Tuesday, July 7, 2015

Greek Loan Repayment

The following is a comment made in response to a Ralph Musgrave post. An example of a young-couple-who-liked-to-borrow is used to question whether we really want to have Greece repay the loans it has received.

"Our community could have a young couple that liked to borrow money from the community bank for the simple reason that they liked to spend more than they could earn.

If this couple was very likable, they might be able to borrow more than they earned every year for many years.

In fact, they could do this until the bank said "NO MORE LOANS!".

A "NO MORE LOANS" decision would be a paradigm change. It would be a change in the annual way of running the local economy.

How might the economy change if, after many years of lending to the (formerly) young couple, the lending stopped? Those businesses that received the annual loan proceeds (the couple always spent the loan money) would see fewer sales and need fewer workers. This because less money each year would be spent.

Now if the bank also required the (formerly) young couple to repay the loan, there would be an additional effect that we might call a second paradigm change. The couple would need to work harder to earn money. Working harder would entail producing products already made by other workers which would increase sales competition. The  economic effect of loan repayment is the opposite of initial loan creation.

I think we can consider that Greece has been this (formerly) young couple. Now the loans are being denied. Do we really want them to repay the loans?"

The story of the (formerly) young couple illustrates that TWO paradigm changes occur when a series of annual loans evolves into a series of annual loan repayments. Paradigm changes are difficult events for entire economies.

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