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Greece's Odious Debt
on August 26, 2011
Economics is tricky. When it comes to buying sovereign debt, people everywhere seek to make informed investment decisions on the basis of "good" economic data but few seem to understand what that means. Contrary to popular economic theory, people are not rational decision-makers, rendering the predictive power of "efficient market" models weak. There also seems to be an overeliance on a suite of rather shallow metrics to judge the health of an economy, namely: GDP growth, credit expansion, and consumer spending, among others. Correspondingly, there is a widely-accepted notion in economics that growth is triggered by a combination of deregulation, privatization, trade, exchange rate and interest rate liberalization, and lifting capital restrictions, without qualtitatively understanding if doing these things is in the long-term best interests of a country. Aren't all countries different? Aren't all countries a product of their historical experiences as a nation? Finally, international investors seem to demonstrate overconfidence in international rating agencies, monteray unions, and artificial labels without paying attention to the strength of a country's underlying economic foundations. Why is that investors disregard warnings that become so glaringly obvious in hindsight? Why don't investors do some real homework before committing billions of dollars to what turn out to be wobbly debtors?
These are the primary questions that Jason Manalopoulos brilliantly addresses in his book: Greece's Odious Debt. Just 10 years after the Argentine debacle, how was tiny Greece - plagued by corruption, an uncompetitive ecnomomy, a bloated public sector, weak institutions, a reliance on minimal industries for foreign exchange, a sclerotic business environment, rampant tax evasion and an inherently disfucntional system where government revenue is used to buy votes rather than make prudent investments in the productive capacity of the nation - able to borrow close to $500 billion from the international investment community? Were the lessons from Argentina forgotten? Or never learned?
By far, the most important read of the year to fully understand the European debt crisis: simple yet informative and expertly logical, using astonishing examples of largesse, mismanagement,and mininformation that will likely catalyze an irreversible shift of power from the Euro-centric world to Asia and Latin America. This book is an important lesson for rethinking fiscal policy in the "developed" world.