Greece Shows What America Would Be Without More Borrowing

AOL Daily Finance By Peter Cohan

On May 2, Greece announced a deal to get a bailout from the European Union and the International Monetary Fund. But as part of the agreement, Greece needs to cut government spending in ways that are causing social unrest. That chaos could get so bad that Greece might decide it’s better simply to forget about the bailout and “restructure” its debt.

Greece will make budget cuts ranging from $40 billion to $53 billion each year so that by 2014 its budget deficit falls from the current 13.6% to below 3% of GDP. And this will mean recession in Greece for years: A 4% GDP contraction in 2010, a 2.6% decline in 2011, followed by anemic 1.1% growth in 2012.


To get the U.S. debt down to the 3% of GDP level, either GDP would need to grow much faster, or we would need to cut that deficit by $953 billion so it totaled a mere $447 billion. Where will that $953 billion come from?

I apologize, but to illustrate how painful such a cut would be, we have to look at some more numbers. Out of the $3.5 trillion in Federal government spending, only 39%, or $1.37 trillion, is considered discretionary. And of that, 22% (or $782 billion) is for defense, which many would consider mandatory.

If we cut all of the other 17%, or $588 billion, that’s considered “other discretionary” spending, that would still leave an additional $365 billion in cuts required to get down to a $447 billion deficit. This would mean going after so-called mandatory spending. But where is there room to cut $365 billion? Do we slash Social Security’s $678 billion or Medicare/Medicaid’s $676 billion by 54%? Do we simply gut $607 billion in “other mandatory” spending by 60%?

Whatever political pain Greece is suffering now would be in the U.S.’s future if we ever lost the ability to convince other countries to lend us more money. The kind of budget cuts that Greece now faces are a painful preview to what the U.S. would need to do to get its budget deficit down to 3% of GDP.

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  1. Harry Coin :

    No matter the country: A public employee, say a school administrator or government department administrator, is in negiotiation over pay with a union representing public employee teachers or other skills, and the matter is being settled by a public employee, an arbitrator or administrative judge of some sort… do you expect the result to be more or less payment to public employees?

    The Greek government will take the bailout money and will promise with full sincerity they will implement the austerity measures (hairdressers not ‘high risk careers’ eligible to retire at 50 and collect pensions). Enough people will strike and otherwise make a fuss that the elected officials will fear losing their election and will not implement the austerity measures. More bailout money will then not come. Greece will go back to the Drachma, at a very inflated rate so as to ‘pay off’ the various locals. Everyone will ‘get paid’ and be happy.

    Except those that sold insurance policies to people who lent money to Greece. They will be unhappy. They will raise their rates for insuring loans. Bank expenses will then rise a great deal and most of Europe will head into a recession again much in the same way rising energy prices was ‘the last straw’ that popped the US housing bubble. (A price bubble caused by Barney Frank’s legislation putting the taxpayer on the hook to pay mortgages given to those who couldn’t afford the monthly payments to begin with creating the unsustainable spike in housing prices to begin with).

    Taxed money will then flow to banks to ‘increase lending’ while at the same time requiring banks to have more of their own owners money at risk before loans can be made. The owners won’t have this money so the banks will not be able to actually create more loans making the government money ‘given to them to increase lending’ like so much water in a tank that has no exit pipe.

    There are two ‘ways out’ of the mess. One is not sustainable: Just print more money and ‘inflate’ your way ‘out’ of debt burdens. Who loses: Anybody who has saved anything. No real growth or improvement in quality of life happens. It’s like pushing the ‘do-over but start from a worse position button’. One is sustainable: Recognize that government employment is at heart not creative and can only be productive if it curbs crime and enforces agreements and otherwise enables competitive markets to grow.

    If the governement really wanted full employement, it would offer employers tax credits that do not roll-over or accumulate that equal the minimum wage for every full-time employee. Profitable companies would be strongly motivated to have people around doing something, reporting to work every day, not being on any form of handout and not increasing the size of the government, there would be a downward pressure on prices as costs are reduced and maybe we could compete with China.

  2. George Michalopulos :

    Harry, this is California’s future as well. We can hope that the other states learn from California’s failure of nerve and steel themselves by taking the necessary precautions.

    Either way, it’s not going to be pretty. As it is mainly entitlement spending which is driving this insanity, cutting back on military expenditures will prove to be a drop in the bucket. It would be the equivalent of City Hall laying off policemen but keeping municipal swimming pools open. We all want our public swimming pools but we need police protection.

    So what are the options? Welfare checks are going to have to be postponed, Medicare cuts will go into effect, postal service will be curtailed, the border will have to be sealed and aliens deported, public schools will have to be consolidated, new contracts with public employees will have to be negotiated, GM & Chrysler will have to be sold, the remainder of the $787 billion dollar stimulus package will have to be cancelled, and that’s just for starters. If all of these things happen, then we could conceivably not lose our triple-A bond rating.

    The downside? Social dislocation, possibly including riots, especially in those states which have high percentages of welfare dependency. Some states will weather it better than others, perhaps along the Red/Blue divide? New Jersey is an interesting test case. A very Blue state that is at the end of its rope. It’s possible that some of the harder-hit Blue states (like Michigan) may have gone too far down the road to permanent Third World status. As for NJ, its governor is making some drastic decisions which are necessary. Will he succeed or is it already too late? We’ll see.

