Beware the Ides of March — and Greece
There is a concept known as Chaos Theory. One way it is explained is: “A butterfly flaps its wings in Iowa and a tsunami hits Indonesia.” The point being, these two unrelated events are actually very connected. In statistics we talk about correlations and causations and the degree to which variables are related, known as significance.
I subscribe to the premise that the world is connected and getting smaller all the time. You remember the six degrees of separation rule whereby one can throw a dart and land on just one name of seven billion people in the world. Mathematically, that random person is only six degrees removed. In other words, you will know someone, who will know someone, who will … anyway you get the picture.
However, in the last decade, a reset of the degrees of separation now has that reduced to five degrees (17% improvement). This is due to the efficiency of social media.
I open with this as a foundation to segue to my discussion on Greece. Picture awakening in a bankrupt country, where even a liberal and generous International Monetary Fund (IMF), along with the European Central Bank and the European Commission, will not lend you money without a significant reset of your very way of life.
In other words, requiring you to significantly cut expenses, programs, and quality of life to a level you find unacceptable…then what? The country responds by closing all the banks, the lending institutions, and the stock market. Even the ATM machines were set at a limit of $70 per day per person until such time that the cash runs out.
How long does it take to remove your money from the financial system at 70 bucks a day? Food is becoming scarce, employers are laying-off, businesses are shutting down and panic ensues. While it sounds like a script from a drama, if you are living the life I just described, you are a Greek living in Greece.
The Greeks are a loving, hardworking, family oriented people. They are artisans, laborers, merchants and entrepreneurs. They are doctors, lawyers, and scientists. Greeks have played a very, very major role in the structure of world societies and their governance. As an academic, I must also acknowledge the contribution the Greeks have made to the field of mathematics. However, in the end, you must live within your means.
Eventually, you must pay the piper. That piper, known today as the IMF, is demanding payment. In June, Greece defaulted on a modest $1.68 billion payment on its $300 billion debt and act one of a three act Shakespearean tragedy had begun. Sure, Greece can separate from the euro and reactivate the drachma yet who, outside of Greece, will accept that currency?
The other remaining options are for Greece to accept the IMF austerity requirements (unlikely) or the IMF to reconsider and lessen the austerity expectations. Prime Minister Tsipras who originally encouraged the country to vote down the financing package now, in an about face, encourages its endorsement.
This, in effect, now further confuses and divides the parliament (Syriza). While at the time of this writing, the course of action has not yet been determined, I predict Greece will need to accept the terms, including tax increases. Returning to a currency (drachma) that the world will not recognize, runs the risk of the recession evolving to a depression.
The Eurozone consists of 19 countries that have adopted the euro as their currency. Germany and France are the dominant players, and they are split on Greece. Germany’s Merkel takes the position that Greece must take responsibility, while France’s Hollande says Europe should show solidarity with Greece.
Anyway, can that butterfly in Greece affect world markets? Are there any takeaways for the U.S.? Is there perhaps the proverbial message in a bottle making its way to our shore? In other words, what can we learn? For a recent perspective, Greece hosted the Olympics in 2004 and did an outstanding job showcasing their beautiful country and wonderful people. However, the resultant additional debt happened to reach the equivalent of 100% of their nation’s GDP. When a person, country or enterprise has debt topping a full year of economic activity, it is a critical, psychological and mathematical tipping point. The causes and culprits are numerous including:
- Retirement expectations of overly generous public pensions
- Social programs & subsidies that continue to expand unabated
- A public demanding more and more and more for less and less and less
- Citizens paying pennies into a pension expecting dollars in return, and passing the bill to future generations.
Again, I just described Greece, and if you don’t like my Greece analogy, just plug in China, or a dozen other countries with a socialist foundation. However, did I not also describe anyone else we might know?
Now to the big takeaway
It may be worth noting that the U.S. GDP is $16.7 trillion. Consider for a moment that our debt is $18 trillion or 108% of our GDP. On a per capita basis, U.S. debt is $124,000 for every single citizen! I should also point out that it took our country 205 years to create its first trillion dollars in debt, but we now add a trillion dollars every 403 days! Just think, that debt is financed at a mere 2.5%. Should that debt increase to 5%, which in itself is conservative, our annual interest cost will be $1 trillion. This means our interest payments alone on government debt will consume two-thirds of what the government collects in taxes. Good luck with that plan.
Hello…can anyone in Washington, D.C., hear me? From my Irish heritage, I might reference that the piper’s pipes are calling. However, to those policy makers, under whose watch our debt has grown, I suggest you beware the Ides of March.
“The problem with socialism is that you eventually run out of other people’s money.” — Margaret Thatcher
Footnote: In the era of political correctness and the need to clarify everything, my reference to the Ides of March is a caution to our policy makers’ (politicians) political life only. The implications being their fiscal irresponsibility invites the risk of being run out of office — a political death if you will. Then again, the likelihood of such dire consequences as Winston Churchill said: “The best argument against democracy is the five-minute conversation with the average voter.”
Dr. Donald McNeeley is President and CEO of Chicago Tube and Iron Co., headquartered in Romeoville, Ill., as well as a Professor of Engineering at Northwestern University. Founded in 1914, CT&I is one of the largest steel service centers in the U.S., with 10 subsidiaries throughout the Midwest. Inventory, fabrication and processing is facilitated in over 1.2 million square feet of ef cient, state-of-theart facilities. CT&I houses over 30,000 line items of inventory from some of the world’s premier manufacturers. It has a 90+ year history of consecutive pro tability that has provided the necessary capital resources for growth. Contact Dr. McNeeley at 800-972-0217, or visit www.chicagotube.com.