Alan Greenspan has predicted that Europe is not going to continue to loan money to Greece. He believes this will lead to Greece exiting the euro, and possibly the eventual dissolution of the euro entirely.

Axel Merk agrees that Northern Europe is ready to abandon Greece. He gives an excellent, in-depth explanation of the Greek situation in an interview with Greg Hunter of USAWatchdog. He explains that Greece’s situation is just one manifestation of the same problem faced by all developed economies: an inability to balance budgets and pay down debt. Ultimately, Merk warns that this will trigger massive inflation thanks to the meddling of central banks.

Highlights from Axel Merk’s interview:

Greg: What’s going to happen if… Greece says, “Hey, that’s it. We’re not paying back [our debts].’? Russia is offering them deals. What happens when Italy, Spain, Portugal, Ireland [say], ‘We want the same deal. We want a debt cut.’? Isn’t Greece the canary in the multi-trillion dollar coal mine of debt that is Europe and European banks?

Axel: In some ways. Let’s take it step by step. First of all, think about what is in the interest of which stakeholder… The reason why Europe has been doing these bailouts is because the banks in Europe held the debt of these weak countries. German banks, other banks, held the debt of Greece. That was a couple years ago. Who owns Greek debt now? It’s the IMF, the EU, the European Central Bank [ECB], hedge funds. The banks don’t own it as much anymore. Last week, what happened was that the new finance minister… had a chat [with the ECB], and afterwards the ECB came out with a statement that said, ‘We’ll cut you off from our funding in two weeks.’ Earlier than previously expected… Sure enough, the euro tumbled on on that.

The next morning, the euro had recovered. The reason… is because Greece’s problem is mostly Greece’s problem now… What about Italy, Spain and so forth? The biggest fear Northern Europe has is that anti-austerity parties are becoming more popular… From the point of view of Germany, if there’s a meltdown [in Greece], that would kind of discourage the Spaniards of following the same path. The roles have changed a little here. Germany knows that the money is gone, but they can’t give in because everyone else will give in. [Germany is saying] ‘If you want to take a haircut, you can do it, but you’re going to suffer the consequences.’

Greg: If this thing gets out of control, couldn’t we have bank runs across Europe? Couldn’t we just have fear and panic take over? Aren’t they rolling the dice on that? Isn’t there a downside?

Axel: In some ways, yes. Two years ago I would have said we’re going to have financial meltdowns. These days… the market has been pretty complacent about it. Why? I think a key reason… is because the banks have had time to prepare… Now, [financial institutions] know this debt is risky, so they’ve had time to prepare. That’s ultimately the role of central banks. Central banks can buy time. They cannot buy solvency. Yes, there will be an impact… I don’t think it’s going to be a meltdown. I think it’s going to be more like Cyprus. There was a meltdown in Cyprus, but the ripple effects were limited. Yes, it’s bad, but it’s mostly bad for Greece…

The big problem that Greece has is time. By the end of the month, they need to find an agreement to extend certain provisions. Some people have said that they have money until the summer, others say they only have money for two weeks or so…

Think about the US budget. The president comes out with a budget proposal that has absolutely no chance of being passed. The reason the markets don’t get nervous, is because we know how this game plays out. The difference is that [in Greece], we have a player we don’t really know yet. Ultimately, it’s a high stakes political poker game. I think the Greeks are overplaying their hand, because I think Northern Europe is going to be quite willing to let them melt down…

Talking about Russia, yes I’m very concerned about Russia. I’m very concerned about what’s happening in Ukraine. The problems we have there and in Europe, and in fact also in Japan and the US – we cannot balance our budgets. Ukraine wouldn’t be in the situation it is in if it were able to balance its books. That’s just the symptom. It exhibits differently. We see one way how it plays out in Greece. We see in Ukraine another way. In Japan, we’re trying Abenomics. In the US, we have our feel good growth strategy. But ultimately, we have the same issues everywhere. Yes, I’m very concerned about it, because the Great Depression ultimately ended in World War II. There’s a reason for it. Because extremist populism is the on the rise when you have this dragged out period where everyone is trying to postpone the inevitable, then people get fed up with austerity and they start to blame everybody but themselves…

We’ve designed a system where bankruptcy can cause a financial meltdown. That’s what we have to get away from. It’s not that bankruptcy is bad, it’s the financial contagion that’s bad. The way you avoid it is by posting collateral in every transaction. If in all of these derivatives you’re pointing out people had to post collateral… they would be discouraged from taking such extreme positions… We get into this with super loose monetary policies. When interest rates are zero, of course you give yourself up. It doesn’t cost anything to have yet another derivative in place…

Greg: Do you see big inflation? Are the big central banks, the US, the ECB, going to miss the inflation threat and all of a sudden find themselves in huge inflation?

Axel: For me, it’s a slam dunk we’re going to get inflation. We have negative real interest rates in the developed world as far as the eye can see. Just about every country has negative real interest rates. We have financial oppression everywhere. I think we cannot afford positive real interest rates over an extended period…

Sure, currently inflation is low. The reason we have this battle between inflation and deflation is because we’re faced with a deflationary bust and central banks are fighting against it. If we didn’t have central banks, I would be fully on board – yes, we’ll have a deflationary bust. But because of the reasons we discussed, we cannot have bankruptcies, [etc.], we will inflate our way around it…

I think investors should have a toolbox… I’m very concerned about equities and bonds, both at the same time. If you print enough money, bonds and equities go up. The problem is everything goes up in tandem, so people need to look at alternatives. The easiest one is gold… You’ve got to look at alternatives, [and] find a way to get uncorrelated returns…