Wednesday, 8 July 2015

Q: What is the cause of the #GreekCrisis ?

What is inflation? Despite what you’ve heard, it’s not rising prices – although that may be one of the effects. So ask then, what is the cause of the Greek tragedy? Answer: Inflation. The Greek Government borrowed without the means to repay. Never mind prices, this is inflation. And what you’re seeing now is its results.

Let me stress again …

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 pretences, and issuing fraudulent bonds.
    This describes the Greek finances perfectly.

That description comes from the Gold Standard Institute’s Keith Weiner, who points out most of that tanker-load of counterfeit capital was spent on consumption – just as good Keynesians’' said it should be.

    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.

Like most government spending, it was never in any sense an investment. And it was profligate as hell:

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 fuelled 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. 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?

Of course it won’t. And the reality is that, with a paper debt of €72,000 for each working Greek (and few enough of them are working outside government), all that counterfeit capital “lent” to Greece as part of its Eurozone participation will never be paid back. Ever.

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.

So what caused the Greek tragedy? Inflation, pure and simple.

And as Ludwig Von Mises points out, the destruction of deflation is one of the inevitable results.

Obviously the side effects that accompany monetary deflation are never pleasant. However, these bad side effects are not caused by deflation but rather by the previous monetary inflation. All that deflation does, is to shatter the illusion of prosperity created by monetary inflation.

As with all great Greek tragedies, the outcome is inevitable from the outset – made so by the first bad choice of the protagonists.



  1. This prax wonk stuff is getting out of control. We didn't see the inflation you were predicting when the US started "printing money". Is the response to just redefine the term?

    1. | Maybe you weren't reading closely enough.

      "is always and everywhere a monetary phenomenon". I get it. I'm not arguing. But "never mind prices"? Seriously?

      (Also, that second link doesn't work).

    2. Oops:


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