We Stand with the Communists!

Reluctant Tourist

We stand with the Communists!

That’s right – shoulder-to-shoulder, singing “The Internationale” with Syriza, the ruling party of Greece, after an election campaign marked by an unusual degree of honesty.

At least, one party was telling the truth when it sent an “open letter” to the voters of another nation! More on that in a minute.

First, let’s follow up on our travel memoirs. We are a reluctant tourist; wherever we go, nothing quite measures up to Baltimore. Once you have come to know Charm City, well, there’s nothing else like it.

Which is too bad for a rogue economist, condemned to wander the earth in search of fleeting insights. He sees the most bizarre, appalling, and often fetching, things… and they all remind him of home.

A “Self-Reinforcing Crisis”

Meanwhile, strange things are happening elsewhere. Among them is a letter published in German business newspaper Handelsblatt (think the Wall Street Journal for Germans).

Alexis Tsipras, leader of the radical left-wing coalition that now governs Greece, was surprisingly forthright.

“In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future.

Nothing more than common sense was required to see that the application of the “extend and pretend” tactic would lead my country to a tragic state. That instead of Greece’s stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.”

Greece had never really taken “austerity” seriously. Government spending and debt had both risen since the bailout program began. Dear readers wrote to tell us how wrong we were not to consider the plight of Greek widows and orphans, suffering under the austerity program.

Naturally, the thought of human suffering always upsets our stomach and troubles our sleep. When meditation and alcohol failed to stop the torment, we were forced to do further investigation.

And now we are on the side of the commies. Forget austerity! At least, forget the phony austerity as practiced by the former Greek government and promoted by the International Monetary Fund and the European elite.

Nothing More Than a Scam

That was never anything more than a scam. It allowed the Greeks to continue spending more than they could afford… while bailing out the banks that had foolishly lent too much to them in the first place. In short, Greek austerity closely resembled America’s bailouts, boondoggles and QE programs of the last five years.

A brief history of Greek debt: Since the country became independent in 1828, it has been in default about one year out of two. Then Goldman Sachs helped disguise Greece’s debt burden to get it into the European Union. This had the effect of suddenly turning Greece into a decent credit risk. It was able to borrow in euro… with the implied backing of German savers.

This, naturally, led to a lot more debt. As Tsipras tells us, the country was bankrupt by 2010. Greece now owes its creditors about €250 billion ($284 billion). What do you do when someone can’t pay his bills?

You write off what he can’t pay and let the guy start again. Lenders take the loss they deserve. The borrower has to tighten his belt (a genuine austerity program) and live within his means. Life goes on.

But the banks that had lent hundreds of billions of euro to Greece saw a way out. If they could get the Greeks to play along, pretending to submit to an “austerity” program, they could lend even more money.

They wouldn’t have to write off any debt. And eventually the European Central Bank would bail them out. Their game was going well, until the Greeks decided not to play ball. Now, voters seem to have had enough. The questions on the table: Can Greece’s new leaders be bought? And at what price?

On the one hand, they were elected for promising to tell the bankers what they could do with their debt. On the other, Syriza’s leaders will be tempted by “moderation” and “responsibility” – code words for getting a lot more money from the IMF and the ECB – and some cushy jobs for themselves.

As it stands, they are committed to doing some smart things and some dumb things. Most likely, they’ll do both.

The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.