Stop me if you’ve heard this one. Ben Bernanke, Goldman Sachs, and a taxpayer walk into a bar. I don’t remember the rest, but it involves an ex-wife, a Greek donkey, and trillions of dollars of burning, worthless money.
Lost in the non-existent punchline is the unfunny realisation that Europe is gearing up to solve its Greek problem the way America has tried to cure its debt problem: by printing a ton of money and pretending that’s the only viable solution.
Whether that money comes in euros or a revived drachma isn’t terribly important. What’s notable is the use of QE-style inflation to spur asset price increases, drop the currency value, and in turn, spur economic growth via exports. This could be useful for the Greek government’s management of its past debts.
Of course, it also could, in theory, do what it’s done to the American middle class, and increase prices across the board. That would pair a recovery in assets and economic growth with an increase in prices — potentially a net wash for working Greeks. It would truly be playing with fire…and it may be the only viable option left.
Think realistically about the options. Greece owes a ton of money, relative to its tax revenues. It has this large debt and runs a deficit, adding to the debt every quarter. Its economy is drowning, and unemployment is running anywhere between 17 and 23%. Greece has taken on two bailouts and there simply isn’t the political backing to offer a third, at least not without tremendous changes to Greece’s structure.
In other words, they cannot borrow any more money. They cannot beg for any more money. They cannot realistically default without dooming themselves and the entire eurozone. They can’t keep kicking the can down the road, as they’re already looking at 25% interest rates on their near-worthless government debt. On top of all that, until their economy starts moving again, they cannot organically grow more money.
What’s a Spartan to do?
The options left on the table, it seems, are two. One, Greece can impose austerity, cut government spending massively, and continue to accept IMF and eurozone assistance until it rights its ship. This would certainly make current-debt holders happy, as they’d be more likely to get paid (rather handsomely) by the rest of Europe.
But what would these cuts do for the Greek economy as a whole? Most likely, this would be the Chuck Norris Death Punch to the face of Greece’s economy. Cutting spending mid-recession is a recipe for disaster, especially when Greece is already looking at 25% homelessness in Athens. The social welfare net isn’t as strong as one would expect from a wanna-be-communist nation. There would be rioting and, if I were a betting man, a toppled government by year’s end.
So, if they can’t cut spending, they’re going to have to raise revenues to service all this debt. There are two options here. One is simple and should be non-controversial. Greece can go after the wealthy taxpayers who simply refuse to pay their taxes. There are some 15 to 20 billion euros that are due the government that go uncollected each year, because tax cheats have little to fear from not paying. That’d be a good start.
The other option is the Bernanke Big Print/Quantitative Easing Plan. Oy vey. It offers asset growth and inflation growth, both of which are tremendous when you’re sitting on a debt you cannot pay but simply HAVE to pay. But it also punishes workers with higher prices without offering real wage increases.
More importantly, since Greece cannot set their own monetary policy (not without leaving the euro) they are reliant in the entire eurozone to set any QE plans in motion. This would require Germany recognising that, from its perspective, this is the least-bad of a series of terrible options, and pushing for the QE. Alternatively, Germany could simply leave the euro and let the forthcoming depreciation be the rest of Europe’s problem.
Whatever the case, it appears that the most likely outcome for Greece is precisely what is stunting the American economy at the moment — quantitative easing. The difference in situations (Greece is Code Red Emergency while America is just Kind Of Uncomfortable) is why QE for America makes no sense but QE for Greece makes perfect sense.
Bullish: The markets don’t give a damn if people in Greece are poor. What matters is that this doesn’t happen in Italy, Ireland, Portugal, Spain, Japan, and the United States (but it probably will). Greece offers a cautionary tale for the entire world, but if they can successfully manage this crisis, get back on track and actually pay their bills, the Greek 10-Year Bond is yielding 18%. Wouldn’t you like those returns? Also, investors who believe that the Eurozone crisis will be resolved may want to look at the MSCI Europe ETF and the CurrencyShares Euro Trust.
Bearish: For investors who believe that Greece will eventually default, the ProShares UltraShort MSCI Europe will track 2x the inverse of the VGK. Also, shorting the FXE would likely be a profitable trade in the event things take a turn for the worse in Europe.
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