For many years, I have been writing about the unsustainable nature of the welfare state. Over decades, successive governments have racked up debts to provide immediate benefits without thought for the future generations who have to pay it back. It has happened all over the world – including Australia.
Today, we have seen the first national financial consequences of such practice in a Western nation. As has been forecast several times recently, Greece has defaulted on the first of its loans. Put simply, Greece is broke.
For too long, it has had cradle to grave welfare brought about by successive government’s refusal to deal with the necessary reforms to create a sustainable financial system. Now they have implemented capital controls with most ATMs running out of money and only allowing people access to limited amounts of their own money from personal bank accounts.
What little money that is around has been hoarded on the expectation that the Euro will disappear in favour of a new Greek currency – which is sure to be worth substantially less than the Euro. Next week, the Greek populace will vote via referendum for or against such a scenario.
I truly hope they vote to go it alone for that is the only hope of them getting their country back on track.
However, the implications of them doing so would be quite significant.
Firstly, if they default on their Euro debts it may inspire other heavily indebted nations to do the same. Ultimately, this could lead to the collapse of the European monetary union – something which I believe is in the long term interest of many nations.
In Europe, national sovereignty has been supplanted by the dictates of the Brussels bureaucracy which has forced nation states to comply with complex, ridiculous and unwieldy legal edicts. It has also seen immigration become one of the biggest causes of unrest and discontent through many Western democracies. As the European economies start to crash and burn, one can expect this civil unrest to become increasingly apparent.
What we are witnessing is the first step of a crisis of confidence in government. People no longer trust the established authorities to deliver on their promises: whether it be to pay pensions, collect the rubbish or act in the best interests of the citizenry. In Europe, it is becoming increasingly evident to many that Brussels is only concerned with protecting the entrenched power of the political class.
The solution, whilst initially difficult, is remarkably simple.
In Greece’s case, they need to quit the Euro. They then need to suspend all debt repayments through a debt to equity swap in national assets. Then the radical reformation of government can begin, starting with a constitutional prohibition of any future government borrowing and a limit on government spending to a fixed proportion of GDP. Taxation should be kept as low as possible to ensure the economy can grow through private endeavours.
Such a process will ensure government is limited and would result in Greece becoming the go-to investment zone for firms and individuals from across the world. It would also set an excellent example for other nations to follow.
Unfortunately, I don’t expect this script will come to pass. One can expect many more sovereign debt defaults in the years ahead. This could be the catalyst for an economic crisis the likes of which hasn’t been seen since the 1930’s. However, being forewarned means one can prepare. That means get out of government bonds and into private assets.
On that rather bleak note, I will be taking a break from my comment over the next few weeks. You’ll still receive the weekly “Things that make you go hmmm…”. I look forward to catching up again later this month.