Greece and the US

The high drama in Greece is happening now.  It’s pretty hard to predict what’s going to happen.  Markets aren’t open right now, so it’s hard to quantify what the markets really think.  They open up in about 8 hours, so we will see then.

Strategically, Greece is a part of NATO.  Many think if Greece exits the Euro, Russia will swoop in.  Putin clearly has designs on a broader powerbase, and Greece mismanagement of its entire government offers a nice opportunity. Strategically, it helps him put a little pressure on the Turks as well.  Turkey and Greece have a long historical relationship.

My experience with other foreign policy events since Obama has taken office gives me zero hope that the US has war gamed what can happen.  Their knee jerk reaction is not to trust markets, so I wouldn’t be looking for leadership from them.

The key is to stop contagion, and because of the interconnectedness of world financial systems, that is awfully hard to do.  Look for the US Fed to provide a lot of liquidity.  However, there will be continued upside pressure on currencies like the US Dollar and Swiss Franc.  There will be a lot of volatility.

Because of what we learned in the aftermath of the 2008 financial crisis, it’s pretty hard to trust the big banks, and the government regulators.  The government turned a blind eye last time as banks manipulated markets like the LIBOR to protect and insulate themselves.  Nothing that has been done over the past 7 years has done anything to repair the confidence in those institutions.  That’s a shame, because we are going to need to have confidence in them again.

The answer for Greece is to modernize.  It needs to gut their socialist/communist centralized government and lower taxes. It’s amazing how entrenched government officials (in Illinois its the Democrats) like to avoid simple math. My home state of Illinois and city of Chicago, and county of Cook are ignoring simple math today. Fortunately, when they all go bust (and they will) it won’t affect the rest of the country.

Bear in mind, the US is on a parallel path to Greece.  62% of the US federal budget goes to transfer payments-our welfare system.  It’s an unsustainable path.  The US has $18 trillion in debt.  It will take years, but someday that debt will blow up in the face of taxpayers-unless we get a lot of economic growth.

Professor John Cochrane proposes a tremendous solution to our fiscal problems that I agree 100% with.  Here are the high points.

• The tax code is thoroughly reformed to do nothing but raise revenue with minimal distortion — a uniform consumption tax and no income, corporate, estate etc. taxes, or deductions.

• A dramatic regulatory reform. For example

• Simple equity-financed banking in place of Dodd-Frank.
• Private health-status insurance (with, if needed, on-budget voucher subsidies) in place of Obamacare.
• An end to the mess of energy subsidies and interference. No more fuel economy standards, HOV lanes, Tesla tax credits, windmill subsidies, and so on and so on. (If you want to control carbon, a uniform carbon tax and nothing else.)
• Many agencies cease to exist.
• No more endless waits for regulatory decisions.

• No more witch hunts for multibillion dollar settlements.

• Thorough overhaul of social programs to remove disincentives. Most help comes via on-budget vouchers.

• No more agricultural subsidies.

• No more subsidies, period. Fannie and Freddie closed down.

• Unilateral free trade.

• Essentially open immigration — anyone can work.

• Much labor law rolled back. Uber drivers can be contractors, thank you. Most occupational licenses removed — anyone can work.

• Drug legalization.

• School vouchers.

• And so on. Essentially, every single action and policy is re-oriented toward growth.

Not hopeful that either party embraces that kind of reform anytime soon in the US.