Greece's Meltdown and the Great Unwinding

03/02/2010 11:11 am EST

Focus: MARKETS

Jon Markman

Editor, Trader's Advantage

Jon Markman, columnist for MSN Money, cautions that the fallout of government intervention without private penalties creates moral hazard on a global scale.

The gods must be crazy. How could tiny Greece, better known for turpentine wine and sheep cheese than for high finance, threaten the global banking system over the past two months?

And more importantly, what does the sudden blowup of debt worries on the southern tier of Europe mean for the United States, not long after we thought developed-world governments had successfully attacked this problem with the central-banking equivalent of carpet bombing?

Satyajit Das, [an international finance expert] who is based in Australia, observes first that the entire world has indulged in an economic experiment over the past decade, in which rising levels of debt have been used to promote high growth. The policy had the unintended consequence of vastly increasing risk in ways that were not fully understood by bankers, companies, or regulators until it was too late.

We are now witnessing this experiment come to an end, Das says, slowly, erratically and painfully—in Greece now, and in many other countries, among them Portugal, Japan, and the United States, later.

The sad irony, Das says, is that despite higher debt levels built up over the past decade to create affluence through borrowing, real economic growth has virtually ground to a halt in developed countries, and recent improvements in employment, income, and wealth have all slowed dramatically.

The serious problem is that much of the borrowed money purchased unproductive assets, not new factories or universities. In Greece, for instance, billions were poured into programs that allowed public-service workers to retire at age 62, younger than anywhere else on the continent. Those pension dollars, funded by borrowing, have created no wealth and never will. In the US, homeowners borrowed against the inflated value of their homes to buy depreciating trinkets such as boats and bathroom remodelings.

The Greek blowup shows that "the assumption that the public purse is bottomless is nonsense," Das says.

Das sees the European Union's tentative and hugely unpopular effort to guarantee Greek debts as the first phase of the next stage of the global financial crisis. Now that once-private debts are on public balance sheets, the next step is to shift one country's debts to a coalition of countries. In the case of the EU, that means Germany, because it is the only nation on the continent with net savings.

He believes governments missed their chance to take a sensible way out last year by letting private debts expire as worthless. That would have clocked the big banks, but it might have saved whole countries—a classic case of battlefield triage.

Now, governments are going to have to pull back on their spending to balance budgets, which will hamper new efforts to stimulate their economies.

In the short run, this should be a big positive for the US dollar, if you're looking for a silver lining.

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