Greek debt crisis, as of summer 2011

Here’s an update as to what is happening with Greece. First, some numbers from the 2011 Greek budget:

• Total revenue: €128 billion
  • Real revenues from taxes etc. €55 billion
  • Aid from the EU €3 billion
  • Borrowing from the market, including rollover €70 billion
• Total expenses: €128 billion
  • Real expenses such as pensions, health etc. €63 billion
  • Debt rollover and interest payments €65 billion

And another pair of interesting numbers

• Interest rate charged by the market for German bonds, 2 year maturity: 2%
• And for Greek bonds: Around 25%, rising

So, what does all this mean?

Real deficit

In summary the Greek state is like a business that takes in €55 bn in sales but pays €63 bn in salaries and what have you, so it makes a real loss of €8 bn, or 14%. To recover, the state needs to increase revenue by extracting more taxes or running profitable businesses, or it must cut the amount that it pays to the Greek people, or some combination thereof. If it doesn’t the Greek state will run bankrupt anyway, abruptly cut expenses to €55 bn, and go on living in a hand-to-mouth way.

Leading and selling

All leadership involves a kind of lying. Attack and we’ll prevail over our enemies. Work hard on this product and we’ll succeed. Join our growing community. When the leader says these things, success does not yet exist. The act of leading produces an image of success and of a path to it. The many enthusiastic acts of following create the success. If too few people follow, or follow in a very half-hearted manner, there will be defeat, failure, or no community.

Selling is not like this. To sell is to convince someone of the value of a thing that you have, so that you can exchange it favorably. You have to have the thing, and it has to deliver the value readily by itself. Great selling acknowledges this. Buy a Mac, it can do these things out of the box. The cardinal sin of selling is to sell things that don’t deliver the value that is claimed. Drink Coke and you’ll feel happy. Really? That could only be honest selling for drugs. Otherwise it’s very uninspiring leadership. If you’re active and outgoing, do fun things with others, and also drink Coke, you’ll feel happiness.

The need to reform money

I’m not happy with this post. I tried to mix some rather speculative economic thinking with an attempt to explain to a wide audience, and it doesn’t work. I’ll rewrite it as geeky economic article.

The asset bubble that started in the late 1990s and exploded in 2007 as the financial crisis was caused, in my opinion, by our monetary system. In particular, the following cycle took place:

1. The general public in western, mainly Anglo-Saxon, economies started using real estate as hard money, profiting from its parasitic appreciation linked to GDP growth. The real economy deflated against housing.
2. Banks issued new money backed by the rising real estate. This broke monetary policy by expanding the money supply first as intended but then beyond, as banks used securitized debt to evade regulation and recycle their license to create money and use it as their capital.
3. A positive feedback loop developed, where appreciating houses led to banks issuing more money, which led to inflation of money against housing. The market responded by raising house prices further, until both housing and housing-backed money crashed.

The system of money used by western economies, although no secret, is not widely understood by the public. I’ll explain how our monetary system works, how it caused the crisis, and how it ought to be reformed in principle. Obviously I have no tried and tested new system to propose, but I’ll try to articulate what new conditions it should meet.

Hard money and its parasitic appreciation on GDP

The traditional conception of money is as a fixed quantity, such as a ton of gold. It changes hands, and some people hoard it, but it doesn’t grow or shrink. That way the value of goods can settle against gold through the market. This “hard money” concept served well for most of history because the size of the real economy didn’t change much either. In a static economy, a gold coin buys a sack of wheat, say, now or in a hundred years. Using gold does nothing to erode inequality, but doesn’t amplify it either. Sitting on gold yields zero return, so any productive investment whose risk-adjusted real return is above zero beats that, and will probably get funded.