Wednesday, 22 June 2011

The truth about Greece

Now look, there's no need to get yourself into a twisted-knicker situation, it's all really very simple.

Individuals, families, businesses, clubs, towns, cities, counties, countries or federations of countries only have so much wealth. Wealth is measured in money but money is not, in and of itself, wealth. Money is a system of tokens that we give and receive in place of real stuff. The true value of money is dictated by the stuff it represents. I grow a pound of runner beans and you like to eat runner beans so you are prepared to give me something for those runner beans. What should you give? Well, that's up to you. You decide what my pound of runner beans is worth to you. You might offer two pounds of potatoes, or a small diamond, or twenty minutes with your wife, or you might offer money. You must value my runner beans and offer what you consider to be a fair exchange. What is essential is that you offer something of substance because I have no incentive to give up a pound of delicious green scrumptiousness unless I receive something that I value as highly as I value the finest vegetable god ever created.

Our transaction is not about money, it is about stuff. It is about something substantive. I give you something to enhance your life and you give me something to enhance my life. Were I to accept potatoes, diamond or fleeting fleshy pleasures with a lady who has seen better days, we exchange no money. Except that we do. Money is involved in all trades, even barter, because money is just a language by which we value stuff. Money is involved in a swap of a pound of runner beans for two pounds of potatoes just as it is involved in the swap of a pound of runner beans for a £2 coin. The reason it is involved is that the trade comes first, the stuff comes first, and money is just a way we can assign value to the goods we exchange. That exchange involves £2 for £2. My £2 is runner beans, your £2 is ten minutes access to a scrawny dry crone, although the reality is the other way round - £2 is the token we assign to represent each side of what is actually exchanged. Without stuff behind it, £2 means nothing. It has no value of itself.

That is not to say that the production of a pound of runner beans that gives me a £2 coin is a transaction without consequences. I take that coin to Mr Patel's Minimart and exchange it for a super-sized condom (in preparation for my next visit to Madame Fifi's Sauna and Hanky-Panky Parlour) thereby giving Mr Patel a bit of profit and justifying the profit he has already paid to Mr Choudery's Cash-n-Carry who have already given a bit of profit to the manufacturers of the intimate rubber item of gentleman's apparel. Their profits are the consequence of me producing something new. But that tells the story from only one side. Kingdong Condom Ltd also produced something, something rather big actually, and it is the combined action of turning what I produced and what they produced into economic activity that gave work and profit to Mr Patel and Mr Choudery. The whole thing is sustainable because it is based on stuff that people value sufficiently to be prepared to exchange their own stuff for it.

Economic activity that is not part of the production and exchange of stuff is a drain on the wealth of a national economy. What each country has to do is decide how much of the profit derived from the production of stuff can justifiably be committed to activities that drain wealth. Some government expenditure supports and contibutes to the production and exchange of stuff, sadly the things that buy votes are usually nothing other than a drain.

Greece suffers from one thing and one thing only, its government spends far too much money on things that do not support and contribute to the production and exchange of stuff.

There is only so much wealth in any national economy. It can go up and down from year to year but each year and each decade it is limited by the amount of stuff that is produced and exchanged. Wealth comes from the production and exchange of stuff and from nothing else.

Governments can produce more money but they cannot produce more wealth because they cannot produce more stuff. They can produce money by diluting their currency through either the printing press or devaluation, in each case they reduce the value of each unit of currency in circulation; they do not, however, change the substance of their national economy. The substance is dictated by the production and exchange of stuff. Currently the government of Greece can produce neither money nor stuff. It cannot turn on the printing press and it cannot devalue because it is tied into the ludicrous Euro, yet it is spending far more on non-productive governmental activity than the Greek nation's output of stuff can sustain.

Greece is bust, it's a simple as that. Nonetheless it still has a valuable economy, it's just that it is overvalued because it is tied into the Euro. Released from the straitjacket of the Euro the true value of it's economic activity will be reflected because there will be adverse effects to every part of its economy from its government continuing to overspend. Only then will there be any chance of the Greek economy becoming sustainable.


Mark Wadsworth said...

Yup, good summary, but it's "its" and not "it's" in the last paragraph.

"Economic activity that is not part of the production and exchange of stuff is a drain on the wealth of a national economy."

Again, this is what I have been saying all along - rents and taxes are a drain on the economy, so get them down to an irreducible minimum by taxing rents (whether collected in cash or enjoyed in kind) and not taxing anything else.

john miller said...

There is a simple solution to this.

Let the Greeks have a "G-Euro" and the Germans have a "K-Euro".

These are the same exchange rate to the rest of the world, but between Germany and Greece, the K-Euro is worth 10 times a G-Euro. Only Germans are allowed to hold K-Euros but anyone can hold G-Euros.

The Germans can then have cheap food, booze, fags and holidays, as well as buying up all the Greek national treasures for a pittance.

Not an original idea, I admit, but this time round it will involve a lot less killing than 1941.

Neil said...

You say: "The whole thing [the economy] is sustainable because it is based on stuff that people value sufficiently to be prepared to exchange their own stuff for it."

Well said, dear Fat Bigot. You (unlike most) understand what the phrase "a sustainable economy" really means.

james c said...


The problem is getting to the promised land of a new Drachma may result in total collapse of the banking system. Greece could announce a new currency overnight and replace all Euros in their economy with the new Drachma.

This might be valued at 0.5€-certainly it would trade at a big discount to the Euro.

At the same time they would default on all their debt.

What happens next is anyone's guess.
If they are lucky, their economy will recover due to increased exports.

If they are not, the financial system may not take the strain. Their banks will have losses from holdings in Greek bonds and foreign debts in Euros.

A possible scenario is complete financial collapse.

Jim said...

@james c: exactly. There is no way out for the Greeks that does not involve severe societal disruption.

If they stay in the euro they face an uninterrupted series of budget cuts, economic recession, rising deficits, more cuts, more debt, more bailouts, ad infinitum.

But if they cut and run, default on the debts and leave the euro, they face a currency that is worth perhaps half what it was previously. Thus everything imported doubles in price overnight. The population is impoverished again.

The only advantage of option 2 is that it offers some way out via economic growth, driven by the lower currency. But thats a long term gain. Short term it will be as painful as option 1.

Greece is a very good example of what happens when a nation lives beyond its means for too long. Eventually it has to pay the price.

H.R. said...

Get ready to add the USA to the list of deadbeat nations.

FB: Good post. I've visited several times to re-read it. (No, I'm not that slow on the uptake. It's just a really nicely written piece. I've posted a link elsewhere on the webernet so others can enjoy it.)