It Began In Athens - "PIGS" Dying

by Al Doyle    

Thanks to high debt levels and excessive government intervention in almost every aspect of life, Greece is in the midst of a severe economic crisis.  Even the most optimistic mainstream media pundits predict the situation will continue to erode.    

The Greek government has responded to the problem in a totally predictable manner.  Beginning January 1, 2011, all cash transactions above 1500 euros (just $2040!) will be illegal.  Deposits in foreign banks must be repatriated within six months.  Those who obey will avoid audits and be taxed five percent of their funds.     

Greek businessmen and entrepreneurs who create jobs and provide useful products and services despite their government's policies are going to be punished even more for their hard work and success.  The 40 percent tax rate that applies to all annual income above 75,000 euros ($102,000) will now be imposed on anyone making over 60,000 euros ($81,640).    

So what does a nation the size of Greece (population 11.3 million, or comparable to the state of Ohio) have to do with America?  Financial Times contributing editor Niall Ferguson sees numerous parallels.    

He wrote, "It began in Athens.  It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies.  For this is more than just a Mediterranean problem... It is a fiscal crisis of the western world.  Its ramifications are far more profound than most investors currently appreciate."    

Ferguson notes that British and U.S. government debt as a percentage of GDP is just marginally better than the "PIGS" (Portugal, Ireland, Greece and Spain) nations that have endured the most criticism and financial hardship because of excessive spending.  

"For the world's biggest economy, the U.S., the day of reckoning seems reassuringly remote," Ferguson observed.  "The worse things get in the eurozone, the more the U.S. dollar rallies as new investors park their cash in the 'safe haven' of U.S. government debt.  The effect may persist for some months as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.    

"Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase 'safe haven.'  U.S. government debt is a safe haven the way Pearl Harbor was a safe haven in 1941."    

Ferguson concluded, "It is appropriate that the financial crisis of the west began in Greece, the birthplace of western civilization.  Soon it will cross the channel to Britain.  But the key question is when the crisis will reach the last bastion of power on the other side of the Atlantic."    

Could severe limits on cash usage, bans on moving money outside the country and higher tax rates be in America's future?  Greece could well be the canary in the financial coal mine.