Greece - A Lesson in Economic Reality

I have been following this situation in Greece with great interest since it first came out in the news some three years ago.

Greece has become the place where the economic fairy tales we were taught as college students collide with economic reality and dis. Not only that, it is the place where conventional wisdom is repeatedly proven wrong.

My sense is that the Euro is something of a socialist monetary scheme (as are all fiat moneys at the end of the day) that has come to function something like a gold standard. It is a socialist scheme in that the European Central Bank through the intermediary of European banks lends printed Euros to countries like Greece. This is socialist in nature because what the Greeks receive in the form of a loan in essence comes from the small reduction in value that occurs to all Euros in existence as a result of printing. Btw, when I say printing I don't necessarily mean physical printing, but the creation of Euros, mostly in electronic form, out of thin air by the ECB. This causes a slow erosion over the years of the value Euro over the years and this slow erosion of value is the tangible evidence of a hidden transfer of wealth from holders of Euros as a whole to the primary recipients ( and therefore the primary benificiaries) of the printed Euros.

These benificiaries are divided into two categories: a) the banks through whom the printed Euros flow purchase sovereign debt, and b) the parties that the governments in turn pay with their printed Euros: government works, pensioners and banks who receive the interest on the debt.

What this whole Euro crisis has come down to is a struggle between Germany who wants to limit the further printing of Euros and countries like France and Greece who want to print with abandon. All the hollering ahd foot stomping in Europe boils down basically to that.

That is why I have for a long time thought that first country to leave the Euro could very well be Germany, if the rest of the Euro zone over-rules Germany and goes ahead with some Euro-printing scheme. Euro-bonds are just one such scheme. Scheme where the ECB either directly or through the intermediary of regular banks purchase Euro-bonds with printed Euros.

The Euro has become a kind of gold standard to the limited extend that Europe has refused to purchase more Greek debt with printed money. Greece has been prevented from monetizing their debt. They have had to attract Euros into their country the old fashioned way: by trading for them.

We are being told daily that Greece is going to have to quit the Euro. Why? They don't want to quit the Euro. Opinion polls show strong support to stay on the Euro. People are pulling their money out of they banks. Why? Because they don't want their money converted in some surprise bank holiday to drachmas which everybody knows will quickly become worthless.

How do you kick a country off the Euro who doesn't want to leave it? You can stop lending to it, cease to funding their unsustainable socialist state. Ok. What happens then? My guess is the government will turn from downsizing and switch to Drachmas. This they will use to pay their employees and meet other obligations.

But what about the rest of the economy? Best I can tell, much of the economy has already gone underground, operating on cash to escape punishing confiscatory taxes. Those who have pulled out their Euros in cash will be insulated from the inevitable bank holiday where bank deposits within Greece are forceably converted to Drachmas. So I see a parallel cash based Euro based underground economy will continue. This economy will avoid much of the taxes and any taxes that are paid will be in increasingly worthless Drachmas.

This underground economy will have to function without the benefit of an in-country banking system because people will be very reluctant to deposit their Euros risk having them converted to Drachmas.

With the government back on drachmas, the underground economy will have to get back to basics and attract euros to Greece the old fashion way.

Sometimes, I think the best thing Greece could do is go to the Drachma. The sooner the better in fact. With the government carrying on business in a decreasingly worthless Drachma, it will become increasingly irrelevant. And the sooner the Greek government becomes irrelevant, the sooner the rest of Greek society can move on.

I think in a scenario like that, Greece can teach some elemental truths about economics like it taught us Democracy, like there is no such thing as a free lunch.