You Don't Need A PhD In Economics- You Just Need To Understand Basic Arithmetic

We recently received a note from a German journalist writing for a national paper there. He asked, “Simon, German politicians swear to support the well-being of the German people. Given this, what would you advise the German government about the euro– keep saving it? Or let everything fail regardless of the consequences?”

Europe and the United States have much in common in that their sovereign debt problems are really quite simple to understand. You don’t need a PhD in economics– you just need to understand basic arithmetic.

In the US, for example, the government does not collect enough tax revenue to cover even the most basic services that society deems sacrosanct: defense [offense], social security, and Medicare.

In 2010, the federal government collected $2.2 trillion in tax revenue and spent north of $2.5 trillion just on those three programs– already $300 billion in the hole. Everything else– the post office, Homeland Security, the FAA, the FDIC, even the light bill at the White House– is funded by debt.

That includes the most peculiar debt-funded item– interest on the debt. The US government has to borrow money just to pay interest on the money it has already borrowed. This is unsustainable, it’s simple arithmetic.

Europe’s problems can also be explained as simply. Greece effectively has no money, and its only access to capital is continued bailouts. There are four options for the country being discussed:

1) Austerity. Not only is this politically unpopular, it causes social unrest. People won’t stand for it… nor will they be able to pay enough police officers to beat them back with batons. The populist uprising will squash any meaningful austerity plan.

2) “Grow its way out”. Not possible. When you count public and private debt together (roughly 260% of GDP), Greece is spending roughly 15% of its entire GDP just on interest payments. That’s an incredibly high barrier to growth.

3) Inflation. Ordinarily, governments would just print their way out… but this isn’t even possible right now because Greece doesn’t control its own printing press.

4) Default. Result? Set off a chain reaction of banking failures and a derivatives meltdown. Utter financial carnage. Nobody wants to see this.

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