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Tea Leaf: A Greek stitch in time?

Published: Tuesday, Sept. 1 2015 8:52 p.m. MDT

The obvious question on the minds of many is, "What does the debt problem in the tiny nation of Greece have to do with the U.S. and me?" The resolution of the issue has more to do with us than you may think.

Our column of 16 months ago (dated 2/27/10) was entitled "A Shot Across the Bow." It discussed the tenuous Greek debt situation at that time, with a warning for larger nations, including the U.K and the U.S.

That column noted, "The greatest threat regarding the current Greek debt solvency debate is the possible domino effect involving other nations. A Greek default on its debt, or a painful plunge in the value and marketability of Greek debt securities, would likely be followed by similar debt issues for other nations. Such a domino or cascade effect would be difficult to stop once the process had begun."

Dominoes

Well, here we are. A massive Greek financial bailout equal to $157 billion during 2010 by other European nations and the International Monetary Fund (IMF) was eventually followed by similar financial bailouts for Ireland and Portugal. Worst-case fears now include the possible need for a bailout of a much larger Spanish economy as well, with possibly Italy and Belgium not far behind.

The Greek debt situation has been one of ebbs and flows since early last year. Initial market euphoria that the Greek situation had been dealt with effectively soon gave ground to the other national bailouts.

Grecian pressures

Required austerity measures within Greece to raise taxes and cut spending in order to hopefully reduce massive budget deficits were met with violent protests in the historic streets of Athens and other cities. The critical tourism sector, which accounts for much of the nation's revenue and supports nearly one job in five, has been hit hard as many visitors have gone elsewhere.

Greek economic output has declined during the past year, making it even more difficult to generate tax revenues and cut spending. Unemployment is near 15 percent.

The need for more emergency funding — another bailout — is clear. Larger European Union (EU) nations and the IMF are putting another financial package together. Any new funding requires more austerity from the Greeks: more tax increases, more wage cuts and the potential sale of $70 billion in state assets.

Greek citizens protesting these demands are in the streets, highly critical of those who demand these actions. Money yes, tough choices no.

European realities

German and French governments agonize over the new financial realities of more and more financial support for the Greeks and possibly for other EU nations. German and French people are strongly in favor of NOT providing these funds.

Two major issues compel German and French leadership to provide more funding:

First, the reality that German and French banks have been major buyers of Greek and Irish and Portuguese and Spanish bonds (debt). They recognize that massive losses on bond holdings by major German and French banks would only cause other financial headaches.

Second, the strong wish of the German and French leadership to maintain the integrity, the prestige and the validity of the European Union.

Coming weeks will provide greater clarity as to the viability of the EU. It is not inconceivable that nations such as Greece may eventually be discretely invited to drop their EU membership. It is just one of many options to be considered as the Union frays around the edges.

Coming weeks will also provide greater clarity as to the chance that a devastating domino effect could embrace many nations, in Europe and around the world. Another global financial calamity — small odds at this point in time — could finds its roots in Greece.

Inflation stuff

Consumer inflation has been on the rise during the past six months, one more "anxiety" issue to add to an already crowded list of domestic and global issues. The consumer price index — the most well-known, if not necessarily the most highly regarded, measure of consumer inflation — has now risen 3.6 percent during the most recent 12-month period. That is triple the annual rate of just last summer.

The "core" rate of inflation, that which excludes food and energy costs and is one of the Fed's preferred measures of inflation, has now risen 1.5 percent during the most recent 12-month period. By comparison, the 0.6 percent annualized rise in core inflation late last year was the smallest rise in more than 50 years.

Oil up, oil down

Yes, the rise in oil and gasoline prices had much to do with the sharp inflation rise, and yes, oil prices are now in decline. However, the higher level of inflation will place a crimp in the Federal Reserve's interest in a third round of massive monetary stimulus, affectionately known as "quantitative easing 3," or QE3.

There is little doubt that Fed boss Ben Bernanke has been more concerned about the threat of deflation rather than inflation during much of the past 2-3 years. Even as inflation pressures have climbed in recent months, the Fed chairman sees the increase as temporary.

Bernanke sees an inflation rise that will soon largely reverse direction as energy prices decline and global bottlenecks, particularly tied to auto part shortages resulting from the Japanese earthquake/tsunami, run their course. He sees an economy where there is simply too much excess labor capacity to sustain any serious rise in inflation.

That debt thing

There is a school of thought that higher inflation is exactly what the economy needs. The Wall Street Journal last Sunday ran a story, "What This Country Needs Is a Good 5 percent CPI," noting that the economy's primary challenge is high debt levels of individuals, corporations and government entities.

The story suggested that higher inflation would make it easier for all debtors to repay high debt levels with less valuable dollars. This approach, featuring much, much higher levels of inflation, has been used by various nations all too frequently in the past, many in South and Central America, to repay fixed debts with currencies worth much less.

The story also suggested that it was higher inflation that helped end the Great Depression, along with global involvement in WWII. In addition, the story discussed Japan's long struggle with deflation, and the challenges of escaping a deflationary environment.

One could argue that temporarily higher inflation could help stabilize U.S. housing prices. At the same time, however, keeping inflation at bay once it has become more pervasive is no easy task.

Jeff Thredgold is the chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.

Copyright 2015, Deseret News Publishing Company