Copyright 2012 by John T. Reed
Greece has borrowed and spent so much more than they collect in taxes that they have not be able to borrow from the real free market for about a year. Since their May 2012 elections, there has been a run on Greek banks. A number of them have become insolvent as a result. The ECB is supposed to be the liquidity provider of last resort—like our Federal Reserve—but they follow Bagehot’s Dictum that they do not help insolvent banks, only illiquid ones. So they are refusing to help the insolvent Greek Banks. That means the people who are in the back of the line to withdraw their savings will likely get nothing, which cause more frantic effort to withdraw, yadd yadda.
The subhead on the top of the front page headline of the May 16, 2012 Wall Street Journal was “Depositors Withdraw $898 million on Monday alone.”
Deposits have been leaving Greek banks since 2010. Those depositors are doing the same as I have been doing for six months and continue to do. I am moving my U.S. dollars into selected foreign currencies in foreign countries. In there a run on the U.S. dollar? Yeah, me and my readers. Do I feel lonely? I feel lucky that I am doing this before the mob hits the banks. The early bird gets to withdraw and preserve his life savings. Devil take the hindmost.
Greece hit that point when their debt-to-GDP ratio reached around 140%. They are now at around 165%. We are at 104% and rising at a rate of 8.5% per year.
They are members of the Euro Zone and the Euro Zone has made them some bailout loans and agreed to make some more, but they insisted that Greece lower its deficits and national debt. Essentially, the European Central Bank—which prints the euro for the Zone—is now buying the Greek bonds that the bond market is rejecting.
Although the ECB is more lenient than the bond market—they use taxpayer’s credit rather than their own money like the bond market—they have belatedly demanded Greece stop the borrowing and spending binge.
Greece, is now unable to keep politicians in office who will end the borrowing and spending binge.
They just had an election, but the party that came in second—far left socialists—declared the prior austerity promises made by Greece to be null and void. Their plan is to dare the Euro Zone to throw them out.
They were having meetings in the middle of May 2012 to try to put together a ruling coalition—without the second place far lefties—so they can get the next bailout payment. But as I write this on May 15, 2012, the far lefties refused to even attend the meetings, let alone change their tune on the needed austerity.
So they apparently will soon have another election and polls indicate the far left party gaining votes.
That seems pretty sure to result in the ECB refusing to make any more loans to Greece. That, in turn, means Greece runs out of money to pay its bills, within weeks. Greece would thus be forced out of the Euro Zone and have to resume printing its own money which was previously called the drachma.
To Greek demagogues, not demigods, this is the easy way out. Once they regain control of their currency “printing presses,” they can simply counterfeit the money they need to pay their bills. The ability to hyperinflate their money is the only reason for, and only benefit of, their leaving the euro zone.
This is where the U.S. will be in about four years according to simple projection of our current rate of increasing our national debt. We do not have to leave the Euro Zone.W e were never in it. We have had control over our own “printing presses” all along.
This will result in an instant financial catastrophe in Greece. This is a country with 11 million people, similar to Ohio. It is 51,000 square miles, about the size of Louisiana. It is surrounded by Muslim states including one, Turkey, that really dislikes it.
For one thing, they will have to start “printing” drachmas. But who will want them? If you have a bank account in euros, would you trade them for drachmas, which are likely to be shunned by the world? But your Greek banks and government do not have enough euros to pay everyone they owe, like depositors.
Ah! I see the light bulb going on over your head.
The Greek government will probably do the usual capital control thing, namely, ban ownership, possession, import, or export of euros and all other foreign currencies and gold. They will probably order all Greek residents to turn their euros, gold, and any other foreign currency into the banks for which they will be given drachmas at a rate well below what the market will value the drachmas at. This used to be called “devaluation” in the era of fixed exchange rates. EZ governments cannot devalue unless they leave the Euro Zone. In other words, the government still steal from its residents the value of the euros turned in that exceeds the value of the drachmas paid to the people turning in euros. If your euros are in banks, the Greek government will order them turned into drachmas, by the banks, against the will of the depositors, at the government conversion rate which will far exceed the market value of the drachmas. In other words, the Greeks with euro accounts in Greece will instantly become much poorer as their good currency is forced to be traded in for crappy currency.
If you have been reading my articles from some time, you know I have been moving my money out of U.S. dollars into Canadian, Australian, New Zealand dollars, and Swiss francs. Can you now see why? Greeks should have been doing the same as me with their euros which are about to become a foreign currency within Greece. Some have. God help the ones who have not.
The U.S. government will do the same to Americans when the world bond market stops buying U.S. bonds. In 2011, the U.S. Federal Reserve bought 61% of the U.S. government bonds sold. That is the equivalent of the Greek government leaving the EZ and printing its own drachmas. The Federal Reserve “buying” U.S. bonds is a joke. The Federal Reserve has no money. It simply conjures the money it uses to buy U.S. government bonds out of thin air. Eventually, that will cause hyperinflation. The U.S. dollar will fall in purchasing power to nothing.
Consider what happens no residents of Greece on the first day of The Return of the Drachma. All payments by the Greek government: salaries, pensions, payments to suppliers and subcontractors, will be in drachmas instead of euros. Furthermore, the Greek government will insist that their private sector—small though it may be—also pay only in drachmas.
