As the crisis deepened, the Greek Prime Minister blamed profiteers and speculators for his country’s economic crisis. U.S. news coverage though, cited profligate spending, as if excessive borrowing was a deadly sin for which Greece was to be punished by the gods. The bond markets are certainly speculative and averse to high levels of debt. But there was more to the story than that.
Some thirteen years ago, William Greider brilliantly described “The Rentiers’ Regime” — his term for bond buyers and their dominating power — in his book, One World, Ready Or Not. Bondholders, he wrote, “could see that many nations were taking on new debt faster than their economic base was expanding — and borrowing at real interest rates that were higher than their growth rates. The abnormality described a malignant condition that, as economic history taught, would lead sooner or later to a crisis for the rentiers themselves: either a debt default by governments or an inflationary episode that devalued their bonds, because the borrowed capital would be paid back with money of cheapened value.” (pp. 298-299). And so we witnessed bond buyers ostensibly trying to protect themselves against these risks by exacting interest rates on Greek bonds that were much higher than those paid by say, Germany. As we now know, those higher rates pushed Greece closer to collapse, forcing a wholesale reshaping of the Greek economy.
Greider’s key insight in this process has to do with the “rentiers’ core goal” of “stable money — zero inflation, if possible” and how “the entire intellectual framework for managing economic life was reconstructed around that premise.” (pp. 296) Pressure by the bond market to keep inflation low, he explains, resulted in sluggish economic growth, which, “in turn drove governments into their deepening indebtedness, since the disappointing growth inevitably undermined tax revenues while it expanded the public welfare costs.” (pp. 298)
Greece, which was unable to hew the line of both slow growth and low indebtedness, had to be disciplined. Economic conditions in Ireland, Italy, Portugal, Spain (and Sweden and others before them) suggest that countries can manage that economic paradox, but not for long.