Good morning Hank, it’s Friday! Good morning Hank, it’s Friday you know in my hug bucket? Greece. every time I see Greece just wanna give
it a big ol’ hug. I don’t, however wanna give them a 150 billion euro and therein lies
a problem. Okay, so I wanna to talk about sovereign
debt today, but just to establish at the outset that this is not a particularly
political problem here the Chart of the gross federal debt, by president as a
percentage of GDP. As you will notice, the fluctuations have
nothing to do with whether the president is blue or red. The same is true in other
developed countries as well. Okay so Hank, to begin let me tell you
one of the great rules of economics. If you are rich, you have to be a idiot not to stay rich
and if you are poor you have to be really smart to get rich. This is true for individuals but also
true for countries. Fancy Pants countries with Fancy Pants currencies have all kinds of advantages over developing countries, including that we are able to borrow
money cheaply. In fact, because the Fancy Pants countries can
borrow money so cheaply it actually often makes sense to run a deficit. And the reason for this is that in the
long term our economy can grow faster than the cheap cheap debt were requiring
to pay for our economy to grow. So that is not inherently bad for
nations. The famous example of this is that in 1945 the United States had a debt that
was more than a hundred percent of it’s GDP. And our deficit was more than twenty
percent of our GDP and that level with debt immediately preceded the largest
expansion of our economy in history. Also the largest expansion of our waistlines
in history. Yes that’s funny, we did get fat. So debt is not bad, but debt that you can’t repay is very bad. The trick of Fancy Pants countries being able to borrow money cheaply has always been that the market
assumes that fancy pants countries are basically guaranteed to pay you back. And when I
say the market assumes I mean the market iassumed until two months ago. When it realized that Greece fancy pants
country with a fancy pants currency maybe can’t pay back its debts. What’s
interesting is that Greece is probably technically in a better economic
position that America was back in 1945, but for a variety of reasons, some of them very legitimate the market is so that Greece won’t be able to pay back its
debt, which in turn has led to new debt being much more expensive, which has in
turn made it completely impossible for Greece to ever pay its debt. You see, Hank, it’s a circle,
and its vicious. That’s where they got the term.This raises the
possibility that fancy pants countries with fancy pants currencies might not pay
back the money we loan them, which will probably raise interest rates
for a lot of fancy pants countries, which could lead via the vicious circle
to more defaults, higher interest rates, more defaults, higher interest rates, I could go on like
this forever. Which will be very bad, like we would yearn for the days of 10 percent
unemployment. All of which is complicated by the fact we’re coming out of a worldwide
recession in the total economic output in the world is smaller. So there’s less money coming in taxes
but governments still need to spend approximately the same amount of money and for everybody that says the problem is wasteful
government spending we aren’t even close to a a balanced budget. I mean the United States
would have to eliminate both its two biggest expenses, Social Security and
Defense, in order to even come close to balancing
the budget. The only other way to shrink the deficit would be raised taxes which
is not generally seen as a good idea during recession. So the problem with
sovereign debt maybe not being as cheap as it once was, isn’t the fault of any one political
ideology, it’s kinda everybody’s fault. So basically Hank, I don’t want to alarm you,
but I do think we should all buy unicorn pinatas and hide our valuables in them. Actually Hank the unicorn strategy won’t work because we have to keep
loaning each other money, and we have to figure out a way to loan confidently, like we did back in 1945. That’s where the EU the IMF are working
so hard try to nail down a bailout plan for Greece. And if fancy pants countries can’t continue
to convince us that our money is as safe with them as it is inside of a unicorn pinata
they will lose the cheap money privilege they have enjoyed for centuries. And history tells us that once a stupid
rich man gets poor, he doesn’t usually get rich again, unless
he is Donald Trump. Hank, I’ll see you on Monday. Hank, I told you I’d see you on Monday, that’s your signal to stop watching but nerdfighters there is still time to participate in our secret
project click here for more info. Here, I made it a heart for you. Click.