The government will state its official exchange rate for drachmas versus euros, but the world market will place a far lower value on drachmas. For example, if your salary is 100 euros a week, you will henceforth be paid, say, 100 drachmas a week. But where the 100 euros bought you a nice couple of bags of groceries, either in Greece or in Italy or anywhere else before, now it will buy you very little inside Greece and even less outside of Greece.
A black market will spring up where euros and other world currencies like the U.S. dollar or the British pound will buy you more than before, but you will need far more Greek drachmas than the predecessor euros. The black market will be illegal. Legally, all sellers and lenders must accept drachmas at the official exchange rate for obligations stated in euros or goods and services previously priced in euros. In reality, no sellers will sell goods or services for those official drachma prices. The black market will have plenty to sell and the stores that are required to take drachmas will be empty. Wage, rent, and price controls will be imposed. Instantly, there will be shortages of everything and the quality of everything will plummet if you insist on paying in drachmas or only have drachmas.
Rationing will then be started by the government stating how much of each thing you may buy per week. “Hoarding” will be outlawed, that is, having more than a week’s worth of ration coupon allotment of the product in question. People who abide by the law will literally starve to death.
The government will try to pay everyone in drachmas. Suppliers to the government will stop supplying everything from food to medicine to fuel. Foreign suppliers will laugh at all Greeks, including the Greek government, who offer to pay for imports like oil or food in drachmas. They will demand euros or gold or whatever. That will force the Greek government to start favoring export industries and promoting tourism to encourage outsiders to give the Greek government euros and other trusted currencies with which to buy things that are not produced in Greece. Because Greece is relatively small and has over recent decades turned itself into a non-competitive welfare state, it lacks the ability to feed itself or produce goods or services that non-Greeks would want.
In short order, the entire population will scream bloody murder because the drachmas they are receiving from the government and private employers are worth far less than the euros they previously got, so they cannot live off them. And they cannot find jobs. and they are not allowed to have real money from other countries.
Greece will turn even more into a nation of law breakers than it was when Michael Lewis wrote a chapter about the country in his Vanity Fair articles and book Boomerang. There nothing wrong with Greek DNA. E.g., Pete Peterson. But as with so many Old World countries, the diaspora who got the heck out of their ancestral country do far better than the ones who stayed behind. I do not know how much better Greek culture may have in the past, but it is certainly a piece of crap now. And our culture is deteriorating along with our finances. The two are connected. Americans, like Greeks, now expect to be paid for doing nothing (pensions, unemployment benefits, fraudulent disabilities, AFDC, Social Security and Medicare that pay out more than comes in, etc.) That way lies disaster.
Greece’s best people will flee the country. Like Zimbabwe recently, the Greek government will be forced to end all these crazy laws requiring the drachmas be accepted at an artificially high exchange rate and the black market will become the legal real market and all transactions will be done in euros, dollars, etc. Normality will return, but 1950 reality, not 2011 reality.
Greeks, will have to go back to the way their economy worked right after World War II. For example, instead of just selling Greek fisherman caps, they will actually have to go back to fishing and selling the fish they catch. The 50-year old hair dressers who retired on government pensions because hair dressing is a “hazardous profession,” will have to go back to dressing hair or some other private sector work. Because they are out of practice, most Greeks will suck at this. But eventually, they will reacquire the habits of industry, initiative, entrepreneurship, and so on that they gradually abandoned in recent generations.
Greek products will become bargains, as will Greek tourism, unless surrounding countries protect themselves against such cheap competition with tariffs and other restrictions.
I hope—really hope—that Americans and the rest of the world will see this, be horrified by it, and order our elected officials to get us off that track right now!
However, they will essentially be told that the only way is to drastically cut federal spending so that social security checks are cut in half or means tested so that only the bottom half keep getting them. And all other federal spending would have similar changes essentially so that the amount the federal government spends will be cut around in half one way or another.
Democrats and leftists will demand “the rich” pay the entire cost. That is mathematically impossible and “the rich” will refuse by leaving the country and changing the way they make their living, etc. The real solution is a Laffer Curve/Hauser’s Law tax code that maximizes revenue, which is probably where we already are. Plus we have to sweep almost all business regulation off the books. Hopefully, the screaming public will demand that any and all impediments to hiring are eliminated right now! Drill, baby, drill! Build the pipeline. Damn the spotted owl! End unemployment insurance or cut it down to only the destitute. Etc. etc.
More likely, we will get the New New Deal and quasi-Greek behavior. That will be disaster. But the Greeks are about to give us a chance to avoid this craziness—maybe during the current election campaign. I expect the public will connect the Greek insanity with Obama and figure Romney is the antidote. That is probably correct. But I am not sure the American people won’t turn left and blame it all on capitalism as they did in the 1930s.
American like to scoff, “We’re not Greece.” Yeah, we are. The main difference—size—does not matter. Ratios are all that matter in finance and our ratios are racing to match those of Greece. Deficit-to-GDP ratios: Greece—9.1%; U.S.—8.7%. Debt-to-GDP ratios: Greece—165%; U.S.—104% and climbing at a rate of 8.5% per year.
What should our goal be on those ratios? The requirements for joining the Euro Zone are a good starting point: Deficit-to-GDP ratio: 3%; Debt-to-GDP ratio: 60%. We are far from either of those. They are also good rules for picking the countries to which you move your money, although one of mine is Canada which has a debt-to-GDP ratio of 84%. I cut them some slack because they are near me and because they are lowering, not raising their debt-to-GDP ratio.
John T. Reed