Greece failed to make a 1.5 billion euro payment to the International Monetary Fund (IMF) on June 30, 2015. Greece has now defaulted. Why should we care about a little country on the periphery of Europe?
Greece's economy only makes up about two percent of the euro zone economy. Its economy has shrunk by 25 percent since 2009. Banks are now closed throughout Greece in order to quell a run on the banks. Depositors are limited to a 6o euro withdrawal from ATM's per day. So if you are planning on taking a vacation in Greece this summer, you better bring along a lot of cash.
Beyond travel woes, what effect could this have upon the rest of us folks? Many economists talk about contagion. The argument supposes that if Greece leaves the euro zone, then Portugal, Italy and Spain will not be far behind. They too have monstrous debt that they too cannot repay. Sound familiar?
The 1.5 billion euro payment is merely a prelude to the 3.5 billion euro payment due in late July. And if Greece doesn't receive emergency funding from the IMF or the European Central Bank (ECB) how will its banks fund the withdrawals that are rampant throughout Greece?
Clearly if Portugal, Italy and Spain exit the euro zone, the world financial markets will come under extreme pressure. Creditors throughout the world will likely have to write off billions. The credit markets could cease up as they did during the 2008 crisis. But there is a far more serious problem with a Greek exit.
If the IMF and the ECB turn their collective backs on Greece, to whom will Greece turn? Their only other solution is to obtain help from China or Russia. If Greece turns to Russia for help, what happens to the North Atlantic Treaty Organization (NATO) of which Greece is a very important member? The geographic location of Greece is of immense importance to NATO. Strategically located on the Mediterranean Sea, Greece is a gateway to the Russian block on its border with Bulgaria which borders Romania, which borders the Ukraine.
Russia would gain an enormous foothold in Europe if it was able to place bases or troops in Greece. This would pose a serious threat to NATO. Even worse, what would happen if Greece, in exchange for a massive bailout from Russia, allows Russia to place nuclear missiles in Greece?
Living beyond our means never ends well. We should learn from this mess while we still have time. The United States is now a debtor nation which, like Greece cannot repay its debts. We have the unique advantage of having the world's reserve currency which we can print into existence at a touch of a button. With over 18 trillion and growing by the second, our national debt dwarfs all other nations. Instead of reducing spending and starting to reduce this debt, our law makers continue pile on more and more of it.
There is no free lunch, as the Greek situation clearly points out. Why do we continue with business as usual? Because no politician wants to take the cure on their watch. Austerity didn't work in Greece because its working class wants the free lunch to continue forever. You can't print or borrow your way to prosperity. If we don't learn that lesson now, soon we will discover that the rest of the world won't be too eager to loan us money or accept our greenbacks.
If that happens, then interest rates will rise, despite the Fed's attempt to hold them down. If interest rates rise, the economy will go into a tailspin and the way out is totally unknown. The Fed is out of ammo and they will have to invent some new way back to normality. The storm is coming and we continue as though clear weather will last forever. History has shown that it won't.
John Lawrence Allen, a nationally recognized legal expert, represents investors nationwide in securities arbitration. Mr. Allen’s second book, “Make Wall Street Pay You Back,” was just released. For more information visit http://www.mybrokerfraud.com/.
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