I've seen the future, and it's ugly

An article in today's New York Times makes plain that Greece should have defaulted on its government debt long ago. Three things kept this from happening. (1) Jean-Claude Trichet, head of the European Central Bank, refused to believe that a Euro state could be allowed to default. He was influenced toward his view by the increasing amount of Greek debt the ECB had purchased to stem the growing crisis. (2) Many European and American banks were holders of the debt, and in their still anemic state, might collapse if forced to write off most or all of the loans, leading to worldwide recession/depression. (3) Many of the loans were hedged (insured) using the infamous credit default swaps familiar to us from the mortgage debacle still underway. If Greece goes into a state of default without the permission of its creditors, the swaps are triggered. No one seems to know who all has sold the swaps, and who has bought them, with the result being fear of a panic if they're triggered and the solvency of major financial players is put into doubt. As in 2008, credit would stop, and our system, which depends on credit to continually roll over short-term debt, would collapse.

The only reasonable, if still painful solutions left are these: (1) The Euro states that can afford it buy a lot of the debt. This would be a political and moral disaster. Wealthier and more productive states that took difficult steps to rein in their debt years ago would have to bail out the Greeks, who lied repeatedly in order to keep the loans coming and not face the political consequences of reducing their borrowing. Or (2) the European Central Bank buys the debt by increasing the money supply ("printing money") in order to fund the purchases. It is currently forbidden to do this, so a rule would have to be changed or ignored. The price would be a drop in the Euro, inflation in Europe, and a transfer of wealth from those with assets denominated in Euros to those holding other forms of real wealth (land, real estate, stocks, etc.). 

This means either German taxpayers would pay quite openly and would likely rebel, or Europeans in general would pay with a bout of inflation. Such an inflation would also make it more difficult for non-Europeans to sell their goods in Europe, since the Euro would fall relative to other currencies, making European goods cheap elsewhere, and imports more costly.

Welcome to Our New World.