  3. Michael Bauman :

    Speculation: in addition to limiting freedoms one of the major problems I see with all brands of socialism is the monopolization of capital. This can happen either through government control or from having too much debt. Can it not happen in a ‘capitalist’ system (I don’t know another word for it) in which a few institutions have essentially monopolistic control over capital? Does not that control limit innovation, restrict employment opportunities and the ability of people to be successful economically?

    Is there a legitimate role for ‘trust-busting’ activities by government on financial institutions in such situations?

    Or does this just happen when too much of the economy is dependent on debt?

    Is there a viable alternative to the current corporate model that seems define ‘growth’ in terms that reward practices that violate essential Christian anthropology?

    • Peter Evans :

      Re: the monopolization of capital… it would seem to me that the intention behind the ‘monopoly’ is the distinguishing feature between socialist and capitalist monopolizers. The aim of the former is power, whereas that of the latter is profit. The socialist uses the government’s coercive regulatory power to control other people’s money to control “the people” (for their own good, of course) and enhance the power of the governing elite. The capitalist uses the power of persuasion (advertising, a desirable product) to attract other people’s money to voluntary transactions that result in the capitalist accumulating more money that is his own. This money is then (usually) re-invested into the same capital-attracting process as long as it keeps working. When it stops working, the capitalist re-directs the capital towards something else that might prove more profitable.

      Very briefly, the capitalist creates wealth and the socialist consumes wealth, leading to Margaret Thatcher’s critique of socialism, “eventually, you run out of other people’s money.”

      Re: trust-busting… there might be a legitimate role for government to break up monopolies that were actually causing noticeable harm to society but my, admittedly limited, knowledge of the relevant history inclines me to believe that a ‘capitalist’ monopoly, dependent as it must be on voluntary transactions, would ‘naturally’ dis-aggregate when it started to become oppressive. However, where we could have really used some legitimate trust-busting was (is) in the case of Fannie and Freddie… Oh wait! They ARE the government and, thus, “too big to fail.” Couldn’t that be a definition of hubris?

      • Fr. Johannes Jacobse :

        Sure could.

        Here’s an interesting economic fact. It only takes a 10% surplus of goods to break a monopoly. Say a handful of nations fixed oil prices. How to break that lock? Introduce at least 10% more oil on the market from an outside source and the monopoly will fall apart.

  4. Taking a look at the states with big problems and the states with difficulties but not killer big problems two key differences emerge which the more healthy states have and the seriously troubled ones do not:

    1. Balanced Budget Amendment in the state constitution. States that can’t spend more than they take in are not suffering as much as others.

    2. Non-partisan legislative district maps. States that have legislative districts drawn by non-partisan panels mandated to follow city / county / metropolitan area boundaries have done better. In short: States where the voters pick their legislators the people do better than in states where the legislators use the map drawing process to pick the voters.

  5. cynthia curran :

    Well, I’m not a big fan of Texas either since like Calfornia its demographis are changing. Texas still has some of the poorest counties near the border and with a change from non-hispanic white to hispanic could end up spending like California in the future since Dems do better with hispanics since their income is lower. Ths is not to sound racists but its a fact. Granted, Republicians are big spenders as well but Houston saw a dem lesbian win and Mark Krikorian, an Aremian Orthodox did a study of the 20 largest counties in the US on the Center for Immirgation studies and with heavy immirgation the Dems pick up. And both Houston and Dallas are now around 27 percent foreign born. And Mark Krikorian shown that in 1980, Orange County Ca voted the most for the Republicans at 67 percent and Mccain won the county at only 52 percent in 2008. OC went from 13.3 foreign born to 30.4 foreign born in the mean time.

  6. Apropos Greek debt, a market report from today’s news (excerpted from Fox Business):

    The Dow was on track for its worst point drop since a 268-point plunge on Feb. 4. At session lows, the blue chips were on pace for their steepest selloff since April 2009.Most of the Dow’s 30 components lost ground…

    The Nasdaq Composite fell by more than 1% percentage point more than the Dow — losing more than 3% …

    Wall Street can’t seem to shake its European debt woes, even after the European Union and International Monetary Fund came to Greece’s rescue with a $146 billion bailout package over the weekend aimed at preventing a default. European bond prices tumbled and the cost to insure the debt of Spain, Portugal and other debt-ridden nations remained elevated. Some traders worried the bailout won’t be enough to save Greece or that the response didn’t prevent Greece’s woes from infecting other countries.

    “Markets have given a clear ‘thumbs down’ to the Greek aid package,” Win Thin, senior currency strategist at Brown Brothers Harriman, wrote in a note. “The entire Greek aid package is predicated on getting market borrowing rates back down so that Greece can issue new debt for the private sector and stay current on its current debt load. That’s not happening yet.”

    The rescue establishes a pricey precedent, especially considering Spain and Portugal have serious debt issues and much larger economies. Hurt by the sovereign debt worries, the euro tumbled 1.1% to $1.3041 Tuesday, a fresh one-year low and edging near the psychologically-important $1.30 level. Kalivas predicted traders would “hit the panic button” if the euro closes below that level…

    End quote. Here we see the price of purchasing insurance against debt default going way up, and all banks buy that for all sorts of debt, driving interest rates up and lending down since the losses come from bank owners invested money — and the banks can only borrow from the government and loan based on how much money the bank owners have at risk — not how much the government is willing to make available to them.

    When lending goes down business that depend on lending reduce employment and purchasing, and so on and on.


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