There’s a further issue here. For dollar-denominated stocks at least, price-to-earnings ratios are currently above their long-term average going back several decades. Given that the future economic growth outlook for the U.S. is less than rosy, I think it’s safe to say that stocks here may be overvalued. Perhaps we should welcome a stock market correction.

Still think Greece default will only hurt Greece?

Like I said, Greece can not be allowed to default. The world should not allow Greece to escape its debt and force the world to pay the consequences for Greek’s mistakes.

I actually think there is another option. Make a loan at a specified rate of interest, on the condition that failing to pay back the loan authorizes the lending governments to take control of Greece’s budget. But this also would never happen.

P.S. See the U.S. CPI data on measuringworth.com, published by two economists at the University of Illinois at Chicago. The deflation was all but continuous from 1872 to 1900.

Your last sentence makes it seem if you assume there are only 2 options (i.e., allow Greece to default, or bailout Greece). There is a third option other than bailout and default. The world could say to Greece that it has accrued the debt and it is obligated to make good on its debts, and the world will not tolerate Greece defaulting on its debts. And, if Greece does default, they will have forfeited soveriegnty over their nation and the world will move in to liquidate every thing in Greece it can to make good on the debts. It is in the world interest to make such a threat because the potential economic disaster resulting from Greece defaulting is so great it can’t be allowed to occur. Now, the odds of this occuring are probably zero, but it does not change the fact that Greece can not be allowed to default due to the economic carnage that it would cause.

Now, to the numbers that you mention, it is not Greece’s deficit that is the problem. Instead, the problem is the amount of debt that Greece would seek to default on. That number is much greater than the $20 billion you have mentioned.

In regards to the years 1872-1913, deflation was not an annual thing. Instead you had several years of inflation and economic growth followed by financial panics of deep deflation and deep economic regression. This cycle repeated itself several times during those years. If you wanted to compare the two time periods, it should be obvious that the US would be at the apex of economic and inflationary growth, and should the US enter a peroid of unchecked deflation it would result a trully catastropic economic collapse as 80+ years of inflation would be wiped out in just a short couple of years.

If Greece has a budget deficit of 9.1% of GDP this year, this will be a deficit of about 23 billion Euros, a very minuscule portion of the world’s money supply.

Moreover, suppose deflation were to occur, even in the long term, because money growth didn’t keep up with real economic growth. This happened in the U.S. from 1872-1913 at a rate of about 0.5% deflation per year. Meanwhile, annual real growth averaged 3.75%, or 1.7% per capita. All this without Ben Bernanke to step in and cause people to expect inflation. (See measuringworth.com and you can do the math for yourself.)

And what a fortunate thing. It would be pretty depressing if we had no choice but to step in during these crises and act in a way that could only make them more likely to occur in the future.

1) If Greece past laws to reduce pay-scales and benefits for civil servants and cut the number of such jobs, repealed of critical regulations, taxes and policies, would you favor a bailout to close the gap between current obligations and the lowered future obligations? Theoretically this may be best for those outside of Greece (the bailout lenders).

2) You should really consider paying a professional photographer to get a good picture of you with a smile. Psychologically, people are more likely to listen to new ideas and arguments from someone that appears friendly.