When an economic system has too much "Greece"

I don't consider myself short of education with six-years of post-secondary, but I was until recently just kind of confounded and befuddled on how a small country like Greece could essentially pull down the world economy.

A very fine piece by the Associated Press that can be found here at The Free Press website is the best explanation yet that I have seen.

I will try to give you the Reader's Digest version to pique your interest and then you can read the detailed stuff that some journalist -- not blogger -- has taken time to learn, understand and report in a credible and digestible way.

Essentially, Greece's economy is a mess. They've got too much debt, and don't spend their money wisely. People work but don't get paid by the private sector, and some people don't work and still get paid by the government.

But there are a lot of bigger countries that hold a lot of that Greek debt. So if Greece doesn't or can't pay, those countries and the big banks associated with those countries don't necessarily fail, but they face a big time hurt.

And when they hurt, they lend less money. The bank examiners are on them and they generally pull in lending at a time when the economy needs money.

Secondly, this whole Euro currency issue ties the world together in ways not readily apparent. If Greece goes back to the drachma, a less stable currency than the unified Euro, people in Greece will lose confidence the currency will be worth anything (why would it) and they would begin to buy stuff, hoard stuff and pull their money as quickly as possible out of the banks.

And because most countries like Greece and the U.S. have what is called "fractional reserve systems" people can't pull their money all at once because the banks don't have it. They lent it out knowing that not everyone usually needs their money all at the same time.

Of course, a bank run in Greece could cause bank runs in other countries that hold Greek debt. It's not logical, but then we're living in a crazy world.

And another problem on the Euro front. If Greece dumps the Euro (it appears now given the recent election it WILL NOT dump the Euro), those who hold Greek debt in Euros are all of a sudden worried because they fear the drachma will not be worth as much as Euros. (They're probably right).

So they sell like crazy the Euro on the futures exchanges. Others sell other stuff including international stocks based on Euros. It's a downward spiral.

Eventually, this debt and fears of Greece debt being worthless goes back to multi-national banks that do business in America. They actually built complicated investment products called "credit default swaps" (remember 2008 crisis?), which are like insurance against something like Greek debt being worthless.

Hence, if Greek debt is worthless, the credit default swap insurance kicks in at a higher rate than anyone expected, and more people have to pay, and pay, and pay. Banks or investment houses paying out credit insurance again, have less money to lend.

There. How's that for Reader's Digest. Again, read the whole story here. It's long, but it's very informative.