Superphysics Superphysics
Fiscal and Monetary Reform (Industry and Trade Factors)

How to Fix Greece

April 15, 2015 7 minutes  • 1324 words
Table of contents

Updated March 2024 to add credit derivatives, and EU weakness, as the main cause of the fault

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
Metric Notes
Demand The Population from 2001 to 2009 is ok. But the decline in 2013 shows an anomalous reduction
Capital Employment from 2001 to 2009 is also ok, so that is not the cause of the problem
Industry Production started to decline by 2009. This is strange because its employment was good
Trade Trade rose from 2001 to 2009. This is strange because it is way above its supporting capital

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 (like in a stock market crash) or unproductive (like 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, Portugal and Ireland, also had debt and almost had a crisis like Greece, but did not.

The GDP-Debt ratio

So why did Greece suffer a debt crisis?

A Consequence of the Derivatives Spree in the 2000s

In the 2000s, credit default swaps took off. It allowed large corporations to take on huge amounts of debt and spread the risk to so many people and investors. The key change was to regard the derivatives as an insurance which could be sold to many people, instead of as a loan.

Previously, this was illegal. But the repeal of Glass-Steagall suddenly allowed it from 1999.

This allowed banks to sell huge amounts of debt which then gave huge amounts of profits, and so they pushed it aggressively.

It soon spread to public debt where governments were offered so much debt. This is why former Greek Prime Minister Simitis blamed “European economic management” which was helpless against it.

The last line of defense should have been credit rating agencies. Unfortunately, their revenue came from the lenders and so they allowed bad debt.

This is why both private and public debt ballooned and collapsed nearly at the same years:

  • from 2007, as seen in the fall of Lehman
  • to 2010, as seen with the fall of Greece

The evils of debt were very well known in the 18th century, especially to Adam Smith who blamed the finance industry for it:

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 Wealth of Nations Simplified, Book 5

Large Debt = Wasteful Spending

Unlike Spain, Portugal, and Ireland, Greece had more opportunities to waste huge amounts of debt in the following ways:

  • The Athens Olympics
  • Military spending
  • Socialist government pensions and salaries from a governement
Athens Olympics disused arena
The Athens Olympics venues ended up unused. Keynesian projects bloat governments and attract the corrupt like sugar attracts ants
Update: March 2024
The Greek mistake of spending wastefully for the Olympics was recently repeated by Japan spending for the 2020 Olympics which is much more wasteful because it coincided with the pandemic. Japan has recently fallen to be the fourth economy in the world because of its weak currency. Unlike debt which fueled the Greek mistake, it was quantitative easing which fueled that of Japan. Both are flawed Keynesian solutions which are based on the nature of money and finance.

The Greek government’s solution was austerity, raising taxes, and decreasing services and pensions. This resulted in the suffering of the people without the bankers getting punished proportionately.

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.
Wealth of Nations Simplified, Book 4, Chapter 1

Adam Smith’s solution to financial crises was to revert to barter and to pay for the debt 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
An example of 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, a positive economic action, instead of austerity and increased taxation, a negative one.

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
Athens could be made a permanent place for Olympics

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).

This system can be scaled to other countries so that the monopoly of finance can be broken and economic crises can be avoided. This proposal from Adam Smith was refined by EF Schumacher, not only as an economic solution, but also as a deterrent to war.

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