Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
The Greek and the American Financial Crises -- Similarities and Differences.
Greece is experiencing a monetary crisis. It is incapable of servicing her debt which is payable in euros. It faces defaulting. No one mentions the true cause of its difficulties, the trade deficits with other euro countries, particularly Germany. It has to pay for its imports in euros. In 2009, Greece’s trade deficit with Germany amounted to €4.81 billion. Other euro countries are having similar difficulties balancing their trade with Germany. In 2009, Italy’s trade deficit with Germany amounted to €11.4 billion; Portugal, €2.62 billion; and Spain, €12 billion. We mention these countries because analysts have suggested that they are beginning to face the same problem that Greece faces, a scarcity of euros.
Greece faces the problem that many countries experienced under the gold standard, a scarcity of legal tender to service their debt. Were the U.S. on the gold standard, it, too, would face a scarcity of gold that would threaten its economic stability.
The problem is that the European countries, with the exception of the United Kingdom, Norway, and Sweden, are on the euro standard. ...
The Euro standard works like the gold standard. As a result of chronic trade deficits, countries have to deflate prices, including wages, to make their goods competitive in world markets and countries with surpluses like Germany are supposed to inflate their prices and wages to make their goods less competitive. The United States which experienced an $800 billion trade deficit with the rest of the world in 2008 -- over $250 billion with China alone – has been urging China to allow its yuan to rise relative to the US dollar in order to reduce its trade deficit.
The U.S. does not face a problem of servicing its foreign debt because countries have been lending it billions by buying its bonds and other financial assets. And unlike Greece, U.S. debt instruments are denominated in U.S. dollars. While printing dollars to service its debt should there be a run on the dollar would have serious economic consequences, bankruptcy is not one. Inflation, even hyperinflation, is a likely consequence but countries survive hyperinflation as Germany and Brazil have demonstrated.
WSJ on 4-7-2010 reported that Greek government bond yields and the cost of insuring Greek debt rose amid concern that Greece may be looking to cut the IMF out of a recent aid pact. It appears more and more likely that the IMF will have to come to Greece’s rescue unless Germany changes its policy of maintaining its chronic trade surpluses. The reason Greece would prefer loans from the European community is that the IMF would require as a pre-condition that Greece take severe austerity measures to increase its ability to export and earn euros and other foreign currencies.
We’ll have to see how the European community resolves the Greek monetary crisis and how it intends to avoid an increasingly likelihood that Spain, Portugal, and perhaps Italy will confront scarcities of euros.
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