QE 2: Greece-ing, The Pig
The story of Greece and how its role as a new E.U. member state led to their frame, capture and trial by public opinion for being among the worst culprits of the global 2008 financial panic
Greece is a small peninsula country in Southern Europe with a rich and varied history. One of the original empires of the modern world, Athens is rivaled by Rome even today for its place among the most popular and famous tourist destinations. So much is analogous between them - incredible ancient structures, feats of engineering that rival our modern day, even religious power centers - Catholics in Rome Italy of course, with the Orthodox church was central in Greek life following the Macedonian conquest of the known world. (Why do I feel like no one in K-12 education [and that includes the teachers, very sadly] would know who Alexander the Great was if they were asked on one of those street videos)
Anyhow Greece and the narrative surrounding the sovereign debt crisis they went through starting in 2008 is an interesting story, one that in the microcosm may well become a prescient and terrifying harbinger of what is coming to the financial systems of the Western powers very soon. The deference of pain, when we define it as taking the losses and restructuring for the poor decisions and overleveraged positions the American financial industry had put itself into circa 2008, was a mortal sin that reset our entire economy and the expectations of its actors. We discussed this and outlined that the pain deferred did not dissipate in the time between then and now, but rather has been growing steadily and then more rapidly in the last two years, as the zero inflation, papered over style market conditions functioned as a kind of “new normal” biosphere for our market and greater financial system. Profits still needed to be made and investors satiated in the new system and so the institutions adapted to the system. Now that inflation is coming from the extra speed that COVID provided for the paper printers in the Western monetary system, we’ve all begun to see the cliff's edge that was the same one in 2008 - only because of the choices made back then on exactly how to avoid that precipice, the drop we could be in for now is much, much further down should we not be able to avoid the fall. It was a nasty one before but ultimately survivable, albeit the injuries may have taken quite a long while to heal depending on whose diagnosis you believed. Now the precipice is going to be certain death and there is no argument whatsoever about that. The story of Greece could provide a window into a shared fate for our economic lives here in the West; that thought is a terrifying one, as you will see when we tell the story and its consequences for average people.
This 7 month old video from Al-Jazeera's English division is a light recap of the current consequences of the Greek financial & state spending run amok on the citizenry. Defaults, unpaid taxes, and other bad financial behavior is commonplace: rioting young people in Greece's capitol city were a normal feature of life, egged on by unemployment rates of upwards of 40% in their age group and 25% nationwide. Massive failures of small businesses in every sector and pensioners not receiving increases or in some cases, not being paid at all or very late. Austerity measures forced upon the country by the EU in 2015 put increased taxation and cost of living onto the people of Greece as well, in an already near untenable environment. The damage to lives is severe and has become a near constant over two decades. I want to spotlight these conditions at the first so we can gain an understanding of what life is like in such an environment, because well, it could be coming for us next.
This is the consequence of a government that put itself into places financially that were outrageous. Sadly, the potential for a successful Greek economy was good, based on the country itself and what it brings to bear to the world market. “If you look at Greece, if you think of their coastline, if you think of their resources — this country should be rich,” Peter Schiff expounds in a podcast from 2015 following the austerity news. He went on to explain the reason Greece wasn’t was due to its government, and that countries like Hong Kong and Singapore which lacked the resource bounty of a Greece within their borders but had stable, pragmatic governance and thus positive investment outlooks and growth potential as emerging economies, would be able to get unravel the crisis in Greece in short order if they governed that country. Likewise if you took the Greek government and dropped it into Singapore to rule they’d be broke there too. Why? An unwavering commitment to a pro-socialism agenda and the requisite spending by government that must come with it had become a long-standing feature of Greek political powers. By implementing socialism in a long term way the country got itself into big trouble on the spending side and debt to GDP ratios soared over the years, reaching highs of 180%-200% in public debt held vs. GDP. At those limits, prices spiraled up while assets became steadily more worthless in the paper they were backed by.
