Greek financial crisis (part 2)

so let's review the situation that has been emerging in Greece and then dig a little bit deeper as to their options so as we saw in the last video Greece was spending it was spending a lot more than it was bringing in in tax revenues than its revenue so it was running it was running these deficits and year after year these deficits were piling up and the national debt and the national debt was increasing and to make matters worse Greece actually tried to cover this up for many years with some accounting shenanigans because there were some euro there were some european central bank rules about how much debt you could take on and so it was trying to not trigger those rules while still being able to take more take on more debt so that it could fund so that it could fund this spending right over here but then in the last few years it became clear the shenanigans were cleared up and when they were cleared up one it made people realize that wow that was kind of shady what they did but on top of that they had a much larger government public debt burden than people thought larger than then thought and the combination of the two the combination that this country was actively trying to kind of not make its obligations apparent to the to the to be transparent to the markets and on top of that that this debt burden was so huge and made people wary of whether the company would actually or where the country would actually be able to fulfill its obligations so Trust trust investor trust when I talk about investors I'm talking of the people who would invest in Greek bonds so essentially the lenders to Greece their trust went down and they expected higher interest so they expected higher interest from from the Greek government and that made things worse now not only did they have to full keep spending on all of their entitlements but now the cost of funding that existing debt that they already had a new debt that they had to do to keep spending at that rate the cost of that debt itself went up and that only kind of added fuel to this ever this ballooning debt problem now the last video we explored a couple of options in particular we said what about austerity what about the situation where you just really mainly you could try to increase your revenues laughs spending but people really try to focus on the spending side what if we really just tried to slash the spending in a very severe way really just cut straight to the bone well there's a couple of problems there we thought about one problem was that it's not popular at all it's not popular at all and then the bigger problem was is you're already in a recession and that you're already in a recession and this could make the recession more severe recession recession more severe and frankly it was not popular it's never popular but it became even as we move now then in 2012 it's even less popular because Greece has already gone through a couple of rounds of this austerity this is not a new problem they've been bailed out in small ways and I'll talk more about it what a bailout is but as part of that package the people who've been bailing them out says look if we're going to give you something if we're going to use some of our own taxpayer money to help you out you got to cut your spending but what's happened every knee round of austerity so far is that that helped slow the economy even further that the recession kept deepening and deepening and it's kind of common sense that it would if the government stopped spending in a big way it slows down an already slow economy now the other thing that you might be saying well so you know why doesn't why does it Greece just stopped paying its debt why doesn't it just default on its debt so why doesn't it why doesn't it just default say we're a country I'm sorry investors that you have to take a loss here but we're just not paying anymore well the problem is is it has a situation where it's spending more than it's bringing in and its obligations are all in in the euro it does not have its own currency and so if they were to default on their debt the the obviously the people who lent the money will be very upset and there's no way that they're going to lend more money to Greece and if they don't lend more money to Greece than Greece if they don't lend more euros to Greece Greece is not going to be able to continue spending euros the way it has it's promising all of their that you know the pension retirees the unemployed insurance it's paying all those obligations in Euros and if they default they're not going to be able to borrow more euros to do those obligations and once again it'll kind of be a very fast and violent austerity because theirs wouldn't even be the money to fund that and you would have this very kind of drastic almost shutdown of the government so this right over here is not a good option now to start exploring the third option and this is kind of the option that it seems likely that Greece might have to go in let's think about what Greece could have done if it had monetary independence if it had its own currency so just remember this is completely this is completely hypothetical Greece did have its own currency the drachma before it joined the euro but let's think about what it could have done in this situation had it actually if it actually did have its own currency and it's not cut and dry here because Greece was actually able to and historically borrowed very cheap rates because it was part of this euro zone but let's just think about it if it was in this situation what what it could have done if it had its own central bank so this is some of the stats from our last from our last video and if it had its own central bank and let me make this very clear this is all hypothetical Greece does not have its own high central bank right now all of the eurozone countries the euro is printed by the european central bank it's not by any one country but let's say hypothetically let's say that greece does have a central bank so Greek Greek central central bank that prints its own let's call it the new drachma and so that Greek central bank in this type of a situation could just start printing drachma it could just start printing drachma and essentially use that drachma to buy government bonds so it could buy government bonds so it's essentially printing that money and when it buys government bonds its lending it to the government it lends to the government so this is and so the government could spend on entitlements government could spend on all of its various obligations now that might seem very convenient you know essentially one part of the government or something pseudo associated with the government prints money essentially lends it to the government funds its obligation but the immediate thing you might say well the way if you just print currency like this willy-nilly won't this lead won't this right over here lead to inflation inflation and the simple answer is it probably will but that actually might be the solution if you're in a conundrum like what Greece is in first of all inflation might not be so bad it's right now the country is in a deep recession so there's all this extra capacity so you might even have a little bit of a price cushion and just in general the inflation rates the inflation rates aren't ultra dramatic they're not super low but they're not super high either so there might be some you might not have to worry about kind of a hyperinflationary situation but on top of that the government probably wants a respectable amount of inflation might not want a hundred percent a thousand percent inflation but it might like ten twenty or thirty percent year inflation and to think about that think about the idea in this hypothetical Greece all of its obligations would not be in Euro its obligations would be in the drachma and so you can imagine a world so let's think of a hypothetical Greece and I'm going to use hypothetical numbers just to make things more simple to understand or to do in our heads let's take this hypothetical Greece it could be Greece or air early any country now let's say it has a GDP it has it has a GDP of 100 I don't know this let's call it 100 let's call it 100 of its currency it's a 100 drachma is its GDP and let's say it has entitlement obligations and title entitlement obligations and this is obligations this is all on an annual basis now let's say 10 billion of its currency of its drachma this isn't the situation of Greece all of its obligations are in Euros well let's just think about the situation and let's say and let's say that on top of that it has debt obligation so the total debt the total value of debt let's say that it was I don't know let's say that it was another 150 billion of its currency if you were to inflate let's say you inflate over a couple of years so inflation occurs and let's say it you have a hundred percent inflation over a few years and but in real terms your GDP doesn't change this is really just more of a thought experiment so and then in real terms if you have a hundred percent inflation but you're producing the same amount the nominal value of your GDP will now be will now be 200 billion it's the same amount of goods and services but everything now costs twice as much so you would valued it 200 billion if you were an inflation-adjusted it would still be at a hundred billion the good thing and it's very seldom that you use inflation into good context but would be good about Greece in this situation is that these entitlement obligations they would still be they would still be 10 billion you're still going to say I'm still going to pay you 10 billion even though that 10 billion is going to buy people half as much that is much easier to do politically than telling people overnight that I'm going to reduce your pension by half that's political suicide but to inflate away the obligations nominally it looks like you're paying the same thing but it's just buying less it's a little bit more viable to do and the same thing is true of your debt obligations your debt obligations won't adjust to inflation and so you would still owe 150 billion but as a percentage of GDP you have now haft hat you've have how big that debt is you've have how big the entitlement obligations are so it is actually a viable solution and in this hypothetical situation it's probably the best solution for government to essentially inflate inflate away its obligations so I'll leave you with that something for you to think about and then we could think about what could Greece actually do in this direction but more important let's think about and you can start to thing but why is the whole world so scared all of this is Greece it's a relatively small country why is it why is the whole eurozone so scared why are people thinking about bailing out Greece in some way to prevent all of this craziness from happening and and what are the repercussions in the larger global market but I'll leave you there and leave you to think about all this stuff