Greece

[John]

Dear all,

Back in 2010 (yes, five years ago) I wrote to you all to point out that Greece's finances were broken and that some kind of breakdown was inevitable. 

The mistake I made (and repeated on other subjects) is to underestimate the lengths that politicians and bureaucrats would go to (and the depths they would sink) to delay the inevitable. I'm talking about both sides of the negotiating tables that have existed over the years. I am trying to recalibrate this part of my analysis in future to give more "credit" (to abuse the term) to the lengths people will go to avoid reality. Credit where it's due, in terms of the big financial issues, Syriza is the most rational about Greece's situation presently. The view of the "troika" is close to absurd - Greece simply cannot "trade it's way out". It's bankrupt. Syriza, to their credit understand that Greece's debts are unsustainable and must be restructured and have the gall (snark!) to stand firm on this.

However, let Greece's story be a reminded that no can-kicking actually changes the fundamental issues (except it often makes them bigger) and how they must, eventually, be resolved.

The world is choked with, and economies stagnated by, debt. This is obvious to any rational assessment. A growing number of newer generation economists recognise this. Appallingly, most still cling to the absurd notion that the level of debt in an economy is more or less irrelevant. None other than Ben Bernanke himself, former US Federal Reserve Chair holds this ridiculous view - a flawed theory that should never have breathed life outside of a university Economics department.

But countries in the Euro-zone are shackled with an additional problem - the fundamentally flawed design of the common currency system itself. If different countries are going to tie themselves to a common currency, there must be a mechanism of transfer payments between countries to balance out each country's trade imbalances. For countries that have their own currencies, the trade imbalances are offset by changes in the relative value of their currency - having the same/similar effect as an outright transfer payment. By tying themselves to a common currency and without a transfer payments mechanism, national fiscal imbalances have no "relief valve". 

Most of the talk about Greece is limited and shallow. Regardless of Greece's levels of corruption and financial mismanagement, at some point it was inevitable that a country in the euro-zone would reach this point due to the flawed design of the system I already mentioned. If Greece had never joined the Euro-zone then we would almost certainly at some point be watching this happening to another euro country, most likely Italy, Spain or Ireland. In fact, stand by... they're up next (but there's probably some more cans that can be kicked in those countries).

If you would like to read more, I recommend the following articles:

• Forbes: Bureaucrazies Versus Democracy (by Steve Keen, Professor of Economics and Head of the School of Economics, Politics and History at Kingston University London)
  
• I Fear The Greeks, Even When They Bring Gifts
  
• Syriza and the French indemnity of 1871-73 (by Prof Michael Pettis)
  

The founders of the common currency system new this and were explicit about the existence of the flaw.  Do a bit of Googling and you can find this out for yourself. They recognised it's existence and that it must be fixed or else the consequences would (eventually) be dire. In their wisdom they also realised that they could not fix the flaw at that time because there was not yet enough solidarity across europe for the fledgling common-currency nations to agree to simply hand over some of their money to other countries in the zone (the necessary transfer payments). The founders hoped that the euro-zone nations would, over time, grow in solidarity sufficiently to agreement to plug this hole. This would have created a true "United States of Europe".

Well, the hole is now gushing and - thanks in no small part to the mostly shallow and ignorant debate on Greece and the other southern european countries creating even more disharmony, misunderstanding and division - it seems that hope of generating sufficient solidarity to plug the hole is dwindling, not increasing. This does not bode well for the great european common-currency experiment over the coming decades.

This all means that I'm still avoiding the euro currency. Patience was required concerning my long-held view that the US dollar would regain favour, but last year it finally turned the corner and I expect that it will continue to remain stronger than most other currencies, particularly the euro.

Barring some kind of ugly violent revolution (which would be dreadful), if Greece goes ahead and returns to the Drachma and default on it's debts there will be a period of real financial struggle for a year or two but Greece will finally get back on it's feet, free of the chains of the euro. I will be looking to speculate a small portion of my savings on the Greek stock market over the next 12 months or so because Greece is close to bottoming out.

Over the next 6 - 12 months

That's all for now.

John