Posted by: Dirk | April 28, 2010

The Greek debt crisis and the oracle at Delphi?

The following excerpt is from a document I wrote almost 3 months ago on February, 1st 2010, available on scribd, and not originally written for publication. Since I was (mainly) right, I publish it anyway. It is not a big deal, other people saw it coming as well. And this is the point: people saw this coming. Economists who are acting surprised now – or politicians – should keep this in mind. This – again – is not an event that nobody predicted, but something that has been in the making for quite some time. Serious economists have been writing about it, and they were not consulting the oracle at Delphi. Here’s the main part of my document:

The state of the world economy is bad. When the financial sector was saved by government intervention in 2008/09, debt was transferred from the private to the public sector. By now, interest rates on public sector debt is rising in some countries that had experienced huge asset price bubbles (like Spain and Ireland) and those that had shaky government finances all along (like Greece). The options for those governments to expand domestic demand are few. However, cutting government spending now, like proposed by many leaders in Davos, would lead to a situation that resembles 1937. Economies that have stabilized on a weak level will be pushed over the brink by the retreat of government spending. Another source of trouble might be China, where over-investment has led the People’s Bank of China to stop its aggressive policy of increasing the money supply. A fall in Chinese demand threatens to de-stabilize net exporters like Germany and Japan.

The fall-out from the financial crisis has been moved into public accounts, and what you see now is the result. I don’t say it has been a bad decision that it happened (this issue requires some more thinking on my side), what I stress is that you should not be surprised.

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