the use inflation in a good context-- but what would be good about Greece in this situation, is that these entitlement obligations, they would still be 10 billion. You're still going to say, I'm still going to pay you 10 billion. Even though that 10 billion is going to buy people half is much. That is much easier to do politically than telling people overnight that I'm going to reduce your pension by half. That's political suicide. But to inflate away the obligations, nominally it looks like you're paying the same thing. But just buying less. It's a little bit more viable to do. And the same thing is true of your debt obligations. Your debt obligations won't adjust to inflation. And so you would still owe 150 billion. But as a percentage of GDP, you've now halved how big that debt is. You've halved how big the entitlement obligations are. So that's actually a viable solution. And in this hypothetical situation, it's probably the best solution for government to, essentially, inflate away its obligations. So I'll leave you with that. Something for you to think about. And then we could think about what could Greece actually do in this direction. But more importantly, let's think about-- and you could start to think about-- why is the whole world so scared? All of this is Greece. It's a relatively small country. Why is the whole Eurozone so scared? Why are people thinking about bailing out Greece in some way to prevent all of this craziness from happening? And what are the repercussions in the larger, global market? But I'll leave you there and leave you to think about all this stuff.