Greeks and Money

Boy, where's Donald Rumsfeld when you need him? Say what you will about Mr. Rumsfeld but he could turn a phrase, twisted thinking for twisted times. It seems "Old Europe" is once again pushing their way to the forefront of world affairs. We're full in to another week of the Greek debt crisis, and finally, thanks to the Germans, we're beginning to talk about real solutions. Bloomberg writes(tx credit writedowns):

German Chancellor Angela Merkel is coming under pressure from allied and opposition lawmakers to compel banks to help bail out Greece, threatening to further delay aid for the debt-strapped nation.

“It’s absolutely essential to bring Greece’s creditor banks on board to work out how we’re to solve this problem,” Hans Michelbach, deputy finance spokesman in parliament for Merkel’s CDU/CSU bloc, said today in an interview in Berlin. “Clearly there are risks in restructuring debt but banks can’t just shy away from responsibility and expect the European taxpayer to pick up the tab.”

This is a really important point. How this is done, how it is accomplished is essential for the future. However, having the banks and the bondholders take losses is only a first step, the next will be how do we change the money system. Can't we say that a money system, which flooded the world with bad money is one that isn't working too well?

In modern economic thinking, money really only comes into play concerning debt. In general, we have three schools of thought. The first is the old school, who believe that everything needs to balance, including money. The most doctrinaire don't even like paper currency, they'd rather have something hard, and preferably shiny, like gold as money. The second school is by far the largest, but paradoxically the most irrelevant, they make up theories as apologies for established power structures. They're not much help when power is shifting. The final school are in one way or other the descendants of Mr. Keynes, who made some very unorthodox observations about money. In short, you could say Mr. Keynes view of money was that a shortage of money should never be a hindrance to viable economic activity. Yet, Mr. Keynes was also very firmly in the first school, in some way, there needed to be some balance, money and money creation needed in some way(s) to be tied to the real economy.

The massive amounts of global debt has completely unbalanced the economy in so many ways, that it might be said we all live in some Rumsfeldian reality distortion. We have a failed system and we need to do some fundamental rethinking. The idea of simply adding more debt to relieve old debt isn't much of a solution, except to permanently indenture a good portion of the population and the economy. The question is first how we destroy the bad debt, in order to free the future. But in so doing, we're going to have to reform money and in reforming money, we're going to have to figure out what is a 21st century economy.