The Greecey Skids

If you eliminate corruption in Greece, I said recently on CNBC’s “The Kudlow Report,” you destroy the social fabric. Greek society is a scam funded by foreign creditors in which virtually all social strata participate. And now it’s coming to a crashing close.

Goldman, Sachs’ chief European economist predicted today that Greece would restructure its debt (delay or reduce interest payments to creditors) some time over the next few months, the first time that a first-world country will have done so since the Second World War. I am told that Greece will do this as a “voluntary” measure so as not to trigger payment on outstanding credit default swaps, insurance contracts that pay off in the case of a specified credit event. A general strike today has shut down Greek public services, including hospitals, and the price of Greek bonds is falling:

In Athens, more than 500,000 workers were called on to strike today, according to the unions organizing the walkout. With Greek folk music blaring over Constitution Square in Athens, the PAME Hellas union set up a stage for speakers across from the parliament with a banner demanding “no more sacrifices” from the Greek people.

Members of PAME Hellas, which is affiliated with the Greek Communist Party, blockaded entry to the port of Piraeus yesterday, preventing ferries from sailing. Others picketed luxury hotels in the city center, including at least one where IMF negotiators are staying.

“We must dare, otherwise we will be led like lambs to the slaughter,” said Aleka Papariga, head of the Communist Party of Greece, the third-largest parliamentary party. “Working people aren’t about to be used to allow passage of policies that will bring the worst barbarity we’ve seen in the past 35 years.”

As numerous financial commentators observe, this puts the whole group of so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) under the gun: a debt restructuring for a European Community state would cross a Rubicon to a place investors don’t want to go.

More broadly, it calls attention to the limits of government bailouts. The government bailed out the banks, and the banks in turn are buying government debt, financing in America’s case about two-thirds of its $1.6 trillion deficit through pure balance-sheet leverage. It is Japan in the 1990s all over again—except that back in the 1990s Japan also had a 20% savings rate, enough to absorb a great deal of government debt. America is trying to finance a deficit equal to 13% of GDP with a savings rate of 3%. If the savings rate were to jump 10 points to equal the government deficit, the economy would shut down.

I don’t think that the US government bond market will collapse any time soon, but there’s a lot to worry about. The IMF wants to claw back from the banks some of the profits they are generating by leveraging up government debt, by taxing balance sheets — skimming the skim of the skim. But all of it is a bubble, and arguing about how to redistribute the bubble isn’t a solution.