The function of loans is an important component in an advanced economy, as it is conducive to economic growth. Individuals and businesses are able to acquire the necessary capital in order to pursue their ideas and innovations past the limits of their own resources. If successful, society benefits from: the creation of desirable goods/services, increases in productivity (lowering consumer prices), and growth in the economy (more jobs). However, if the debt is misused, it can be detrimental to a business and lead to its insolvency; people lose their jobs, productivity falls, and creditors suffer the loss on their investment. If too many bankruptcies occur, then you have a serious macroeconomic problem on your hands. But worse than the misuse of private debt is the misuse of public debt, and we can see why that is the case by examining Greece.

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Government Debt

In general, the consequences from the misuse of private debt are limited to a small portion of society, to those individuals directly involved and those indirectly linked, but the misuse of public debt directly affects every single person in society because it will be every citizen who will have to pay for the actions and irresponsibility of their government. Every dollar the government generates comes from the citizens one way or another, and once taxes can no longer be increased to meet the obligations, creditors come to the doorsteps of government, willing to finance the deficit by buying bonds. Once the bond expires, these loans will be paid back to the bond holders with interest using tax payer’s money.

Unfortunately for the taxpayers, governments easily get into financial trouble because of a three pronged attack by the people, the government and corporations. The people believe the role of government is to protect society instead of the individual, state politicians fanatically promote “social welfare,” and privileged corporations who receive tax dollars (or tax credits) encourage spending through lobbyists.

The support for government spending also comes from economists, including those working in the financial sector, who will argue public debt is different than private, and that it can grow very large because of government’s capacity to raise funds in taxes and in the bond market. But this assistance only encourages government to over-spend to a level where taxes can’t be raised high enough without losing votes and so deficits mount, increasing the debt along with the interest. When the debt becomes too big, markets begin to lose faith and interest rates go higher, as the likelihood of repayment increasingly diminishes leaving them in a situation where they can no longer borrow to finance current spending. It is at this point that bankruptcy of the state occurs.

Greek History And Greece Today

For a long stretch of time, in its recent history, Greece’s leaders have had no reservations towards spending money. After the military junta in 1967, the colonels that took control of the country spent money on their authoritarian government, but also on social services and economic development, relying on taxation but mostly inflation to pay for the spending; the price inflation inevitability appeared at the end of the Junta’s reign after the initial boom, which undoubtedly had an impact on social conditions. (1)

In 1974, after years of social unrest, the Junta was overthrown and the major political party that emerged was the Panhellenic Socialist Movement. But this government didn’t stop the spending and, not surprisingly, it showed in the inflation rate which followed along the lines of the Juntas. (2) The debt exploded in the 80s, although in the 90s Greece was able to bring it under control in order to join the EU. (3) But after joining in 2001, Greece had to do away with the Drachma and replace it with the Euro, meaning it could no longer create inflation to pay for their spending.

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Refusing to cut back, the debt grew larger and when the crisis in ‘08 hit, Greece could not recover. In 2009, the government debt to GDP ratio reached over 100% and their deficit ratio was at 12.5%, leading to the announcement of the downgrade of their credit by the major credit rating agencies. (4) Greece was forced to implement unpopular austerity policies including government layoffs, lowering of pensions, and increases in taxes so that the country could receive its first international bailout in 2010 from the International Community (International Monetary Fund, European Central Bank, and European Union). In 2012, government bonds on the 10-year went as high as 48%, showing a loss of confidence in the market. (5)

Today, in total, Greece has around €315b worth of debt owed to international creditors, as well as commercial bond holders. (6) The economy is contracting annually with unemployment at 25% (7) and interest rates at 10%. (8) The Greek banks, having experienced a number of runs on their reserves from depositors (9) – leading the government to enforce capital controls (10) – had also needed capital injections from their government to remain afloat. (11) Protests in Greece have been commonplace since the austerity measures were forced, but Greece lately has seen its Finance Minister attacked by protestors, local governments and unions refusing to hand over the revenues central Greece asked for, and disgruntled pensioners crashing a pension fund meeting. (12)(13)(14) This economic tragedy – and central planning error – came about by the unwise use of public funds and putting the financial burden of it on the citizens.

Global Reach

“100% of what is collected is absorbed solely by interest on the Federal Debt… all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government.” – Grace Commission, 1984

This is a problem not exclusive to Europe. Many governments, local and federal, around the world are in bad shape financially and only by today’s historic low rates can these governments – as well as companies – stay solvent. These failed policies have caused the poor economic conditions we see leading to protests and revolutions. But instead of economic chaos, if our desires is towards progress, economic growth, and higher living standards in a monetary world, then the understanding of debt, especially public debt,  is crucial.

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