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Global lesson in Greece

Feb 05 2015 12:05
*Edward ingram

JOSEPH Stieglitz is a renowned American professor of economics. What he says about Greece is largely right. He says that lenders have a moral duty to make the terms and conditions of a loan repayable. Europe did not do that, so they (the European lenders), should pay. US banks also did that.

European lenders are mainly to blame for the debt problem Greece is facing.

Europe imposed austerity on nations such as Spain, Portugal, Greece, Ireland and Cyprus. The professor wrote: “The contraction in government spending has been predictably devastating, i.e. 25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio.”

He wrote that then German leader Adolf Hitler emerged from a similar plan after World War I and that the US great depression was, in part, created by the same policy of balancing government budgets.

He wrote that after World War II, German debt was forgiven and in fact money was given to restore the economy. It worked. We are all better off for that and maybe this should be done for Greece as well.

A remedy by Greece

In order to make the debt affordable, he suggests that Greece should replace their unsafe (and incredibly damaging) debt repayment fixed interest method with index-linked bonds linked to gross domestic product. That seems to be what the Greeks are thinking.

Index-linking explained

The idea of an index-linked bond is that you increase the amount of debt owed at the same rate as the index to which you are linking.

The huge interest payments normally needed for a fixed interest bond disappear and are replaced with a very low interest rate, say 1% p/a if the risk to the lender is thought to be very low.

Good thinking, bad thinking

From the very week the Greek crisis happened I wrote on this page that they should have thought this way. Someone remembered. There was a fresh batch of page views a day or two ago.

Doing this gives the economy a chance to virtually forget the debt until such time as it is working again and can afford the repayments. Good thinking. My thinking as well, but with a slight difference explained below.

There is still a problem – choosing the index to use.

A copy of what Professor Stieglitz wrote prompted this reply from me.

“The professor is right and wrong.

He is wrong to suggest GDP-linked bonds - linked to the Greek total national income.”

As one person wrote, if Mexico was merged with the USA the GDP of the USA would rise by 30%. [This would increase Greece’s debt by another 30% if they did that kind of thing. Yet that is basically what this proposal is leading to.]

If Greece's policies work, then total national income (GDP) will rise as its nationals return home and as employment rises.

Savers' delight

The correct link to use is Ingram's Wealth Bonds which I wrote about for Fin24 users in 2013. These are savings bonds index-linked to national average incomes/earnings (NAE) of either Greece or Europe in this example.

Look at this from the investors' viewpoint. They get an ideal investment for pension funds, even national reserves, written in euros if it is linked to the national average earnings per person of any European nation. The whole point of pensions is to keep pace with national average earnings/incomes.

They can issue some linked to Greece for Greeks, to Germany for Germans and so forth, or just to Europe. But compiling the statistics for so many nations is a problem.

Take your pick which index to use - there are pros and cons.

Key points

Marketability of the bonds is a key factor in keeping costs down, so do not link to GDP.

And affordability is also key; 1% interest is enough to pay. Wealth bonds will stabilise both governments’ finances and those of the people.

Wealth bonds are just as important for South Africa or any other nation. And they can be used for business and housing finance too. Why give governments all the privileges? Why not stabilise the whole economy?

* Edward Ingram is a past investigative quality control engineer of complex systems, who turned to managing investments and learning all about economics and finance from the experts. Combining these disciplines has enabled him to understand what others see, but have not understood.

He has created an index to his essays for Fin24. Economists from a few central banks have written to him in support of his revolutionary draft book.

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.

edward ingram  |  greece  |  world economy  |  wealth

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