It’s All Greek to Me

Greece became the first industrialized nation to default on its debt to the IMF on June 30.  Greece’s long journey to default over the past five years has spurred lots of conversations and debates and lessons.  There is far too much to cover in this blog so I want to focus on one that has personal, as well as international, implications.

There is a simple, common-sense lesson to be learned from Greece: You can live on debt for only so long as someone is willing to lend to you.  Greece’s debt (as a ratio to its GDP) is high.  Japan’s debt is higher, however.  So why is Greece facing default and Japan isn’t?  Lenders were concerned Greece wouldn’t be able to pay its bills in the future, and thus stopped loaning them funds.  Japan doesn’t face that issue (yet).

The same is true with the US.  The US has a debt-to-GDP ratio of around 1.  Spain’s is lower, approximately .75.  Yet, Spain is facing a crisis similar to Greece (albeit not nearly as bad).  Similar to Greece, investors are concerned about the country’s ability to repay debts and have scaled back their lending.  This is not true in the US.

In theory, any country could deficit-spend its way through life into perpetuity, so long as someone is willing to lend.  But if something happens and that credit stream dries up, then it presents big, and painful, issues.

Margaret Thatcher once famously said that the problem with socialism is you eventually run out of other people’s money.  As the USSR, Venezuela, and Argentina found out, that is very true.  But the same can be said of deficit spending in general: the problem with deficits is you eventually run out of other people’s money.