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In the news recently, and on everybody’s mind, is the financial collapse on some level or another. Many of you may have heard about Greece and her financial woes and you may ask yourself “How does that even happen to begin with?” Let’s talk about it with some brief examples.
You are a Government and you need money so you issue bonds which are really promissory notes to pay the money that they sell for back with interest. As an example I sell a bond for $1 with a graduation interest rate of say 10% – meaning the person who bought the bond, on graduation date, will be owed $1.10. Not bad, especially given how much you can make from a bank these days (remember when you got decent interest on your money from a bank?).
Now the Government takes that money and uses it by either hiring people to do things, or lends it out. The weird thing being how this is one big cycle. We sell a bond, for which we owe on it more than we got, we lend that out to other people, hopefully making a profit, or spend it on people who later owe me money for taxes, which I hope to use to pay back the original Bonds. The problem at this point should become obvious: everything counts on everyone being able to do their part, and me, the government, not spending more than I can actually make back.
Let’s do an example:
Greece, through bonds and the above mentioned cycle, spends 110% of what the country made last year in taxes – meaning she spent 110 billion when she made only 100 billion. So she now owes, at day one of this year, 10 billion – or to put it bluntly she is 10 billion in the hole, again, day one. So to be able to do anything she puts more bonds out there to not only make up that 10 billion (borrowing money to pay back money – great theory) but so that the government can actually do stuff – like EXIST. Rinse repeat.
At some point the country owes more in one year on back bill interest that it makes, meaning the country borrowed 100 billion, with 10 billion in interest per year. At the ten year mark (really about the 8.7 year mark) the country now owes more in interest that it makes – 100 billion original, and 101 billion in interest. It is now IMPOSSIBLE to pay back the loan, EVER. In the private sector you file bankruptcy, lose basically everything (note that) and are cleared. The problem here is if Greece were to file bankruptcy what happens? BAD BAD STUFF. It was proposed that creditors would get GREECE – think that through for a moment.
taking a lesson from the greece model, should i begin learning chinese?
Lets all go in and make an offer on the parthenon
Yeah see a pattern here?
Then the creditors would treat Greece like a foreclosed home (“We aren’t in the business of actually OWNING countries!”). Luckily that would never happen. Ever. If even lowly Greece can’t be repossessed, then I don’t see a pattern here at all.
I love it when people (partially joke) that its time to learn Chinese. Does ANYONE actually learn Chinese in anticipation of the country’s eventual majority ownership of our country? NO – it has never happened. That means no one really believes it.
I’ll start watching Kai-Lin with my daughter….
I don’t see the leap of faith on the Greece to America thing – that said I do think that the USA is in much deeper water than most Americans believe. If you have been paying attention at all to the international scene then you may be aware that Spain and Italy are also both have serious financial problems.
I heard:
1) Greece
2) Spain
3) Italy
4) England
as the order of countries to have financial crashes. We shall see if any of that holds water, although Spain has already been in international news quite a bit for their beginning downward spiral.
Ni Hao.
btw – this link cracks me up.
http://www.brillig.com/debt_clock/
and I believe the number at the top is actually accurate.
Of course the USA is in much deeper water than most Americans believe – most Americans don’t even understand the concept of national debt, the trade imbalance, or any other of these high economic concepts. Hell I would argue that only a handful of world-leading economists, if any, know the true repercussions of such a high level of national debt.
As I previously mentioned – Greece is a worse-case scenario, and if any country should be in “foreclosure” by now it is that country. So why hasn’t the creditors taken it over and started selling off all the assets (The Ancient Parthenon, brought to you by Yum! Brands)? Because that is not how it works. Maybe that’s how it is imagined by folks, but no.
It is kind of a funny situation if you think about it.
My Country owes your country 20 billion. I tell you I am not paying you. What can you do about it besides invade me? Like Bay said, thats not how it works.
I still see all of this as “propping up” (that is the term used by MSM these days – quite appropriate really) due to the fact that the European Union is attached to each others’ successes and failure through the Euro – thus if Greece goes down they take the Euro with them. NPR was discussing this at great length – its not that the other countries actually care if Greece goes down, they care if Greece drags their precious Euro with them.
To make matters even funnier – when the Euro was conceived nobody bothered to create a Europe wide governing financial body – so if the Euro freaks out there isn’t anyone that can directly stop it.
OOOOPS
@Bay – there is an interesting anthropological precedent with the “learn Chinese” euphemistic device. There exists written stories from the Roman Empire defining quick-learning “Entrepreneurs” who learned latin in order to sell food stuffs to the conquering armies. Looking at it in a more generalized manner, this is actually a survival stratagem a la “Darwin”.
Bringing this into a modern timeframe, during the mid-to-late 80s, the Japanese were focused on owning U.S.-based assets. And it was at this time that the highest rated Business Schools began offering Japanese language courses.
It is my belief that a positive correlation exists here. Although to your point, I have no real intention of learning Mandarin. I’ve devoted my free time to pursuing a syntactic knowledge of Klingon.
@Thrax – I read the most vulnerable European nations follow the acronym of PIIG – Portugal, Italy, Ireland and Great Britain.
I too had heard about Portugal and Ireland – however I had heard they were like 5th and 6th. It will be exciting to be sure to see who “crashes” first.
Perhaps we should make hold some form of lottery on the subject. Going to be tough to define who really crashed, or what crash means to begin with though.
A lottery is a good idea! It is basically establishing the financial instrument of options. However, if one were to prescribed to a pseudo-domino theory caused by interwoven economic interests, then there would have to be a dominate option offering either “all collapse” or “no collapse”.
I’d bet “no collapse” right now with “all collapse” out of the money. Although I’ve been enjoying the intra-day volumes pumping through the FOREX caused by misinformation chaos and panic.
Oh do tell! I’d love to know how sporadic the financial trade systems are these days.
Euro segment had volume of 23.2 billion last wednesday.
How goes the price points?
I had heard the EURO took a dive against the dollar weeks back but started to rise again after the 1 trillion bailout announcement.