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Greece's Trouble with the 'Troika'

When politicians resort to clubbing together under and official-sounding banner, it means they have no idea what's going on...

WHAT A SHOCK! Greece now reckons it will miss its deficit target for the year, writes Dan Denning, editor of the Daily Reckoning Australia.

The Greek government made the announcement prior to the arrival of its new imperial overlords from Brussels. Athens revealed that this year's budget deficit would be around $25 billion, or about 8.5% of GDP.

But Greek Prime Minister George Papandreou said he'd be able to cut the deficit down to 6.8% of GDP in 2012. One of his biggest – and most controversial plans – is to put 30,000 public service workers into a "special labor reserve". They wouldn't be fired exactly. Instead, they'd receive 60% of their current wages for the next year and THEN they could be fired.

Of course by then, whenever then is, maybe all the problems will have magically gone away. In any event, "then" is a long time from "now". Greece says it needs €8 billion from the first EU/IMF/ECB bailout fund in order to stay in business this month.

The "troika" – the ridiculous name given to the EU/IMF/ECB – will probably cave. Jean-Claude Trichet, the current president of the ECB, doesn't want a Euro collapse on his watch. And his watch has about 29 days left to go. It could be a long month for investors anxious for a resolution to the fate of the Greeks.

There are a couple of things you need to know about this whole situation. First, any time a group of institutions gets a name like "the Troika," you're in for long-term failure. Remember the "Six Party talks" to end the cease fire on the Korean peninsula? Those involved North Korea, South Korea, the United States, China, Japan, and Russia. That's worked out pretty well.

Then there's "the Quartet" of parties solving the problems in the Middle East. The "quartet" is made up of the United Nations, the European Union, the United States, and Russia. They have not made beautiful music.

The moral of this story is that any time a problem is so intractable that politicians give themselves an official-sounding moniker, they have absolutely no idea what's going on.

The second thing you need to know is that "austerity" is not a solution to the debt problem. In fact, in the very short term, cutting government spending and raising taxes is bound to increase the debt-to-GDP ratio for the Greeks. Higher taxes will shrink consumer spending. And lower government spending will take money out of the economy.

This doesn't mean the Keynesians are right, by the way. They are so obsessively focused on GDP that everything they prescribe is designed to do one thing: boost GDP. It's an obsession that has everything to do with the quantity of money moving around in an economy...but nothing to do with the quality of that economic activity.

For example, you can pay 30,000 Greek public servants 60% of their annual wages using money borrowed, in a roundabout way, from the Germans. Some of that money – the part that doesn't go under mattresses, out of the country, or into Buying Gold – will end up back in the Greek economy and contribute to the illusion of economic activity via GDP.

But simply moving money around to simulate activity is not the same as say, paying down debt or building a factory or starting a business. In other words, not all contributions to GDP are equal. Some are more equal than others. Some indicate growth in output and productivity – real people making real goods and services that real people are willing to pay for. And some are a giant shell game.

For the rest of the year you're going to see the shell game in Europe. It involves moving money that doesn't exist from one institution (the ECB) to another (the EFSF) in order to finance the borrowing of a third (Greece, Italy, Spain et al). Meanwhile, the issue of how to write down the value of billions in government debt will be studiously avoided.

Some of the Australians we talk to are still surprised that the debt woes of tiny little Greece should have a negative impact on the Aussie share market. But there is the ASX/200 this morning, opening down almost two per cent. Why?

Credit makes the world expand. It contributes to GDP growth. If we're in a credit depression, GDP isn't going to grow. China might even grow less fast! The HSBC China Purchasing Managers Index came out on Friday and showed the third straight month of decline. China's Shanghai Composite Index fell 6.2% to its lowest level since April of 2009.

Are lower lows on the way?

Buying Gold...?

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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