Fiscal and Monetary Reform (Industry and Trade Factors)

How to Fix Greece

April 15, 2015 Icon

We can use our DCTI tool to analyze the Greek crisis to prove that the current solutions of austerity and high taxes are not the best ones. Such solutions are are a relic of the mercantile way of thinking of an economy as a business, instead of, naturally, as a society, family, or group of friends. The proper solution will involve the whole EU and will help the union stay together*.

Update: 11/2016

The Brexit vote proves that the current mercantile solution was wrong

As the 2008 Credit Crunch was said to have triggered the crisis, we set year 2009 as the central-point (when the effects would have been felt) and 2013 (the year with the latest data) as the last point of our Value-Trade analysis. To make a better trend analysis, we will set 2001 as our starting point.

Greece 2013: High Demand, Low Trade

The DCTI ratios of Greece
The DCTI of Greece: Demand as population, Capital as Employment rate, Trade as Nominal GDP, and Industry as Production
  • The Population from 2001 to 2009 is ok. But the decline in 2013 shows an anomalous reducton
  • Capital, as employment, from 2001 to 2009 is also ok, so that is not the cause of the problem
  • Trade rose very much from 2004 to 2009, way about its natural ratio to capital
  • Industry fell from 2009, which is strange because its employment was good

We can pinpoint the anomaly to the strange increase in trade in 2004 and 2009 that did not contribute to industry. This means that the trade was speculative (as in a stock market crash) or unproductive (as in a debt crisis). As there have been no reports of a crash or a great scam in Greece, it leads to the cause to being a debt which was used unproductively.

A lot of European countries, such as Spain and Ireland, also had debt but did not have a crisis like Greece. So why did Greece suffer a debt crisis while the other countries did not?

The GDP-Debt ratio

The Wasteful Spending by the Greek Government as a Legacy of Keynes

Athens Olympics disused arena
The Athens Olympics, 2004 and 2014. Keynesian projects bloat governments and attract the corrupt like sugar attracts ants

Bubbles begin when nominal prices go far above real prices, in a mercantile effort to increase arbitrage for profit maximization. In Greece’s case, the government acted like a business which borrowed heavily in the hopes of generating future revenue to match that of its European peers.

Ever since Keynes’ time, government spending has been advocated to stimulate economies. In classical economics, that job was the task of the merchant class, made up of the people who live by profits:

  • banks
  • merchants
  • manufacturers
  • producers

However, because of the doctrine of utility and profit maximization from the Marginal Revolution of the 19th century, this essential duty was only done when it was profitable. Otherwise, it shifted onto the ruling class as the governments or those who live by rent or taxes. This then burdened the government with two tasks:

  • Managing the people as governance
  • Managing the economy of the people asmacroeconomics

This added burden divided the attention of government. On one hand, it needs to keep wages high to keep the people happy. But on the other hand, it needs to keep wages low to keep businesses happy. To keep both happy, the government merely passes the burden to future generations as a growing national debt.

Such improvident anticipations gave birth to the more ruinous practice of perpetual funding. This practice puts off the liberation of the public revenue from a fixed period to an indefinite period, never likely to come. However, it raises more money than the old practice of anticipation. When men became familiar with funding, it became universally preferred to anticipation during great state exigencies. Relieving the present exigency is always the object of government. The future liberation of the public revenue they leave to the care of posterity. The Simple Wealth of Nations Book 5
Small republics sometimes derived a big revenue from the profit of mercantile projects. The republic of Hamburgh derived revenue from the profits of a public wine cellar and pharmacy. Government management of mercantile projects like this requires orderly, vigilant, and parsimonious administration, like those in Venice and Amsterdam. The Simple Wealth of Nations Book 5

The Evils of Debt

Smith explained that debt is good for the merchant class, but bad for the ruling and working classes because it does not always increase the society’s productive capital and frequently drains it away through unproductive uses:

In return for the capital they advanced, the creditors obtained an annuity in the public funds of more than equal value. This annuity replaced their capital and carry on their trade and business to a greater extent than before.

However, this new capital which they bought or borrowed from other people must have existed in the country before. It must have been employed in maintaining productive labour. When it came into the hands of those who had advanced their money to government, though it was a new capital to them, it was not a new capital to the country.

