Why is a Greek default a big deal?

morganist · May 15, 2012

Quote from investwthme:

Ya but don't they don't just lend without collateral, do they? Should we never trust the credit worthiness of any gov't?
How do you measure that?

That makes it worse. If they lend without collateral it means the money that has been lent does not have an asset to claim if the contract defaults. It makes the likelihood of complete collapse higher so makes the right off absolute.

Remember we are talking about the money people put into the bank to lend to the countries and how that is your asset. So the borrower not backing up the debt contract with an asset to pay you if defaulted means you lose completely.

investwthme · May 15, 2012

Quote from morganist:

That makes it worse. If they lend without collateral it means the money that has been lent does not have an asset to claim if the contract defaults. It makes the likelihood of complete collapse higher so makes the right off absolute.

Remember we are talking about the money people put into the bank to lend to the countries and how that is your asset. So the borrower not backing up the debt contract with an asset to pay you if defaulted means you lose completely.

when you say money in th ank you mean regular saving and checking acounts? Or other investment instruments? Arent'y we covered for 250 FDIC?

morganist · May 15, 2012

Quote from investwthme:

when you say money in th ank you mean regular saving and checking acounts? Or other investment instruments? Arent'y we covered for 250 FDIC?

Everything you put into the bank or any type of saving. You have this idea that the government can cover you. The fact is that almost all western governments are in debt themselves so the idea they can bail you out is silly. The only way they could do that if there is a big default is if they print money. Besides money in pension funds and savings over certain amounts are not covered so there will be big defaults.

investwthme · May 15, 2012

Besides gold or diamonds are there any other commodities that hold value? (Well diamonds more than gold although I don't think gold will be heading back under 1200)
Or any instruments or currency like cash?
Maybe the yuan?

morganist · May 15, 2012

Quote from investwthme:

Besides gold or diamonds are there any other commodities that hold value? (Well diamonds more than gold although I don't think gold will be heading back under 1200)
Or any instruments or currency like cash?
Maybe the yuan?

The Yuan is difficult because it is pegged to the USD. All precious metals are good. I like silver palladium is good also. Mining stocks are good. In terms of currency I would go with Australia, New Zealand, Canada, South America maybe. To be honest it is hard to get good investments. Also I have suspicions the government will come and take any assets of value away soon to "Pay off the deficit".

The Swiss Franc might be good but they have capped to avoid such a currency transfer.

Random.Capital · May 15, 2012

Quote from morganist:

No there is a debt contract that will collapse that means all the money they owe in Greece will not be paid.

It doesn't really matter much.

The roads and buildings will still be there. People will still grow food, have kids, go to school, etc.

New money will be issued, they'll take on new debt, obladi oblada...

morganist · May 15, 2012

Quote from Random.Capital:

It doesn't really matter much.

The roads and buildings will still be there. People will still grow food, have kids, go to school, etc.

New money will be issued, they'll take on new debt, obladi oblada...

I think you'll find it does.

To start with people will not have money as pensioners. The obligation for people to look after pensioners for pay will not be there because they will have no money to pay for care.

In relation to growing food. The UK and most of Europe do not have the capacity to grow food on the level they consume in their domestic countries. They have to buy it from abroad and the currency will be worthless. In addition to that every gram of food needs ten grams of oil in fertilizers. This will have to be bought but the currency will have become worthless so it will be in real terms fare more expensive.

The you have the issue of mortgage default and the lose of value of homes and the impact that will have on the wealth of the country and consumer consumption.

These are just a few of the problems.

bettles · May 15, 2012

Quote from piezoe:

Why do you think the Fed is so concerned about inflation dropping too low as well as being to high.

Okay, I just had to bite on this one. Its quite obvious to me. The reason is because both the nation, and individuals, have large net debts. Deflation would make these debts even larger, whereas inflation allows them to shrink relative to the number of dollars floating around. So inflation is the only choice at the moment.

morganist · May 15, 2012

Quote from bettles:

Okay, I just had to bite on this one. Its quite obvious to me. The reason is because both the nation, and individuals, have large net debts. Deflation would make these debts even larger, whereas inflation allows them to shrink relative to the number of dollars floating around. So inflation is the only choice at the moment.

Also consumer consumption will fall with deflation and that will impact on output and jobs.

piezoe · May 15, 2012

Quote from bettles:

Okay, I just had to bite on this one. Its quite obvious to me. The reason is because both the nation, and individuals, have large net debts. Deflation would make these debts even larger, whereas inflation allows them to shrink relative to the number of dollars floating around. So inflation is the only choice at the moment.

Blam! I've just slapped a gold star on your forehead. You get an "A". Go to the front of the class.

And you will also know that much of U.S. debt is held externally (in contrast with Japan). It would be very difficult for the U.S. to pay off its creditors in constant dollars. But impossible would be to pay them off with dollars worth more in buying power than the dollars borrowed! That would be the equivalent of raising the interest rate on debt. Inflating your way out of debt is what monetizing is all about. (It's our clever way of getting China to help us pay for the Iraq war.) But China is not stupid, they will use their dollars to try and buy U.S. assets -- if allowed to; thus obtaining a measure of protection against U.S. inflation.

And you are also right about individual debt. Imagine what would happen if everyone with a fixed rate, 30 year mortgage remained in the same house for thirty years. The last few years of the mortgage would be paid with "funny money" worth far less than the dollars borrowed which would significantly reduce the effective interest rate paid. In fact, under some circumstances the bank would be paying you to use their money, That is to say, the purchasing power of the dollars borrowed would be greater than the total purchasing power of all the dollars paid back to the bank, including interest. Fortunately for banks, the average mortgage rolls over about every 7-9 years.

In a debtor nation like the U.S. significant deflation would be a real disaster. The Fed is not going to allow that to happen.