Fallacies and Misconceptions about the Greek Crisis
One frequently gets the impression from reading the mainstream media that Greece has a monetary policy problem and not a fiscal problem. This is incorrect. Yet many commentators seem to argue along the following lines: This crisis is due to the straitjacket of the single currency with its one-size-fits-all monetary policy, or at least aggravated by the constraints of this system. Greece would have more “policy options” in dealing with its troubles if it had control of its own national currency.
Then there is, connected to this, an underlying – and not very flattering – notion that the Greeks are somewhat unfit to live and work in a ‘hard money system’, which presumably the euro is. The Greeks, this seems to be the allegation, like borrowing and spending too much. I am paraphrasing here but this is certainly the underlying tone of the narrative. The Germans and Dutch and French can live without the constant aid of conveniently cheap national money – but the Greeks can’t.
This is nonsense, and dangerous nonsense at that. Let’s first look at what Greece’s alleged “options” would look like if the country suddenly had the drachma back. The idea in the mainstream media seems to be that they could have lower rates and an even easier monetary policy than they have today under the ECB, and that such a policy would be suitable to the country as a whole. We have to remember that the ECB is already running an ultra-expansionary monetary policy, that the ECB is already the single biggest owner of Greek government debt, and that the ECB is very generously funding all euro banks (including the Greek banks) under lending programs that allow a lot of toxic waste to be used as collateral. But, I guess, a newly independent drachma-central bank could print even more money, hand that money to the Greek banks and the Greek government to allow them to stagger on, and then have a go at – what’s that pernicious phrase, again? – “inflating the debt away”. Well, good luck – we will debunk this shortly.
But there is another, slightly more sophisticated sounding argument out there. According to this ingenious interpretation, the Greek government is insolvent not because it habitually spends more than it takes in but because the Greek economy is not growing fast enough. If only the Greeks were more competitive and could sell more stuff abroad, then their government could happily continue spending! So again, the problem is with the inappropriately “hard money” of the Eurozone when what is needed is “soft money” — a super-easy monetary framework, in which the currency can be debased and international competitiveness and government solvency be restored with cheap money and low rates.
Luckily, I have never needed the help of any of those debt advisory services for consumers who face personal bankruptcy, so I am not speaking from experience here. Yet, I very much doubt that the first advice these services give to individuals at risk of getting crushed under mountains of credit card debt, is that they should get better jobs so their income rises. Yet, this seems to be the standard advice from mainstream economists for governments. Governments are expected to manipulate the economy via their paper money monopolies in order to generate the economic growth they need in order to sustain their lavish spending. Economic reality has to be made to perform to the demands of state largesse.
Also, I wonder, if soft money is such a great idea, why should we confine it to Greece? Should we then not all ask our central banks to run an even easier policy to “stimulate” growth? Well, most central banks are already trying this without much success. Could it be that there is something fundamentally wrong with fighting a crisis that is the result of too much debt and cheap credit with yet more debt and even cheaper credit?
I am not quite sure what is scarier, the present crisis or the fact that such economic nonsense is widely considered accepted wisdom.
A soft drachma would be of no benefit
But back to Greece. First of all, it should be clear, that a reintroduction of national paper money in Greece and the subsequent debasement of this money would not prevent bankruptcy. It would accelerate it, as the original debt was contracted in euros, and any attempt to repay it in debased “new drachmas” would constitute a default. (Of course, the Eurocracy may try and label it “restructuring” or “re-profiling”, but the rest of us have to live in the real world.) And even if repayment in new and debased drachmas was finally agreed, it would still constitute a massive loss to euro-area lenders such as the reckless German and French banks that foolishly lent to Greek politicians with blissful abandon and that are really the designated beneficiaries of the bailouts. They might as well write-off the Greek euro debt now.
Reality is not optional. The Greek government is bust, which means it cannot and will not repay its debt in anything of material value. Introducing a soft drachma doesn’t change anything.
However, many commentators suggest that even after default and substantial write-downs at the banks and pension funds, Greece should still leave the euro. Why? First of all, there is no need for an exit. The euro is a form of paper money, and paper money is not debt. The euro, just like the dollar, pound and yen, is an irredeemable piece of paper. The governments that issue it promise to exchange these notes for – nothing! The creditworthiness of these states is immaterial. The Eurozone is a currency union, not a credit union or fiscal union. I explained this here.
But I suppose the argument for post-default exit is essentially the one I cited above, namely that a soft national currency is more in character with the Greek’s alleged tendency to financial extravagance. Even if we accepted the distasteful national stereotype behind this, this argument would still be nonsense.
Debasing the currency can never be in the interest of Greek society – or any other society for that matter. Of course, weakening the exchange value of the new drachma would be a temporary shot in the arm to the export industry. As Jamie Whyte explained so lucidly here, and using the UK to illustrate the point, a weak currency is a subsidy to exporters funded by a tax on importers. Debasing the currency never furthers overall prosperity. In terms of access to internationally traded goods and services, the Greek population would get instantly poorer.
Additionally, easy money is a subsidy to the banks and the borrowers, and a de-facto tax on savers, who – contrary to the caricature in the media- do in fact exist in Greece. The recommended soft money policy for Greece would mean that savers lose purchasing power via a combination of artificially low interest rates, international currency depreciation, and rising domestic inflation. But sadly, savers do not count for much in today’s macro-economic debates, which are all geared toward borrowers and dominated by Keynesian ideas of boosting the growth statistics and generating artificial “aggregate demand”. Such a policy bias has far-reaching and long-lasting consequences. Saving and the accumulation of real capital are the backbone of any economy and the only method we have for increasing productivity and thus generating lasting prosperity. It is the savers who put the capital into capitalism.
Continue reading at Paper Money Collapse