The markets are frenzied worldwide, we have seen steep sell offs in the European, North American as well as Asian markets across the board during the last weeks, all due to Greece, a country whose economy makes up a small percentage of the European economy and a tiny percentage of the world economy. The equity value the world markets have lost is tenfold that of the entire Greece economy. The Capital Research Institute has been calling for a Greek default for years, it would have been better in the beginning, so far the bailouts amount to more than the default would have cost in the first place. Almost none of the bailout money stays in Greece, it get’s transferred to the banks right away, so the bailouts are not for Greece, but once again for incompetent bankers that made risky bets by loaning too much money to a country that should have never been able to borrow the money in the first place. You can consider the loans to Greece subprime loans, driven by pure greed.
Now there is talk that Greece will leave the European Union, which also should have been considered years ago, the reason is that the inflation due to the transition to the Euro crippled the economy and that even austerity won’t fix the problem, which creates the dilemma. Just remember when Germany started the transition to the Euro, at first stores would publish two prices, one in Deutsche Mark and one in Euro, which was about 2 to 1, that was intended for the Germans to get used to the new currency. But what happened over the months was that prices started to creep up, businesses made the argument that the transition to the Euro would cost a substantial amount of resources in order to implement the change, like changing cashiers to the new currency, printing new price tags, training of staff, etc. Eventually, as many Germans will be able to confirm, the Euro price became the old Deutsch Mark price, for example a liter of milk might have cost 1 Deutsche Mark (DM), but once the Euro came that same liter of milk now costs 1 Euro, which translates to 100% inflation. Many price tags where simply switched from DM to Euro without changing the number.
When Greece switched to the Euro it was even more extreme, a country whose economy primarily lived of tourism due to its beautiful old architecture and history was affordable until the country got stuck with the Euro which dramatically increased prices. Many businesses looked over the border and saw that in Germany certain goods cost x Euros, and then they thought that if Germans paid that much in their own country they should pay the same in Greece when they are on vacation, over time many other businesses followed the same path not considering that the people of Greece also had to pay those inflated prices on a much smaller salary. The next step was to increase public sector salaries in order to keep up with the price increases due to the transition to the Euro, which started the problem that we see today.
Let’s assume that the Greek agree to the austerity and stick with the Euro, that means lower salaries and lower disposable income, therefore a reduction in the standard of living. Besides that there is no economic growth happening and the country will have an ongoing recession for many years to come. That’s why people protest against the austerity rules that the Germans, EU and IMF want to have implemented, which is understandable. The other option is for Greece to leave the EU and the Euro in order to use their own currency again, but what happens to the inflated prices? In order for that strategy to work, prices would have to drift lower again, causing price deflation, which in return will also cause GDP to drift lower and again Greece will have a recession. Therefore causing the dilemma, they are dammed if they do and they are dammed if they don’t.
So what can be done to solve this problem? As we have stated in many of our previous posts, recessions need to be embraced as they are part of the natural businesses cycle that has existed for thousands of years. Year over year growth is exponential growth, which is unsustainable in the long run, 2% growth this year is more than 2% growth last year since this year’s figure is based on 102% of the last year’s figure. Prices within Greece should be based on the disposable income of the people within that country, not based on the disposable income of the richest nations in the currency union that come for holidays. The same can be said about Italy and Spain, countries which used to be very affordable to go visit before the Euro was implemented, now they are just as expensive and sometimes more expensive than the northern European countries.
In the last few days Greek’s have been running the banks to get their savings out in fear that the Euro will continue to sink in value should Greece leave the Euro behind. So why should the banks be bailed out in the first place since all the money of the bailouts goes right into the greedy pockets of the bankers rather than help the Greek economy recover by rebuilding sustainable businesses? Why should the people of all Eurozone countries even consider participating in these bailouts of the banks, if the banks made bad loans than they need to write them down and take the hit, instead of punishing all Europeans including the Greek. Politicians have zero integrity, they are just a bunch of puppets paid off by the banking cartels, and they are just as corrupt and greedy as the bankers themselves.
The governments and politicians of the individual EU countries as well as the EU government should be ashamed of themselves; they should all be in prison for stealing money from the public in order to bailout the banks. Let all those greedy bankers fail, let all the banks fail that have made bad bets, even if that means the entire financials system will collapse, which is just proof that the whole system is a house of cards build on pure greed and narcissism. It is time to start over; implement a system of sound money that is sustainable and that supports the public, rather than rob it by creating money out of thin air and then charging compound interest to further rob the public of its hard earned money.
Not just the Greeks should be in the streets demonstrating, every single European should be in the streets telling the bankers and governments that this has to stop. It is time for a new era and to implement a new financial system based on sound money. The Euro has been an absolute failure and its implementation has been inherently flawed. These next years will mirror the Lost Decades in Japan with unlimited amounts of bailouts and further quantitative easing. The markets will love that news because the easy money party goes on, also just driven by pure greed of investors, but fundamentally it will do nothing for the people and it will only prolong a painful crash of the entire financial system years later.
It is time for change, change that all of us have to demand, bailouts are not a solution to the problem, it will just prolong the inevitable truth of a complete system failure.
Thank for your time, we know these are tough times and the Capital Research Institute wishes all of our visitors and subscribers the best.