Keith Weiner: Inflation Caused the Greek Tragedy

By inflation, I don’t refer to rising consumer prices in Athens. My Greek friends tell me that prices have been steady there in recent years. The focus on prices is the greatest sleight of hand ever perpetrated. It diverts your attention away from the real action. Inflation is the counterfeiting of credit. It is borrowing, when you can’t pay and you know it. Inflation is taking money under false pretenses, and issuing fraudulent bonds.

This describes the Greek finances perfectly.

 

Greece doled out a lot of its lenders’ euros. For example, government workers got a sweet deal: 14 months’ pay per year, and then a generous pension in retirement at age 54. Of course, Greece employed an army of bureaucrats to administer all this welfare. Once a euro is spent on a welfare program, it’s gone. Greece didn’t use the proceeds to add to its productive capability, to generate income that will make it possible to pay off the loans.

In good times, Greece kept spending more than its tax revenues. This is a colossal failure to govern rationally (inherent in socialism). Loans from outside fueled a false boom, like alcohol feeds a drunken revel. It seems like great fun while it lasts. All that borrowing juices up spending. People are hired, profits go up, and of course tax revenues are boosted.

Metaxa

Then, there’s one heck of a headache when it’s over. Borrowing means consuming today what you would otherwise have to wait until tomorrow to consume. Greece was so desperate to consume that it racked up an estimated €360 billion in debt, quite a lot for a little country with 11 million people. The exact number is not the point, and the total is probably even higher. We will find out, in the coming months.

What makes anyone think that Greece will flip the other way? That it will stop boosting spending via endless loans, and instead spend less than tax revenues to repay its debts? Repayment mode is even harder than it sounds, as GDP and hence tax revenues slam into reverse. Expecting Greece to repay now is pure magical thinking.

The tally long ago passed the point of absurdity, if not mathematical impossibility. The workforce of Greece is under 5 million people. Per capita income in 2014 was about €24,000. Assuming every one of them worked in the productive sector, and thus could actually contribute to debt repayment, the debt load is €72,000 each. At 6% interest—downright cheap, considering—the poor Greeks would be giving up about a third of their paychecks just to pay off their debt in 15 years. And that’s before a penny of tax revenue went towards funding the police.

There’s no way.

Greece is like that deadbeat nephew who lies to everyone, borrowing whatever anyone will give him. Shame on the enablers who keep helping him buy drugs. Shame on him too, of course. But more importantly, the cash is long gone and only the debt remains.

Such is the nature of fraud. Lenders expect to be repaid, but sooner or later realize that they’ve been tricked. The counterfeiter never intended to repay. His promises were plain lies. More importantly, he never had the means either. Even good intentions can’t conjure the lost euros out of a hat. The sooner that everyone acknowledges this simple fact, the sooner they can stop doing more damage.

The Greek inflation was so damaging, because it fooled lenders (including Greek savers) into thinking they had good assets. Based on this illusion, they made other investing, borrowing, and spending decisions. When the government defaults, then reality sets in. Creditors will have dreadful write-offs, and many will be forced to liquidate other investments to deleverage. Formerly busy companies will shut down, their workers laid off.

Welcome to deflation—a forcible contraction in credit.

 

Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona. In March 2015 he moved his Gold Standard column from Forbes to SNBCHF.com.
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3 comments

  1. Thefroggydude

    The family members weren’t just loaning the wayward nephew money. They were actually stuffing his pockets with cash, believing that they would make a small fortune on the interest. There is enough blame here for everyone. All participant will get what they deserve. The only ones that I feel sorry for are the poor retired workers who worked hard all their lives, saving their money for retirement and trusting their governments and their bankers. They may be naive but they don’t deserve what is coming.

    1. Keith Weiner

      Thanks for your comment.

      I agree, that in a broad sense, the creditor usually has some idea that the borrower is committing some fraud. At the very least, there are always red flags. The creditor believes, in part because he wants to believe.

      This applies to workers who get pension benefits that are too good to be true, especially municipal workers where the benefits are doled out by politicians in exchange for votes.

      I don’t focus on blame, rather on a flawed system. The regime of irredeemable currency not only enables this, but creates perverse incentives to encourage it.

  2. Aktuar

    Another good article in your series of re-orienting the traditional inflation / deflation debate.
    They are both two sides of the same, fraudulent coin, or in this case, lack of coin.
    Fiat money inevitably sows economic destruction. Keep the great articles coming.

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