The Greek government continues to negotiate with international creditors
following its recent default on its 1.6 billion euro loan repayment to the
International Monetary Fund (IMF).
Consequently, Greece runs the risk of losing access to a 1.8 billion euro
loan tranche and 10.0 billion euros for recapitalizing banks.
Commentators are of the view that the key factor behind the troubles in
Greece is high government debt, which as a percentage of GDP stood at over
177 percent in 2014 against 79.6 percent in 1990.
But it is not debt as such that is behind the current crisis in Greece. Large
government outlays and strong increases in the money supply are being
ignored in most analyzes of the Greek crisis.
Since early 2000, the underlying trend in the growth momentum of
government outlays was heading up with the yearly rate of growth closing at
45.5 percent in March 2009. Since then, the trend in the growth momentum has
been declining.
Year on year the rate of growth of Greece’s monetary measure AMS
stood at 20 percent in July 2004. It stood at a lofty 18 percent in August
2009 before sliding to minus 13.8 percent in April this year.
Loose fiscal and monetary policies have been instrumental in the generation
of various non-productive activities that have been squandering wealth.
Easy Money Weakens the Wealth-Generation Process
A fall in the growth momentum of both government outlays and the money
supply is good for the wealth generation process.
In other words, a decline in the growth momentum of government outlays and
money supply (see charts) has arrested the diversion
of wealth to non-productive activities from wealth generating activities.
The current crisis is centered around non-productive activities that can
no longer divert wealth from wealth generating activities on account of a
fall in both government spending and the rate of growth in the money supply.
From this perspective this is good
news for the Greek economy, and what is now needed is a tight grip on
government outlays and to allow the plunge in the money supply to continue.
Greece’s wealth generating process has been badly damaged as a result of
past loose fiscal and monetary policies. Thus, reverting back to loose fiscal
and monetary policies, as suggested by various famous economists such as a
Nobel Prize Laureate in economics Joseph Stiglitz, is going to make things
much worse.
Remember, neither more government outlays nor more monetary pumping can
generate real wealth. Only the strengthening of the wealth generating private
sector can do that.
The Damage That Has Been Done
Now, since currently non-productive activities are likely to comprise a
large portion of total activities, the effect that is generated from their
demise appears to be very severe.
After closing at 122 in April 2008, the industrial production index
plunged to 91 by March this year — a fall of 25.3 percent. The unemployment
rate climbed from 7.3 percent in May 2008 to 25.6 percent in March this year.
Any threat to the financial systems of other European economies
is not due to the Greek default, but instead is a result of loose fiscal and
monetary policies that have damaged the savings bases of various European
countries.
Rather than continuing to support wealth-squandering activities and
thereby making things much worse, a better way is to allow wealth generators
to step in and let them restart the wealth generating process. This means
that all the loopholes of money creation should be sealed and government
outlays should be cut to the bone. Obviously such measures will be painful
for various individuals employed in non-wealth generating activities. Failing
to reduce non-productive activities however will only prolong the agony — it
is not possible to create real wealth out of nothing.
