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Copyright 2012 by John T. Reed
The media have many stories reporting that individuals and businesses in Gceece are rapidly withdrawing money—euros to be specific and that is very important—from Greek banks and Greek subsidiaries. Why? They fear that Greece will leave the euro zone and force conversion of euros in Greek banks and cmpanies into drachmas, the traditional pre-euro Greek currency at a conversion rate that lowers the purchasing power of the Greek bank accounts now in euros.
They are quite right to fear that. And that is exactly what I said the U.S. will do when the bond market stops buying U.S. government bonds.
Businesses in Greece are also lowering inventories and cutting costs, thereby making the Greek economy even worse. Greece is in a death spiral. The U.S. is on the same path only about four years behind Greece.
In two regards, the U.S. is worse than Greece. Greece has already embarked on an austerity program to lower government spending and debt. In the U.S., no one daers discuss such a thing because the Democrats will make a commercial showing the person who mentions it pushing a little lady in a wheelchair off a cliff.
The other thing is Greece is small enough to be bailed out by the EU, U.S., IMF, etc. The U.S. is too big to be bailed out by anyone.
Heineken is in Greece, but moving their money out. Ditto Diageo and GlaxoSmithKline. Greek companies are drawing down their credit lines out of fear that the banks that extended them will terminate them before they draw them down.
They are also trying to put clauses in contracts that say debt cannot be converted from euros to drachmas that are worth less. Good luck with that. Greece will simply outlaw such clauses. Those new clauses may be enforceable in ccountries other than Greece, but the assets and income, if any, available to pay the contract will be within Greece.
Greek importers are having to pay more cash upfront to get delivery of imports. Insurers who guarantee that Greek importars will pay for the imports they get are either raising the premiums way higher or refusing to write the insurance at all.
And all of this further makes the Greek economy even worse and thereby spins Greece’s death spiral faster.
Meanwhile, the Greek party leading in the polls for the 6/17 election vows to end all previously promised austerity and increase government spending, essentially blackmailing Europe and the world into giving Greece the money to continue monstrous government spending. There is some talk Europe may pay the blackmail. I can tell them what will follow that, more demands for more blackmail from more countries.
Europe, which many liberals feel has all the answers, is a disaster and has been since about 1900: world wars, a Great Depression, international trade wars, attempts to maintain a colonial empire, and now establishment of pro-union/welfare states that predictably cannot find enough money to pay for freebies for overyone.
Imitate those running to withdraw their money out of Greek banks, i.e., with draw your money from U.S. banks and U.S. dollars. . Put it in another country than the U.S. and another currency than the U.S. dollar. Do not imitate step two of what many in Europe are doing: moving their Greek money into the U.S. dollar. That’s insane. The forex and bond market’s blindness to the deterioration of U.S. credit and the impending entitlement explosion is a mystery for another article.
John T. Reed