6/28/2015 Portland, Oregon – Pop in your mints…
It appears that the Greek government is once again on the brink of an inevitable default on its Euro denominated debt. This time, however, Greece’s Prime Minister Alexis Tsipras appears determined to take it over the edge, calling for a referendum on the whether or not the Greek people should continue to abide by its creditors’ bailout terms and extend their own misery or to give the proverbial middle finger to their oppressors in the north.
We use the term oppressors, for the current state of affairs has been held in place to ensure that Germany maintains a death grip on the Eurozone. Greece stopped benefiting from being a member of the Eurozone the moment it accepted the yoke of a common currency. Sure, it was a nice run for the entire Eurozone when times were good, but when times got tough circa 2008 the Euro handlers at the ECB cut rates too slowly, citing a tired “stable currency” bias, and generally struggled to maintain liquidity, which is pretty much “job 1” when one is running a currency regime.
Maybe the Treaty of Lisbon wasn’t such a good idea after all.
What happened next was a catastrophe that is only possible in a Central Banking/Tax Farm disconnect that the Eurozone’s half baked approach to unity has left as the norm. You see, fellow taxpayer, in the United States of America, we have one Central Bank which runs the tax collection mechanism for the government. This means that, with localized exceptions, the tax farm’s tactics and the Central Bank’s liquidity functions can work in an awkward harmony. For those of us who pay Cesar annually via the IRS, this means that in a demented sense we share society’s burdens across 50 states. To those of us in Oregon, it matters not that the State of California cannot pay its obligations (unless, of course, one is a creditor of the State of California). It is taken as a given that the Federal Government will bail them out and the Federal Reserve will provide the cash (indirectly) to the Feds in order to do so. Then, and this is where the magic happens, we all pay for California’s misdeeds via Federal taxes and inflation.
This same scenario was possible in Europe until January 1, 1999 (a day that lives in infamy) and had played out throughout much of modern history.
Not so today. For today, in Europe, when the government of Greece hits hard times and cannot pay its bills, it has to beg its rich neighbors to the north for Euros, and accept whatever conditions they impose. What is funny is that neither Greece nor its northern benefactors can actively emit currency in sufficient quantities to ensure their new contract can be paid.
What does it mean?
Which brings us back to the upcoming referendum. While in our mind it is still even money that there will be a further modification of the Greek bailout and that the Eurozone will carry on as it has for 16 years now, there exists the strong possibility that Greece will “opt out” of the inconvenient currency part of the European Union. What does it mean? Beyond getting comfortable with Drachma exchange rates again, nobody knows, nobody has ever opted out of the currency after opting in (Denmark and the UK never got in).
The Greek people have decided that it means they are in big trouble, and they have been lining up at ATMs in order to get their hands on as many Euros as possible before the lights go out. For Mr. Tsipras, this in turn means he must declare a banking holiday and capital controls, which is a time tested recipe for causing any remaining economic activity to screech to a halt as anyone with a brain and more than a few Euros to their name starts working 24/7 on ways to keep their assets off the government’s confiscation radar.
The mini-spike in Bitcoin indicates that the Cyprus scenario is playing out again. If anyone recalls that event, it took the Bitcoin from relative obscurity to trading at around $1,100 before the mania wore off. Will it happen again?
It is anybody’s guess, but here are some statistics that may help guide your own educated ponderings:
Population of Cyprus: 1.14M, pre banking holiday bitcoin price: $49 (March 2013), post banking holiday Bitcoin spike: $1,124 (October 2013)
Population of Greece: 10.82M, pre banking holiday bitcoin price: $249 (June 2015) , post banking holiday Bitcoin spike: ???? (January 2016????)
We’ll let you do the math on the hypothetical situation we have planted, but the dynamics of what is occurring in Greece, from a monetary standpoint, are extremely similar to the Cyprus scenario.
Stay tuned and Trust Jesus.
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Key Indicators for June 28, 2015