Missed points Greece failure

Discussion in 'Economics' started by morganist, May 12, 2010.

  1. I have noticed the media has not been making comments on some failings of the Greek bailout.

    The first one is that if the output of Greece diminishes as a result of demand reductions from fiscal constraint the ability to repay is restricted.

    More importantly if the output reduced there would be an inflationary gap due to shortages of goods. Normally this inflation would then compensate for the repayments costs. Inflation means the value to repay is reduced so if there is inflation the relative repayment is the same (for example output declines by ten percent and the inflation rate is ten percent (money to goods ratio has a new equilibrium), the payment has become relatively cheaper, thus taking the sting out). However as the output of Greece is related to the Euro, which is based on the overall Eurozone inflation rate and interest rate parameters are set to meet this target, the reduction in output will not create an inflationary gap to compensate for the repayment costs relative to loss in output.

    In short even if you do not print more money to inflate the economy, it will occur naturally through supply shock inflation as the economy stagnates. This is beneficial when paying debt because it means any lost output is compensated for by a relative (not necessarily equal but not far off) increase in the ratio of currency units. As the number of currency units is based on the Euro targets for the Eurozone the number of currency units to Greek output units will not create this natural compensation. As the Greeks cannot print money due to being in the Euro there is no way to compensate for this situation. This means if there is a reduction in output, which is quite likely as a result of less demand both from fiscal policy plus external demand, there will be a real loss.

    Do you understand this? Please tell me so I can explain further. It is very important.
  2. got it so far
    ( I got an A in Econ 101, does that help?:D )
  3. The best thing Greece had going for it was the Goldman Sach deriviative deal.

    What would you rather have some hokey accounting or riot in the streets?
  4. If it is obvious how come no one else has noticed it. Do you agree with it.
  5. there is a plan to solve euro problem long before this crisis beginning, just little knock, EU have to act faster than before.