Tuesday, May 15, 2012


Greece is gone as the reelections that will occur in about a month's time will produce a clear winner or a coalition that will have to promise to renegotiate the agreement with the Troika.  That will not occur, Greece will default and declare itself free of all agreements and of Euroland.

If things go true to form, a bank holiday will be declared, a new Greek currency will be--or have been-- printed and there will be a rate at which Euros will be exchanged which will quickly lead to a black market, to currency controls, to shock on the part of the general populace and, if the most dire predictions come true, something not much better than a barter society coming into existence for a considerablly long period of time.  Will any one care?  No, not really because no one has ever really believed that Greece is a serious country...a beautiful county, yes, but not a serious one.

Problem is, Greece was once part of Euroland and if this can happen in Greece, the question will be where else can it happen?  The usual suspects are there for all to see and the issue of contagion is becoming front page stuff.  I have a slightly different take on the situation because, you see, I think the horse is already out of the barn.  Tell you why.

We Yanks really don't think in terms of currency risk.  Take the low tax paying Warren Buffett.  Ol' Warred thinks that gold is a stupid investment; he would much rather own stocks and bonds and dollars.   I don't think that Mr. Buffett has ever realized that in India, the nation with the largest population in the world, peoples' 401Ks are worn openly on the arms of the populace.  Gold.  For over a billion people. That's real value, not to us.  People think differently than we do--not necessarily better--just differently.

The European experience has been far different from ours.  The differing value of currencies is well-understood by all Europeans.  They have experienced it first hand.  In Greece as in many other countries in the Eurozone the smart money is already gone.  It hasn't gone into Citibank Athens either.  It's gone to Germany, to Switzerland and yes, to the United States.  When the time comes for the introduction of the Drachma there will be plenty of Euros about, emerging from Germany and Switzerland and from under the mattress.  And as always happens those in possession will make an enormous amout of money adding to the arguments between the haves and the have nots.  Assets for hard currencies will be dirt cheap leading to substantial foreign investment and of course transfer of local ownership.  Not a pretty picture.  And it has substantially begun.

In the other weak economic countries the flight of the Euros, of course meaning bank deposits, continues apace.  It's just the "smart" money now but soon the average Juan or Mario or perhaps even Henri begins to figure this out the process will accelerate.  Oddly, one effect might be the oft-called-for growth in the money supply through the actions of the ECB may become a reality as the deposit drain from the banking system will require it.  And then what?  It is the answer to that question on which politicians and bankers should focus.  Stop worrying about what you call contagion; that is already occuring.  Focus on what happens when Greece is truly, de jurie, gone or it will be more than Greece.
The Bold Experiment will be no more.

No comments:

Post a Comment