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Greek Debt is the new Orange Vol 68

February 18, 2015

“You can always count on the Americans to do the right thing – after they have tried everything else” ! – Winston Churchill

Every time I read Paul Krugman discussing debt, my head explodes. Krugman, the famed Nobel economist and NY Times columnist, has been waxing on lately about debt in general, and specifically how the EU should be treating Greece. As a Boomer with most of my assets in housing, the subject of debt is my major retirement worry, on many levels.

First some numbers, to keep the economists among us happy and really scare the rest of us. According to the McKinsey Global Institute, world governmental and household debt is now over $200 Trillion. Yes, you read right. Trillion !!! With world GDP in the $70 Trillion range, we now owe over 250% of our income. While some countries are de-leveraging since the 2008 economic meltdown, some countries are growing their debt, China being the biggest. In this context, Greece looks to be a very minor problem at best. Slap their wrists, allow them to have a reasonable payment, or some combination of repay and forgiveness plan. We have much bigger issues to fix. How the EU handles Greece however, could be very instructive

Back to Krugman. His main argument is that our debt is not the issue ! We think of household, credit card, and student load debt at important for the family to deal with. World debt however, is immaterial in a time of historically low interest rates. We are supposed to spend money now, to get back to full growth, and then repay the loans in good times. Unfortunately, the Liberal Krugman does not explain why we did not do this the last time we had a chance to curtail our spending, and pay down the national debt. He only sees the spend side of the equation, and somehow is blind to the lack of repayment when we had the chance. When the Tea Party and other groups clamor for some fiscal prudence, he writes them off as austerity nuts.

His other argument is that we just owe the monies to ourselves, so why worry, as we will not foreclose on ourselves. Wrong ! Aside from the government bonds owned by Japan and China, who will need to sell them at some point to fund their elder/rural populations needs, Boomers will be needing that money to fund their own retirement, and we are starting to foreclose now. Think of the CHIP mortgage plans, where you borrow against the value of your house, to buy groceries or travel. Where does that money come from ? Straight out of your kids inheritance.

The point is, debt is the new Orange. It appears free, so why not take as much as you want ? Without a price or consequence, we become addicted. There have been lots of past examples of this insanity, the latest being the 2008 financial crisis, but everyone needs examples of the real cost of this borrowing behaviour. Austerity causes hardship, but if that is what it takes to get thru our hard heads, then bring it on. let Greece be the latest example.

It has to be noted that Greece is also feeling pain because of its socialist leanings. We talk about Greece being in a depression as its GDP falls, but it can be argued that a large percentage of their economy was false. People were paid to do nothing, not even having to show up for work. Austerity is also a wake-up call to governments everywhere to get more efficient.

As you can see, Boomer debt is our main problem as a generation, and not fixing it will shift its burden to the next generation. They will ask the right question, where did the money go, and we will not have a good answer.

I would love for Krugman to do an article and explain where the Trillions went. How did we get this way ? Was it all spent on healthcare ? Who has the money, as it sure was not destroyed ? Show us where it went, and we can try to get some of it back !

You start to see how Greece is the canary in the coalmine. If the EU treats the Greeks like an adult child living in your basement in need of tough love, they will force restructuring of their way of life, and cause huge societal damage. If they consider the Greeks to be an aging parent who needs our help to sustain their life, then some form of forgiveness will be agreed. See, its all about family, no matter what Krugman says.

As noted, Greece is a minor issue. Imagine those scenarios playing out globally ? Lenders suddenly realizing that their chances of repayment are diminishing, asking for their money back, and no-one being able to find the cash. This is the Gloom scenario, similar to what happened in 2007 / 2008, but on a global scale, No money, then no loans, then no spending, then no jobs, then no pensions, then anarchy.

If on the other hand, what if we go the Boomer scenario, a route Joseph Stiglitz discussed in a recent article ( Europe Should be giving Greece a Break ), and Krugman’s preferred approach. Like an aging parent who we love, who made some mistakes in life, we take them in, and forgive them. Maybe they get a stern lecture, and their bank books are confiscated, but they live life comfortably. Unfortunately, the holders of that debt lose everything. Since that debt has been diffused around the world, we all almost certainly own a piece of it. So, we will all be poorer for the forgiveness, but like an insurance policy, the risk will be individually minimal. The biggest hit will be the 1% who have a larger share of the paper assets. That might be the best way to solve inequality !

Greece will probably get a piece of both solutions. They will have to transform their economy, inject some realism into their citizens, but in a way that allows for a soft landing. The other option is too fraught with the lesson the rest of the world will learn – hunker down, because you could be the next victim.

As a Boomer approaching retirement, your overriding priority is to pay down all debt. Only then, will you have some say over your financial future in a world full of angst !

Next on Boomers – WTF ! , our favourite fantasy’s ?

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