A Greek Tragedy and Other Lessons

11/07/2011 9:56 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Greece is facing a “damned if they do, damned if they don’t” scenario…one in which there is no winning position, writes MoneyShow.com personal finance expert Terry Savage.

If the Greek people follow the wishes of their creditors—other European banks and central bankers—their debt will be cut in half. But they will still be left with a huge burden: a debt ratio of 120% of their GDP.

Paying the interest they owe on even that reduced debt will require that they pay higher taxes and receive lower government benefits and services. Their standard of living will drop as they face cutbacks in income and public services.

If the Greeks decide to simply leave the European Union and default on all their debt, they will have to go back to their original currency, the drachma, but at a much lower value in trade with other countries than the euro. So imports of everything from food to energy will become much more expensive.

In this latter case, Greece would be “on sale” to those with stronger currencies, such as the euro or dollar. Foreign tourists will rush to take advantage of bargains on hotels and restaurants—until the Greeks wise up and raise prices.

That should take a nano-second. Then the domestic Greek economy will be faced with even higher prices, so their drachmas will buy even less. It is an inflationary spiral.

Clearly this is a no-win situation, which is why they keep postponing any final decision. No politician wants to be blamed for catapulting the country either into a depression caused by austerity programs, or inflation caused when their currency becomes worth less and less in the global marketplace.

The world watches, the bankers fiddle, the politicians waffle—and global financial markets stumble.

And, after all, this is only Greece—not a major trading partner for any country, not a producer of essential or strategic materials, not a military force, and not an ally of significant importance in the world’s geo-political struggles.

If this wonderful, historic, colorful country can bring the world’s financial system to its knees, what would happen if a more significant country faced the same woes?

Of course, it couldn’t happen in America. Our politicians wouldn’t waffle in the face of political and financial decisions that could destroy our currency, and the global economy. Our politicians wouldn’t let our economy stagger between job-destroying austerity and inflationary credit creation.

Certainly, American politicians will act before this Greek tragedy is played out on our own shores. Surely they will see the lessons unrolling in front of them. Surely the supercommittee of Congress will come to a deal before this month’s deadline.

Right?

Another Lesson in Free Markets
While the Greek tragedy continues to make headlines, there was another important lesson playing out in front of us in the past few days: Free markets work! That was the message of Bank Transfer Day.

Consumers who have become fed up with the high fees, nickel-and-diming charges, and outrageous costs to maintain a simple checking or savings account at the country’s major banks, staged a protest.

It didn’t make headlines like the Tea Party or Occupy Wall Street. But it did move money— more than $4.5 billion—out of big banks and into local community banks and credit unions.

And it didn’t require Congressional legislation, or a consumer protection agency. We’ve just seen living proof that American consumers are smart enough to avoid being ripped off—at least in the most basic financial products.
Let’s face it: it’s tough to change banks. It’s not just a matter of getting new checks printed. In fact, most people pay their bills online. But think of all the automatic bill payments that come out of your current checking account each month—everything from mortgage or rent, to insurance or credit card payments. And then there are the direct deposits—everything from Social Security checks to payroll deposits.

All must be changed. It’s a giant hassle to change banks. And the big banks count on that.

But at some point the inertia of convenience is overcome by the annoyance of the big banks’ lack of customer care. And just as you wouldn’t return to a restaurant or store that gives lousy service, you finally decide to change your banking relationship.

Good idea—but just be sure that your new bank or credit union has plenty of ATMs around town, or agrees to pay any fees you are charged when you use the cash machines that the big banks still own and count as a profit center.

What do these two stories have in common? The lesson is that Americans are pretty savvy when it comes to the things that matter most.

We’ve taken action about our money. Maybe we’re getting ready to take action about our government. And that’s The Savage Truth.

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