The Default Option

When you have borrowed more than your income will allow you to comfortably pay back, you face three choices. One is to borrow even more, assuming that creditors are stilling willing to lend to you. A secone choice is to lower your standard of living so that you can allocate more of your income to debt service. The third choice is to default on your loan.

In the first case, you are merely kicking the can down the road while facing larger payback obligations. In the second case, your standard of living falls. In the third case, the creditor's standard of living falls. In all cases, there is likely to be a drag on economic progress. In fact, collective standard of living will probably fall.

These choices now confront much of the world. Greece is a microcosm of the situation. The people of Greece have borrowed extensively to elevate their standard of living far beyond that which income from productive effort would permit. The Greeks want to borrow even more to sustain their condition. Unfortunately, the bond market no longer believes that the Greek condition is indeed sustainable and has effectively shut the country off from further credit.

To frame it in terms that we in the US might currently relate to, Greece would like to 'raise its debt ceiling.' Unfortunately, lenders refuse to offer any more loans.

As such, the first choice elaborated above is unavailable to Greece.

The Greeks do not appear to want to lower their living standards, as demonstrated once again yesterday by yesterday's riots. The second choice therefore seems unlikely either.

Quite appropriately, by default (!) this leaves the third choice: default.

no positions