There is a deadline – March 20th. There is a plan – 70% default, much higher than what’s been suggested before. The Greek Crisis has everything it needs to conclude after two and a half years standing on the edge of a cliff. Left to negotiate is whether or not Germany will have a man in place in Athens to oversee the Greek budget process as what the Guardian calls a kind of “Viceroy”. It probably won’t fly but it does beg the question, “What if we had a German overseer to our budget process here in the US?”.
Nevermind, there have been enough diversions. At the EU summit this week the details should be finalized and the process for bailing out Greece will be in place. The world can move on to other worries. There is even the chance that the European Central Bank (ECB) will have some authority to print more Euros shortly.
Don’t care? You should. This is very important news to the US for astonishing reasons. The bigger problem, brewing for generations, is that we have lost control over our currency and have no chance to get it back unless Europe gets its act together.
The Greek Crisis largely comes from Europe’s willingness to look the other way as Greece ran up large deficits over a long period of time. They announced in October 2009 that they were in trouble and that all the previous figures were, more or less, a lie. It’s not as though this was a surprise to anyone who watched the situation closely – except for bond traders who somehow weren’t in on it and promptly freaked out. After the failure of Lehman in 2008 this looked like the situation that was going to finally cause the greatest Depression anyone could ever imagine, all around the globe.
The Eurozone spent about 30 months keeping it all keepin’ on until a permanent fix could be found. That be what we have now – though it’s hard to blame the Germans for wanting to be sure.
Everyone has been nervous through this entire time – so nervous that the financial system has been utterly paralyzed. This has caused strange things to happen around the world. For example, the Federal Reserve’s “Quantitative Easing” of $600B cash should have increased the money supply and thus lowered interest rates. It had the opposite effect, however. That money, loaned out at 0%, was picked up by member banks who promptly invested it the only way they thought was prudent – buying more US Treasury notes (T-Bills). This brought up demand for T-Bills, which raised the price, effectively raising interest rates. The investors who had access to the new money just dragged this paper into their corner and sat on it like a bunch of scared hamsters.
Everyone has been completely risk-adverse all around the world because it looked like all of Europe might fall any day. It still does, but if there is confidence in a plan that saves Greece (and then Italy, Ireland, and maybe Spain) investors can move on and look for new opportunities. Before that, however, they are looking for a safe haven – and the only one anyone known is in the US.
US Dollars are more than just what we use to buy stuff. They are the standard currency of the world – and as such they are worth quite a bit more than they would be otherwise. As world trade grew in the last 30 years, so has demand for the dollar. We can never really default because it would bring down everything – some way would be found to keep it going. The Euro and everything valued in that currency might cease to exist long before the US Dollar fails, so it represents more risk.
Keeping the US Dollar more valuable than it might be otherwise means we can buy stuff from abroad cheaply, but it makes it much more expensive to manufacture goods here in the US. In essence, over the last 30 years our economy has become one where we export nicely printed paper in exchange for real things made elsewhere. Thus over the last decade we shed 8M manufacturing jobs as the purchasing power of the US Dollar remained high.
Some of this effect will remain with us for a long time, given that every international exchange is priced in US Dollars. The worst of the effects, and the hardest to predict, would go away as soon as confidence was developed in Europe. And that brings us to today’s news, which hasn’t quite happened yet. There is a plan in place and the final details are being decided. But will it fly with investors?
Let’s hope so. We have no chance of getting control over our own currency – or our economy – if Europe flounders. At least not until we make some hard choices about running the whole world. Where is that German “Viceroy”?