Notice that it was NOT a lack of good investments or resources that sunk the country. Rather, it was hubris - the expectations that because they were blessed with such a bounty, they would have no problem pulling out all the stops for whatever short run crisis or situation needed handling, but somehow be able to take the hit and return to stability in the longer run economic time frame. The problem with thinking like this is that “some day never comes,” as the saying goes. No one ever wants to be the leader who has the austere years on their history. The promises of budget balancing and deficit cuts are not as appealing politically as what can be promised with more spending and increases to public debt, so expedient political choices argue against ever paying back the creditors if you don’t have to. Now if this doesn’t sound to you like where the Western world is headed financially, I’d like to know if you’re sober. The cautionary tale of Greece exactly mimics our current one. It is self-made by our leaders and their refusal to ease up on the system and let it work the kinks out itself. The heavy hand of government always makes markets inefficient. On a long enough timeline, survival rates drop to zero, to quote Fight Club.
Above are two brief and informative videos that will give us a salient timeline of events to work off of. The importance of the shifts of Greece first off of, and then back to, the traditional drachma currency cannot be overstated.
When Greece first got into the Eurozone in 2002, they did so by fudging their numbers. They overestimated their output and earnings, along with growth potential. They hid much of their privatized and public debt as well, which was discovered and admitted to by the Greek state in 2005. They believed that once they gained status within the Eurozone, the economic gains would wipe out the debt they secreted away and everything would turn out fine. Indeed, that may have proven true - as Greece was for years before 2008 seen as a decent to fairly good emerging market for potential investment, since despite its notorious potential for cronyism in governance it had EU status now (and the implicit trust) and the country itself was resource-rich. Indeed some increases did come in those years but it never was able to do what the leadership hoped and paper over their mounting debt. Why? Simple answer as always. The spending never stopped! In fact, it ramped up to greater levels than ever! This is like being informed of a raise coming to you at work, and being shocked that you still can’t pay your bills afterward because you pre-purchased a Tesla as soon as you heard the news from your boss. The Greeks didn’t want to think or calculate the upper limits in revenue of what the good fortune of EU partnership would bring and embarked on a social spending spree without regard to limits. They spent away their growth dollars before or exactly when they received them and never allowed the revenue to hit the books and push down their deficits, which were nearing insolvency levels even then! Not shocking or surprising that they were the first nation to experience a sovereign debt crisis when you analyze the behavior on a economic level. Their psychology of how they used and treated money was completely rooted in deep cognitive dissonance and fantastical thinking; no amount of growth would have satiated BOTH their spending habits AND had anything left over to scale against the deficit. Now I wonder, can we think of any actors in an economy or financial government regulatory system who behave similarly? Who dreamt of QE done to exponential multiples to achieve a societal vision and used simultaneously to throttle one type of energy economy and attempt to stimulate activity in another, without doing harm to the overall economy or driving financial inflation rates? A cabal of academics donning a new and yet untested (modern) monetary theory as armor, storming into the places of financial governance and power, and throwing up the levers to full power in their supreme confidence that they could control and eliminate any issues or hiccups if they occured? Yeah, I thought so. No one I know like that! (And truly they are going to disappear quickly: I believe they are ALL going to get the Bernanke “whack” with the exception of Powell, right? Funny how Dems treat their Keynesian ‘breathren' when the political consequences come knocking)
I want to note that I've gone over the timeline of events in a spotty way because this story actually DOES have a little bit of a fairy tale ending that is worth telling. Despite Greece still being in rough financial waters there is a new day (a Golden Dawn if you will) coming for the country today. That is because after the imposition of those Draconian austerity measures in 2015, Athens and the Greek populace as a whole did a surprising thing: rather than just continue to criticize the EU (deservedly) or parlay for yet another bailout, they turned their criticism inward and looked at themselves. What had they as a nation done to prolong and exacerbate the crisis? The results were a small-scale version of the political movement and election the likes of the one we've just witnessed in Italy. Per this very informative interview in EuroNews, former Greek finance minister Euclid Tsakalotos: “If you want to understand Golden Dawn, if you want to understand the rise of the new right, then the economic policies that lead to inequality, that restrict the public services, the access that people have to health and to transport and to education are part of the answer.” In other words, he believes the populism which saved Greece financially came out of anger from the overbearing IMF austerity policies levied in 2015 which were too heavy handed and crushed the Greek people whether Athens liked it or not. While we don’t share his opinion of populism and leaders like Meloni, his facts are in line.
The lessons of Greece are ones we need to hold close to our chest in this time in the country. Debt to GDP ratios rising near to and over 100% are no laughing matter; and the hubris provided by having an abundance of growth potential and natural resources should not cause our political class to be so reckless financially. Unfortunately all these things are proving true: so is a Greek tragedy going to be our fate?