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In which John explains the Greek debt crisis, which has pushed the Greek government close to defaulting on its loans, the reasons why the Euro zone and the IMF are desperately trying to bail Greece out, and what the rising cost of sovereign debt means for the massive budget deficits throughout the developed world.

Thanks to Karen Kavett at for the illustration.

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A Bunny
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Good morning Hank, it's Friday.

You know who's in my hug bucket? Greece. Every time I see Greece I just wanna give em a big ol' hug. I don't, however, want to give them 150 billion euro, and therein lies the problem.

Okay, so Hank I wanna talk about sovereign debt today, but just to establish at the outset that this is not a particularly political problem, here is a 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 an 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 it's also true for countries. Fancypants countries with fancypants currencies have all kinds of advantages over developing counties including that we are able to borrow money cheaply. In fact, because fancypants 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 we're acquiring to pay for our economy to grow.

So that is not inherently bad for nations. The famous example for this is that in 1945 the United States had a debt that was more than 100% of its GDP, and our deficit was more than 20% of our GDP, and that level of 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 fancypants countries being able to borrow money cheaply has always been that the market assumes that fancypants countries are basically guaranteed to pay you back. And when I say that the market assumes, I mean the market assumed until two months ago when it realized that Greece, a fancypants country with a fancypants currency, maybe can't pay back its debts.

What's interesting is that Greece is probably technically in a better economic position than America was back in 1945. But for a variety of reasons, some of them very legitimate, the market has decided 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 it's vicious, That's where they got the term.

This raises the possibility that fancypants countries with fancypants currencies might not pay back the money we loan them which will probably raise interest rates for a lot of fancypants 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 would be very bad, like we would yearn for the days of 10% unemployment.

All of which is complicated by the fact that we're coming out of a worldwide recession, and the total economic output of the world is smaller, so there is less money coming in in taxes, but governments still need to spend approximately the same amount of money, and for everybody who says that the problem is wasteful government spending, we aren't even close to a balanced budget. I mean, the United states would have to eliminate both of 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 to be to raise taxes, which is not generally seen as a good idea during a recession.

So the problem of sovereign debt may be not being as cheap as it once was isn't the fault of any one political ideology, it's kind of 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 why the EU and the IMF are working so hard to try to mail down a bailout pan for Greece. And if fancypants 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 ya 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.