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"Austerity Arithmetic"

dylancatlow
Posts: 12,245
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7/5/2015 9:09:48 PM
Posted: 1 year ago
As might be expected, Paul Krugman is praising Greece's decision not to accept the bailout terms. He wrote an article about it called "Austerity Arithmetic" in which he claims that austerity would actually make the debt problem worse than it already is, since it would destroy Greece's economy and thus its ability to repay its debts. Article: http://krugman.blogs.nytimes.com...

I have a question about his underlying assumptions which I was hoping someone with a background in economics could answer.

From the perspective of a creditor, is it really worth propping up Greece's economy (so as to be repaid) if in doing so you end up loaning more than you receive? At this rate, Greece will never come close to repaying its debts, so something needs to change if the creditors want their money back, right? If a country's economy is built on quick sand (which Greece's economy appears to be), then it seems like at some point the economy just has to collapse in order to be sustainable. For example, say there's a country whose government simply borrows all of its money, including the money it uses to pay back its loans. Such a scenario is unrealistic, but it does highlight a crucial point: even though refusing to lend more money to the country would damage its ability to pay back its loans, it's still a smart idea. Does this same principle not apply to Greece?

Obviously, Greece CAN pay back its loans if it really wanted to. There's nothing stopping the government from simply spending less money than it receives in taxes, and using the surplus to pay back its loans. Of course, the effect to the economy is another issue entirely.
ShabShoral
Posts: 3,234
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7/5/2015 9:13:59 PM
Posted: 1 year ago
At 7/5/2015 9:09:48 PM, dylancatlow wrote:
As might be expected, Paul Krugman is praising Greece's decision not to accept the bailout terms. He wrote an article about it called "Austerity Arithmetic" in which he claims that austerity would actually make the debt problem worse than it already is, since it would destroy Greece's economy and thus its ability to repay its debts. Article: http://krugman.blogs.nytimes.com...

I have a question about his underlying assumptions which I was hoping someone with a background in economics could answer.

From the perspective of a creditor, is it really worth propping up Greece's economy (so as to be repaid) if in doing so you end up loaning more than you receive? At this rate, Greece will never come close to repaying its debts, so something needs to change if the creditors want their money back, right? If a country's economy is built on quick sand (which Greece's economy appears to be), then it seems like at some point the economy just has to collapse in order to be sustainable. For example, say there's a country whose government simply borrows all of its money, including the money it uses to pay back its loans. Such a scenario is unrealistic, but it does highlight a crucial point: even though refusing to lend more money to the country would damage its ability to pay back its loans, it's still a smart idea. Does this same principle not apply to Greece?

Obviously, Greece CAN pay back its loans if it really wanted to. There's nothing stopping the government from simply spending less money than it receives in taxes, and using the surplus to pay back its loans. Of course, the effect to the economy is another issue entirely.

I agree (I may or may not be at gunpoint right now, help me).
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dylancatlow
Posts: 12,245
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7/5/2015 9:28:02 PM
Posted: 1 year ago
At 7/5/2015 9:13:59 PM, ShabShoral wrote:
At 7/5/2015 9:09:48 PM, dylancatlow wrote:
As might be expected, Paul Krugman is praising Greece's decision not to accept the bailout terms. He wrote an article about it called "Austerity Arithmetic" in which he claims that austerity would actually make the debt problem worse than it already is, since it would destroy Greece's economy and thus its ability to repay its debts. Article: http://krugman.blogs.nytimes.com...

I have a question about his underlying assumptions which I was hoping someone with a background in economics could answer.

From the perspective of a creditor, is it really worth propping up Greece's economy (so as to be repaid) if in doing so you end up loaning more than you receive? At this rate, Greece will never come close to repaying its debts, so something needs to change if the creditors want their money back, right? If a country's economy is built on quick sand (which Greece's economy appears to be), then it seems like at some point the economy just has to collapse in order to be sustainable. For example, say there's a country whose government simply borrows all of its money, including the money it uses to pay back its loans. Such a scenario is unrealistic, but it does highlight a crucial point: even though refusing to lend more money to the country would damage its ability to pay back its loans, it's still a smart idea. Does this same principle not apply to Greece?

Obviously, Greece CAN pay back its loans if it really wanted to. There's nothing stopping the government from simply spending less money than it receives in taxes, and using the surplus to pay back its loans. Of course, the effect to the economy is another issue entirely.

I agree (I may or may not be at gunpoint right now, help me).

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Greyparrot
Posts: 14,281
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7/7/2015 4:48:04 PM
Posted: 1 year ago
At 7/7/2015 4:35:21 PM, dylancatlow wrote:
At 7/6/2015 7:21:17 AM, Greyparrot wrote:
The Greeks make PT Barnum look like a saint.

Lol. Any opinions on the OP?

It's not a surprise. Investors make bad gambles all the time, such as the backers of Greece.
slo1
Posts: 4,342
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7/8/2015 8:05:06 AM
Posted: 1 year ago
At 7/5/2015 9:09:48 PM, dylancatlow wrote:
As might be expected, Paul Krugman is praising Greece's decision not to accept the bailout terms. He wrote an article about it called "Austerity Arithmetic" in which he claims that austerity would actually make the debt problem worse than it already is, since it would destroy Greece's economy and thus its ability to repay its debts. Article: http://krugman.blogs.nytimes.com...

I have a question about his underlying assumptions which I was hoping someone with a background in economics could answer.

From the perspective of a creditor, is it really worth propping up Greece's economy (so as to be repaid) if in doing so you end up loaning more than you receive? At this rate, Greece will never come close to repaying its debts, so something needs to change if the creditors want their money back, right? If a country's economy is built on quick sand (which Greece's economy appears to be), then it seems like at some point the economy just has to collapse in order to be sustainable. For example, say there's a country whose government simply borrows all of its money, including the money it uses to pay back its loans. Such a scenario is unrealistic, but it does highlight a crucial point: even though refusing to lend more money to the country would damage its ability to pay back its loans, it's still a smart idea. Does this same principle not apply to Greece?

Obviously, Greece CAN pay back its loans if it really wanted to. There's nothing stopping the government from simply spending less money than it receives in taxes, and using the surplus to pay back its loans. Of course, the effect to the economy is another issue entirely.

It looks like the gauntlet has been thrown down. The EU is stating get into line or get out of the EU. In the US if a state went bankrupt, it would result in defaults. Investors would take a haircut and everyone would move on. Big banks would rush in to get in on the new financing.

Greece is in a tough problem. First and foremost they have structural problems that contribute to their huge and growing debt load. It is clear that austerity will not work for them. It is great for the rest of the EU, but bad for them. Heck they already have 25% unemployment. If they implemented austerity like they should to get out of debt it probably would be much much higher.

I have to imagine there has been a big influx of Greeks throughout Europe looking for work. That just hurts more if they are not sending money back to family in Greece.

The fundamental problem though with remaining in the EU is that the rest of the EU is pissed off because the citizens of Greece were getting a better deal such as pension at 50 and the other countries work until X age. They don't want to finance debt reduction because their citizens get screwed.

It brings up a fundamental flaw in the EU that there is not a standard of normalization when it comes to benefits the gov's give. When you have a wide variance between the countries this is going to be an issue.

I believe it is in Greece's interest to bring back the Drachma. It will be an instant boot to tourism as it would be valued much much lower. They then have monetary policy that they can use to influence their economy as needed.