Greece's Problems

Greece’s fiscal problems have been much in the news recently. Essentially, the country is bankrupt. They have bond payments coming due this month, and they don’t have enough euros in the treasury to pay back the bond holders.

There is nothing unusual about that. Most governments don’t actually pay off their bond holders when the note comes due. What they do is issue new bonds, and just keep rolling the debt over. Greece’s problem is that they have hit their credit limit. The international financial markets are so nervous about how much debt has already been issued that they don’t want to allow Greece to continue digging the hole deeper.

This is not the first time a sovereign nation has run into this problem. Nations can’t handle their credit cards any better than the average American. The nation state playbook says that in a circumstance like this, you devalue your currency. Devaluation makes your exports cheaper, imports more expensive, and pays back the bond investors with a cheaper currency than they loaned you. The inflationary effects make everyone poorer, including the bondholders, who have to take a haircut on the value of their investment.

This isn’t an available option for Greece, because the Greeks don’t have their own currency anymore. They use the common European currency, the euro. If Greece defaults on its bonds, all of the countries in the Euro zone are in the splash zone. Hence the incentive for the other European Union countries to bail Greece out.

The other European nations, notably France and Germany, along with the International Monetary Fund, have agreed to be the lender of last resort to the Greek government. But there are conditions. They are requiring Greece’s government to reduce the government budget deficit from 13.9% of GDP to 3.9% over the next three years.

With their back against the wall, the Greeks are agreeing to the plan. They are cutting pensions, cutting salaries of government employees, and raising the retirement age. On the revenue side, consumption taxes are being increased one tenth, from 20% to 22%.

How big a cut is this going to be? Government spending makes up about 43% of the total Greek economy. The proposed austerity package of tax increases and budget cuts aims to get that down to about 35%. The government in Greece is going to have to shrink by about 20%. Overall, the average man on the street is going to get 10% poorer over the next couple of years, but the effect will be concentrated for government employees and retirees.

No wonder they’re protesting.

A Simple Plan

We have a host of economic problems facings us these days. If not already in one, we seem to be sliding into a recession. Although the unemployment rate is low, a lot of people are underemployed, wither working part time or in jobs for which they are overqualified. Americans undersave, risking an insecure retirement down the line. The weak dollar is contributing to the rise in oil prices, generating inflation.

I have a cure for all of that. Buy American.

I have to confess, I have been a Galactic-class pain in the rear on this subject for at least twenty years. For a long time, Christmas morning conversations went like this:
“Gee mom, thanks for the tie, let me just check the label. Oops, says here Made in Italy. You’ll just have to return it.”
“But dear, all of the silk ties were Italian.”
“It would have been okay if you had just gotten me postage stamps as a gift. Like I asked you to.”
This issue was finally resolved with the advent of restaurant gift cards.

Still, hear me out on this one. When you buy Chinese made products, you put a bunch of Chinese to work, plus one retail sales clerk. When you purchase American made goods and services, you put more Americans back to work. Basically, your dollars have a multiplier effect, creating jobs for more of your countrymen than when you imported products.

It’s not just patriotic, either. When you buy American, you are putting your money into the pockets of potential customers. Think about it, how many of your customers live outside the United States? Unless you work for Boeing or Hollywood, probably not too many.

I can hear someone whining now: “Nothing’s made in this country anymore!” Since I have worked for manufacturing companies for the last twenty years, this is one of my personal pet peeves (#3994, to be exact). However, I do concede that it can be difficult to find US made products sometimes. My advice in that regard is to do without. I mean, do you really need another picture frame/stuffed animal/baseball cap/kitchen gadget? Our homes are filled to overflowing with possessions now. Why keep spending your money on more stuff? Stop the insanity! Just say no!

If you stop buying offshore stuff, you’ll have more money for other things, like saving for retirement. Also, since we as a country currently buy so much more than we sell, we’ve reached a point where our dollars are worth less and less every year. If we stop buying stuff we don’t need, it will strengthen the dollar, making it cheaper to buy the things we do need, like imported oil.

I’m not advocating that we be slavish about this. We all have some things we just aren’t going to do without. For me, it’s coffee.

Weak dollar, strong exports?

The dollar continues to show weakness against other currencies, falling to new lows against the euro today. Interestingly, most of the media coverage I have read talks about this development in terms of the inflationary effect. "Look at how expensive imports have gotten."

I have seen very little news coverage about how a weaker dollar boosts exports. My guess is that this is partly due to the fact that increases in export sales lag the drop in currency, while currency driven increases in import prices are immediate. When Mercedes imports cars into the US, they're paid in euros, so the price goes up in dollars almost instantly as the exchange rate shifts. On the other hand, if Cadillac wants to start selling cars in Europe to take advantage of a weak currency, it takes time to ship cars over, plan an advertising campaign, and start getting sales.

In the area of industrial components, the sales cycle can take a really long time. For engineered components, it can easily be eightteen months from first sales call to first production shipment. So for the kind of product that my company makes, it could be a long time before we pick up any sales increase due to a weak dollar.

In the meantime, prices for basic commodities (in my case, brass and steel) have jumped, because commodities are priced on global markets. This is true even though domestic demand is down. As a purchaser of those commodities, my costs have increased at the same time my sales volume has decreased. My company makes subassemblies for the major appliance industry, which is tied in to housing starts.

So far, the weak dollar has not helped at all.