European politicians are debating how to sell the idea of a bailout to their taxpaying, voting populations. This is an attempt to contain the damage from the last decade's overspending of the Greek government. This government will default soon, unless we see a combination of sharp cuts in spending and a bailout from wealthier neighbors.
The stronger economies of Europe — the ones not driven by government spending and tourism — are in a pickle. If they let Greece default on its debt, the consequences for financial markets could be sharp and very painful. If they extend a lifeline to the Greek government, every other irresponsible government will line up for a bailout. At that point, everything may appear to be under control, but a few years down the road after a round of bailouts, the problem will emerge once again.
They will remain in place until the size of welfare states and banking systems fall in line with the productive capacities of the economies that support them.
The root of the problem is that the financial and, for lack of a better word, the "government spending" sectors of the global economy have grown too large. The sectors that produce valuable goods and services cannot afford to subsidize banking and government at their current sizes.
The resolution of this problem will take many years, and it will involve a combination of weak-to-flat global GDP growth and currency debasement. Banking and government finance much of their activity by being first in line to benefit from the inflation that's constantly being created by central banks. This is a hidden tax on the productive economy.
At this point, it remains to be seen if German taxpayers will be generous enough to subsidize the lifestyles of Greek government employees.
German and French politicians may have voiced support for Greece, but, thus far, have not backed up words with concrete actions. Ultimately, the IMF may get involved in some fashion (which ultimately adds to the burden of U.S. taxpayers). In the meantime, this situation could get messier, and maintain pressure on the prices of risky assets like top stocks investment.
The endgame of Keynesian policy is on display in Greece right now. The reputation of loose government spending as a serious policy will, by the end of 2010, be dealt some deserved blows.
These policies ultimately lead to bankruptcy, not prosperity. When responding to a criticism of the long-run costs of his prescriptions, John Maynard Keynes, (the economist so revered by fans of big government) quipped, "In the long run, we are all dead." Well, he may be dead now, but plenty of people are still alive, and living with the consequences of his distorted view of reality. Production comes before consumption.
Hopefully, mainstream economists and politicians will have re-learned this simple truism by the time this rolling crisis has passed.
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