As we keep hearing this days terms used by economist to describe the current crisis we are living in Greece, I thought in this post to approach one the most famous terms used often that sound very confusing and try to make and in depth analysis why in my opinion it might not work in Greece.
image from undress4success.com
QE or quantitive easing to face the credit crunch!
It is a slow day in a little Lala land Village, the rain is beating down and the streets are deserted.
Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a 100 Euro note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend thenight.
The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the 100 Euro note and runs next door to pay his debt to the butcher.
The butcher takes the 100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the 100 note and heads off to pay his bill at the supplier of feed and fuel.
The guy at the Farmers' Co-op takes the 100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, which has also been facing hard times and has had to offer him "services" on credit.
The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the 100 Euro note. The hotel owner then places the 100 note back on the counter so the rich traveler will not suspect anything.
At that moment the traveler comes down the stairs, picks up the Euro 100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.
No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism and start looking to live on credit again!
That, Ladies and Gentlemen, is how the bailout package works in the good scenario case.
image from p2p-loans.com
Unfortunately, let’s now examine the bad scenario:
German and French governments after months of negotiations decide to offer the Lala Land 100 Euro as rescue, they call Lala land Prime Minister, advising him to use the money in buying German and French machines to make a real big factory in the small Lala land town that is suffering from the credit crunch, where the unemployment is sky rocketing and the only way out is having the debt under control by having a real GDP growth.
The Prime minister put 25 Euro into his pocket, immediately go buy a nice BMW as to make sure the Germans are happy and in his turn call his finance minister to inform him of the 75 Euro aid from Germany and France to start a big factory, to help restarting the country suffering economy and reduce unemployment.
The finance minister very proudly congratulate the PM on the great achievement and his wonderful new BMW, put 25 Euro into his pocket and make sure to renew his office, house and summer house with the best French furniture and make the French happy, immediately after, ask the mayor of the town for an urgent meeting in his office, presenting the great achievement to get the 50 euro loan for development and constructing a middle size factory in the town helping to lower the unemployment.
The mayor, thank the finance minister, congratulate him on both the nice achievement obtaining the loan and his exceptional taste on furniture in his fully renewed office and in his turn put 25 Euro in his pocket, go immediately buy himself a nice Peugeot before calling the municipality administrators informing them of his success convincing the finance minister in investing 25 Euro in a small factory in the village as to help reducing unemployment a little, the council explodes applauding the mayor on his great efforts and initiative.
Every council member go buy themselves nice top brand French suites and perfumes using the 25 Euro and with full elegance and sad faces transmit the sad message to the local people that unfortunately, the world is going through a hard crisis and they tried there best but the time is hard, but they will make sure they will light candles for the people and pray for God to help them every Sunday they go to church!
As the situation remain the same, the Prime Minister see no other options but increase taxes on the last few shops and factory that are still open, to be able to pay back the 100 Euro the county got from Germany and France, the last few remaining shops in the village cant afford this new high taxes and have to shut down as working or not working, the income after taxes become the same and Lala land declare bankruptcy!