April 8, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Global monetary and macro economics have become more like the literary nonsense in Alice in Wonderland. It is great fun to read, but unfortunately for all of us, we are living through this economic house of mirrors, which is more and more rapidly spinning out of control. The situation in Greece is the most poignant example at the moment. Although there do not seem to be more than 100 people in all of New York City that have any interest or concept of what is going on in Greece and within the euro, the events of the next few months will have a tremendous impact on the world. If the political actors in this tragedy-comedy play their roles well – staving off collapse – our suffering will be worse.
There is no way to win. The powerful elite political forces, and their co-opted market allies, involved in this fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe. Hopefully, they will be forced to give up before the damage is too severe. The quicker the crisis comes, the better for the world, but almost everyone is working in the other direction, stretching it out to inflict maximum pain.
At this point, the best way out for Greece is very clear. Greece should pull out of the euro this weekend, issue new drachma notes as soon as possible, and let the lawyers clean up the mess. If I were running Portugal, Italy, or Spain I would do the same thing – the first one out is the winner.
Our office has done a non-exhaustive, but quite extensive search of the research coming from banks, and it made no difference whether it was from Anglo-Saxon or European names, it was all positive for the rest of the year. Greece will make it! Fantastic cash flow projections, great statements about ‘never giving up,’ assessments of how horrifying it would be to leave the euro, and legal issues galore. Almost not one of these major institutions issuing these studies talked about how horrifying it would be to remain in the euro, how many man-hours of work would be lost, and how lives would be destroyed. There was no comparative studies section, which would have compared what we already know from Ireland, Latvia, Lithuania, and Iceland. Internal devaluation is hell. We believe the Baltic states will make it because they would eat grass and leaves to stay out of the hands of the Russian bear next door, and if Europe follows its Greek strategy much longer, they might have to.
Remember, retail sales in Latvia were down 30.2% last year and this year they should decline another 10% or so. My heart goes out to them, but their country is in a much better situation to suffer this internal devaluation process than Greece, as international trade is a much bigger factor of GDP. Latvia can win even if the Germans are determined to have no wage growth, positive productivity growth and no appreciable CPI movement, but the Greeks and the other southern Europeans are more rational than the Lats. There is nothing but politics that says that Greece can make it through this process.
Although politics includes compromise when it is working, the breakdown of politics is war. Usually the war implied in this famous aphorism would be between states, but in this case it would be between the people and the government that has failed them.
The Greek government can’t follow the current course. On the issue of ‘internal devaluation,’ the European political elites are way out of touch with their people: almost no one will stand for it. The political maze we are entering might have many twists and turns with distorting mirrors, but money is money and its powerful logic will win in the end.
No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3% implies. Please let the Greeks out and please restructure the euro, or drop the whole idea. If you don’t, the future will not be pretty.
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