What Does Greece Have to Do With The United States?

In my last post, I described what is happening in Greece and the rest of Europe and why I their experience could end up being our experience.

            A number of people asked me why I wrote about Greece and Europe, instead of focusing on our problems here in the United States.

            Their problem is our problem on at least three levels.

            On Level One, we and Europe both have the same demographic problem. Falling birth rates coupled with increasing longevity have created a situation where fewer people are entering the work force and paying taxes, while growing numbers of elderly people are leaving that same work force.  The Japanese use the expression “1, 2, 4” to describe the situation.  It means that each child will be responsible for two parents and four grandparents, in addition to raising and supporting his/her own children.  When you think of it that way, the economic, financial and social strains on families and on the larger society become painfully clear.

            On Level Two, we and the Europeans have made promises to our people of pensions and health care, which will are not sustainable going forward.  We have all managed to promise the older generations far more than the generations that follow will be able to pay for.

            Levels One and Two are immediate concerns in Europe and Japan, but a little longer term.  While we may have ten or twenty years more to deal with the situation than Europe and Japan,  my own experience tells me that those years will go by quickly.  The longer we wait to deal with these problems and the longer we spend denying their existence, the more difficult and painful the eventual solution will be.

            Level Three is much more immediate.  Two years ago, whjen the European Central Bank lent the Greek government more money to pay its loan interest, they did nothing to solve the problem.  In the second year, they lent the Greeks more money that they will not be able to repay. 

            You’re probably asking what that has to do with us.  After all, the Greek government borrowed money from banks in France, Germany and Britain.  U.S. banks don’t have to worry.  They didn’t loan money to the Greeks.  But they did loan large amounts of money to the same European banks that have large outstanding loans to the Greek government.  Should Greece default on its loans—something many observers see as inevitable—the loan losses could render many major European banks insolvent and cause then to default on their loan payments to U.S. Banks.  Such an event would have the ability to trigger a financial crisis beyond what we experienced in 2008 or 1932.  The result could be widespread bank failures in our country, which would overwhelm the Federal Deposit Insurance system or, alternatively, a period of hyperinflation (i.e., price levels rising at more than 100% a year) as the Federal Reserve prints more and more money to stave off the collapse of our banks.  Neither scenario is pleasant to contemplate, let alone actually live through.

            The problem is that a large part of our political class denies that there is a problem.  Unfortunately for the rest of us, time is not on our side.  Delay and denial only make the eventual solution more painful.