As noted in the last post, this is a stub end on my series on Greece and Europe.

Looking at Greece and Puerto Rico over the past few decades, and at their recent financial travails, some common themes emerge.

Theme #1 is the relative nature of poverty in the contemporary world. Greece, for example, is a “high income” country (World Bank category) with a per capita gross national income, or GNI, of $22,000. By world standards, the Greeks live a comfortable, cushy life. But Greece is part of the eurozone, and by those standards it’s a poor country – per capita GNI in Germany, for example, is $47,000.

Similarly, Puerto Rico is a “high income” society and the third richest in the western hemisphere with a per capita GNI of $19,000. By world standards, the Puerto Ricans live a comfortable, cushy life. But Puerto Rico is part of the US, and by that standard it’s a poor country – per capita GNI in the US is $55,000.

The Greeks and Puerto Ricans could consider themselves rich or poor, but they choose to self-identify as poor, which leads to Theme #2: Thinking of yourself as poor, when you’re really rich, inevitably leads to envy and dependence.(1)

For decades the eurozone transferred massive financial assistance to Greece and, at the same time, Greece borrowed heavily to live the good life. The Greeks borrowed on Germany’s credit and at Germany’s low rates. For decades the US transferred massive financial assistance to Puerto Rico and, in addition, Puerto Rico borrowed heavily to live the good life. Puerto Rico borrowed on the credit of the US municipal market and at those low rates.(2)

Greece and Puerto Rico could, instead, have depended on themselves and built sustainable, independent economies. They didn’t, not because they couldn’t, but because they envied their neighbors to the west and believed they deserved the same lifestyle without putting in the same effort. The result was absolute dependence on Other People’s Money. “Dependence,” as one Puerto Rican official put it, “is embedded in our DNA.”(3)

Which leads us to Theme #3: the inevitability of economic catastrophe. Societies can’t live beyond their means forever, and when they hit the wall and suddenly have to depend not on Other People’s Money but on their own resources, what they inevitably find is that those resources, which have atrophied over the years, won’t take them very far. The sustainable, independent economy they could have built would have been much better, but now it’s too late. They’re much worse off than they would have been.

Given the huge cultural, economic and geographical differences between Greece and Puerto Rico, and the virtual identity of the outcomes, we have to conclude that economic disaster is the preordained outcome of the relativity of poverty and the benumbing character of dependency. Any society that is rich and full of promise but decides that it is actually poor and in need of outside help is, according to this conclusion, doomed.

If that’s the case, the only hope for those societies lies not in themselves – they had that chance and didn’t take it – but in the richer societies they envy. And the latter will sooner or later conclude that lavishing money on a country in the hope that it will learn to stand on its own two feet doesn’t work. What works is the good old carrot-and-stick approach we use with our children: You want your allowance? Do your chores. As I pointed out in the earlier posts in this series, that’s where Europe finally got to with Greece (after Germany put its foot down). And it’s where the US is with Puerto Rico, albeit after many years of financial support.

It would be a lot better if wealthier countries didn’t conspire in the dependency addiction of less wealthy countries in the first place, of course. That isn’t to say that financial help shouldn’t be offered, but it needs to be offered in ways that reduce, rather than increase, the likelihood of producing a culture of dependency. Instead, Europe airdropped money on Greece, and the US airdropped money on Puerto Rico, for decades. Greece’s debt is now plainly unpayable, and this past weekend Puerto Rico managed to achieve the largest municipal default in US history.

Aside from the fact that vast amounts of money get vaporized in this way, there are two other problems with wealth relativity and dependency that are worth reminding ourselves about. The first is well-known: it’s difficult enough for a country to learn to stand on its own feet ab initio – by which I mean providing a decent life for its citizens without using Other People’s Money to do it. And if before a country can learn to stand on its own feet, it first has to unlearn dependency, well, the prognosis is grim. Both those mountains are big ones, but having to scale them one after the other is pretty much beyond the ability of human societies.

The second problem is less remarked-upon, but ultimately perhaps more devastating: a culture of dependency interferes with the ability to think. We’ve already seen this in Greece, where an entire people first elected the second most Marxist government in the world (after North Korea), then voted overwhelmingly to refuse the EU’s bailout offer, then accepted a far worse offer. Even a moment’s thought would have prevented all these things, but that moment couldn’t happen in Greece.

And now we see it happening in Puerto Rico. Here are two very recent examples:

In decision #1, the Puerto Rico Supreme Court ruled that public pensions were sacrosanct and couldn’t be modified in a financial crisis. In decision #2, the Court ruled that public pensions weren’t sacrosanct and could be modified in a financial crisis. Both decisions were written by the same judge.(4)

The head of Puerto Rico’s teacher’s union, Mercedes Martínez, recently blasted the country’s creditors, saying, “We are talking about a class struggle. The rich people want to get richer and the poor people are getting poorer.”(5) Huh? We must have missed that part of Puerto Rican political history where the creditors voted huge pension benefits for public workers with no clue how to fund them. No, the creditors (who, by the way, include American workers whose pensions are invested in Puerto Rican debt, and older Puerto Ricans invested via Puerto Rican credit unions) had nothing to do with the corruption and cronyism that caused the problem. Ms. Martínez and her union had everything to do with it, as a moment’s thought would disclose.

Let’s hope we don’t have to experience too many more Greeces and Puerto Ricos.

(1) A good example of the relativity of wealth in the modern world is the fact that the issue of income equality becomes more – not less – intense and bitter the wealthier “the 99%” becomes.

(2) Puerto Rico isn’t an American state, of course, but for decades investors allowed the island to borrow at the low rates available to states in the municipal bond markets. Municipal bond defaults had been – and still are – extremely rare. But not in Puerto Rico.

(3) Gustavo Vélez, an advisor to the Puerto Rico government.

(4) See, e.g., “Puerto Rico Supreme Court Halts Pension Reform,” Reuter, 1/15/15; “Puerto Rico’s Top Court Backs Judicial Pension Reform,” Reuters, 2/21/15.

(5) Quoted by Mary Williams Walsh in “A Tangle of Rulings for Pension Cuts,” New York Times, 7/24/15.

Next up: China: The Unraveling Accelerates

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.