Between Dire And Disastrous (sovereign debt crisis)

Business Insider ^ | 02/13/10 | John Mauldin

[TigerLikesRooster]

Between Dire And Disastrous

The news is somewhat "All Greece, All the Time," but most of the pieces miss the more critical elements, and in today's letter we will look at what I think those are, as well as at the important point that Greece is a precursor of a new era of sovereign risk. Plus, we glance at a few rather silly recent comments from economists. It will make for a very interesting discussion.

/snip

A Path-Dependent World

Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant. In essence, history matters.

With regard to the future, the choices we make determine the paths we will take. As I have been writing for a long time, we have made a series of bad choices, often the easy choices, all over the developed world. We are now entering an era in which our choices are being limited by the nature of the markets. Not only are we in a path-dependent world, but the number of paths from which we may choose are becoming fewer with each passing year.

Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options. Some countries, like Greece, are now down to choices that are either dire or disastrous. There is no "easy" button.

Let's look at how Greece came to its current rather dismal predicament. And we will look at why it may be even worse than many pundits think.

[TigerLikesRooster]

P!

[Positive]

Worthy of a lookback...

[dr_who]

If Greece bites the bullet and makes the budget cuts, that means that nominal GDP will decline by (at least) 4-5% over the next 3 years. And tax revenues will also decline, even with tax increases, meaning that it will take even further cuts, over and above the ones contemplated to get to that magic 3% fiscal deficit to GDP that is required by the Maastricht Treaty. Anyone care to vote for depression?

Anyone else care to bet on recession followed by the first hint of economic growth in Greece in decades?

[TigerLikesRooster]

You know, this status of depressed economy would last long. Not just in Greece.

[familyop]

Agreed. We will need to work hard for a long time to produce enough for real wealth on both sides of the oceans. ...even longer to find mutually amicable balances in trade with what are now communist/fascist nations (not yours or mine but others).

[familyop]

IMO, for now, we could do well in building trade with nations like the ROK while avoiding others.