Earth to Greece: It’s Over - by Louis Woodhill

When a developed, sovereign nation finds itself borrowing at VISA card interest rates, it’s time to declare (really, admit) bankruptcy. With market interest rates on its 2-year notes now exceeding 22%, this is the position that Greece is in today. By making a bargain with the bailout devil to raise taxes in the name of “austerity”, Greece has pitched itself into an economic death spiral from which there is no escape short of defaulting on its debts.

Whether it involves Greece or the U.S., politicians, economists, and budget analysts seem hypnotized by “static analysis”, the naïve belief that if you raise tax rates by 10%, you will get 10% more revenue. This superstition leads to “austerity packages” that attempt to reduce budget deficits via combinations of spending cuts and tax increases. If austerity actually worked, Greece would not now be hurtling toward the deficit dumpster, with Portugal close behind.

Austerity is always self-defeating, because tax hikes suppress economic growth, and economic growth is the only thing that really matters to government finances. Here are some numbers. In 2007, Greece had debt equal to 105.4% of GDP. However, real GDP had grown at an average rate of 4.2% over the previous ten years, and the real interest rate on Greek government debt was only about 1.5%.

Even if the EU elites have a desire to continue flinging billions of euros into the fiscal black hole that Greece has become, the taxpayers supplying those euros do not. Political forces are building to put an end to the bailout game. Then what? The fact that Greece is stuck with the euro would actually be an advantage in the event of a Greek sovereign default, if things were handled correctly. This is because when a government defaults, the immediate challenge is to keep the economy moving, which means to keep transactions going and new investment flowing.

Unless the ECB were to do something stupid, a debt default by Greece would have no impact upon the value of the euro, so the Greek economy would still have a viable currency.

For more: Earth to Greece: It’s Over - Louis Woodhill - Unconventional Logic - Forbes