It was just a capital withdrawn from certain employments to be turned towards others. It replaced to them what they had advanced to government, but it did not replace it to the country. The Wealth of Nations Simplified, Book 5, Chapter 3

In the Greek case, the merchant class as the German and French banks had an interest in lending unnatural amounts to Greece for self-profit. On the other hand, the corrupt Greek government, as the ruling class, had an interest in borrowing unnaturally also for self-profit.

Of course, bankers know that they are not supposed to give loans to irresponsible people just as governments know that they are not supposed to spend* on worthless projects. Yet they do it anyway because it brings high profits for themselves in the guise of helping the people.

The same thing happened during the Latin American debt crisis where huge amounts of onerous debts were given to dictators who never really could pay them back. The Greek debt crisis is similar to the Latin American debt crisis.

Update: July 2021
The Greek mistake was recently repeated by Japan’s spending for the 2020 Olympics which is much more wasteful because it coincided with the pandemic. That’s why we predict a crisis for Japan in the future and are proposing Pool Clearing to solve it way before it hits.

Smith would simply throw away such corrupt policies:

Restraining private people from receiving the promissory notes of a banker which they are willing to receive, and restraining a banker from issuing such notes everyone is willing to accept are violations of that natural liberty which the law should support and not infringe.

Such regulations may be considered a violation of natural liberty. But those exertions of the natural liberty of a few individuals which might endanger the security of the whole society, should be restrained by the laws of all governments. The Simple Wealth of Nations, Book 2

Based on the chart below, Greece’s government spending, as a percentage of GDP, has been high since 2004 and highest in 2009, higher than Spain or Ireland (except for 2010).

In short, Greece’s monetary problem, sparked by the 2008 Credit Crunch, exposed its fiscal problem: that its government was spending non-productively and unsustainably while banks kept on feeding it. This in turn is likely due to Greece seeing EU membership as its ticket to riches:

It is not because they are poor that their payments are irregular and uncertain, but because they are too eager to become excessively rich. The Simple Wealth of Nations Book 5

Austerity and high taxes are mercantile solutions which work well for businesses but not for society. If a business is in trouble, it can simply lay off or remove excess workers. But if a society or family is in trouble, it cannot remove its citizens or family members by forcing them to go overseas or to die from disease or suicide.

Instead, society or family members naturally share the burden for the sake of the well-being of the collective, something that would not make sense among competing businesses.

European Politicians together

The Solution: Pool Clearing

If gold and silver should fall short in a country which can buy them, there would be more expedients for supplying them than almost any other commodity. If the materials of manufacture are wanted, industry must stop. If provisions are wanted, the people must starve. But if metal money is wanted, barter will supply its place, though with much inconvenience. The Simple Wealth of Nations, Book 4, Chapter 1

The natural response to the shortage of money is to pay in kind. Instead of raising taxes, the EU can set up a clearing fund in France and Germany where French and German importers of Greek products can pay into. Part of the proceeds can then go directly to the creditor banks. France and Germany can then encourage their people to import more Greek items in order to give liquidity to their own banking systems.

Pool clearing for Greece

Likewise, Greece will set up a clearing fund for its EU imports, so that the Greek Euros can go directly to pay the debt. In this way, the debt will be paid by the Greeks paying for EU imports into their clearing fund and by EU citizens paying for Greek products into theirs. The debt is paid by enticing production and trade instead of austerity and increased taxation.

In effect, the clearing funds unify the EU states into a barter union to offset the problems of their monetary union. This keeps individual member states independent and able to state their own fiscal policies without needing a fiscal union*.

*A fiscal union is a mercantile solution similar to a corporation buying its suppliers and customer-companies in order to vertically integrate for greater efficiency. It would be a sort of imperialism among nations.

Pool Clearing for Services

As Greece is a country for tourism and hospitality, we can extend pool clearing to Greek services to pay off the debt faster.

  • EU citizens can deposit Euros into their nation’s sub-clearing fund aimed for Greek tourism
  • They can use their deposit to book hotels and prepay services
  • Part of the payment will go directly to the creditor bank
  • The EU can encourage its citizens to avail of Greek tourism and deposit into the fund to pay off the debt faster

Athens Olympics fireworks

To further raise tourism revenue and make it regular, the EU could make Greece a permanent Olypmics or sporting competition site for Europe so that the spending for the 2004 Olympics would not go to waste. This would make sense since Greece was the original birthplace of both ancient (Olympia) and modern olympics (Athens, 1859).


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