Zimbabwe, Argentina, Cyprus, Greece, Puerto Rico have all grappled with massive economic disruption caused by debt default. The sad reality is that it will take one or larger, involuntary economic meltdowns where debts are nullified, entitlements reduced or eliminated, and derivatives reigned in to put things back in order. The first such meltdown is expected to begin before the end of 2016. Reinhart and Rogoff are right. It’s no different this time. Except that this time there might not be a helicopter capable of pulling us to safety.
Debt - the unscalable mountain
Debt is a funny thing. When used wisely, it allows one person to use the money of another to spur economic growth. If the borrower spends the money to create a means to …show more content…
We have all watched the situation in Greece as the country 's daily struggle to deal with its debt plays out in the headlines. This time it is a sovereign government facing exactly the same debt-spiral scenario as described above. In 2001 the European Union was preparing to issue the Euro, its newly-formed currency to the majority of its member nations. Greece was very anxious to join the Euro as a way to improve its export market and become eligible to borrow money it desperately needed to operate. The Greek economy at the time was in shambles - plagued with corruption, tax evasion, poor productivity, and large government entitlements. Greece partnered with widely-respected U.S. investment banking firm Goldman Sachs to prepare for qualification in the Euro membership club. Their partnership turned into a classic case of predatory lending and unethical complicity that ended up doing the Greek economy significant harm. Instead of helping Greece make needed financial reforms, Goldman Sachs secretly loaned Greece 2.8 billion Euro and disguised it as an off-books currency transaction. This fraudulently improved Greece 's apparent financial health by about 2%, allowing them to just barely qualify for entry to the Euro. For their help, Goldman Sachs was paid almost $800 million in fees on top of repayment of their short-term loan that Greece covered through the sale of bonds. Right on the heels of Greece’s entry into the Euro came the 2001 market crash that followed the 9/11 attacks. Greece immediately faced insolvency because the world bond market had collapsed along with the stock
Debt - the unscalable mountain
Debt is a funny thing. When used wisely, it allows one person to use the money of another to spur economic growth. If the borrower spends the money to create a means to …show more content…
We have all watched the situation in Greece as the country 's daily struggle to deal with its debt plays out in the headlines. This time it is a sovereign government facing exactly the same debt-spiral scenario as described above. In 2001 the European Union was preparing to issue the Euro, its newly-formed currency to the majority of its member nations. Greece was very anxious to join the Euro as a way to improve its export market and become eligible to borrow money it desperately needed to operate. The Greek economy at the time was in shambles - plagued with corruption, tax evasion, poor productivity, and large government entitlements. Greece partnered with widely-respected U.S. investment banking firm Goldman Sachs to prepare for qualification in the Euro membership club. Their partnership turned into a classic case of predatory lending and unethical complicity that ended up doing the Greek economy significant harm. Instead of helping Greece make needed financial reforms, Goldman Sachs secretly loaned Greece 2.8 billion Euro and disguised it as an off-books currency transaction. This fraudulently improved Greece 's apparent financial health by about 2%, allowing them to just barely qualify for entry to the Euro. For their help, Goldman Sachs was paid almost $800 million in fees on top of repayment of their short-term loan that Greece covered through the sale of bonds. Right on the heels of Greece’s entry into the Euro came the 2001 market crash that followed the 9/11 attacks. Greece immediately faced insolvency because the world bond market had collapsed along with the stock