Round and Round the Mulberry Bush…

Pop goes the Weasel.

In olden times those down on their luck would pawn their coats or their tools on Monday and hope to redeem their pawn by Sunday when they needed to turn up in church properly attired.

Richard Fernandez, writing at PJ Media, talks about the musical chairs of the Greek Crisis:

Eventually the physical world starts to change to reflect the payments that have to be made to the players. Trade begins to contract, stores start to close and desperate individuals start to riot. In the naive days of the 20th century, when faith in angels and demons began to wane, it was fashionable to regard matter as primary. Wars were fought by burning actual buildings, killing physical people. But today we know that information has physical force. Computer programs, genetic instructions, memes — and financial data — are to all intents and purposes actual things, rather than airy nonsense.

Unfortunately we still live in a world governed by ancient 19th century Marxian ideas, where politicians regard information as infinitely corruptible, in a world where lies are not only common, but the stuff of power, the very sinews or privilege.  A financial crisis occurs when information goes so far out of whack with the physical world the music has to stop, and those without a chair must be booted off. belmont club

Greece is not a big deal. 2% of the EU economy. The entire place could sink into the Aegean and the world would be little worse off.

China is a bigger place. The factory of the world and its stock markets are in the process of collapse. A lot of companies which we have never heard of have shed 2.5 trillion dollars in market cap in the last three months. Unlike the Greeks, the Chinese have lots of hard currency with which to intervene and there is every reason to believe that the possibility of a Chinese crash will be averted. For now.

Infinitesimal interest rates and overbought markets are, at the moment, haunting the US, the UK, Europe, Japan and China. Fernadez thinks that “the players” have figured it all out and have comfy armchairs waiting when the music stops.

I am not so sure. The players have always counted on governments to step in when there is a cash crunch. When the derivatives have been drawn against busted counter-parties, when the “too big to fail” surprise us by failing. To date, that assumption has been true. It has been true because the governments have had the means – usually the printing press – to literally paper over the flaws in the system. At the moment the Greeks do not but the EU does and I suspect will. At the moment, the Chinese market is in free fall but the Chinese government has the cash to bail them out. But cash, however abstracted, is a finite resource. If you print more than your economy can sustain your cash begins to lose its value against real assets, against food, against bills of lading which must be settled on arrival.

The music is still playing and only the smallest children have been denied seats; but now the scramble is on to secure a seat for the next round.

The one thing which the world seems incapable of doing right at the moment is making more chairs.

Grexit

Apparently, today, Greece is to have an ultimatum, or is it a prenultimatum. No matter, the EU and the IMF and the Germans are really serious now and they are not prepared to put up with any more waffles. Or are they?

The biggest problem the Greeks and the Eurozone face is the fact that neither side is willing to really draw that line in the sand. The Greeks keep spinning and the EU types keep backing away from the possible calamity of Grexit.

The Greeks are counting on the theory that the Eurozone and the EU cannot withstand the possibility of Greece defaulting. Are the Greeks right? On the numbers almost certainly not. Greece is 2% of the overall Euro GDP. They owe something on the order of 150 billion Euros which sounds like a lot but much of that debt is hedged and much of it will be repaid. The European banking community has managed to transfer a lot of the Greek debt to the assorted government and quasi-governmental institutions. Sure, they will take a hit, but not a balance sheet busting one.

From the European perspective losing Greece would be sad but not quite on the order of losing Spain or Italy. The EU will continue, the Euro will survive.

In world terms, the Greek exit/default/bankruptcy is a buying opportunity. Mr. Cook has denied that Apple will buy Greece but that will not stop any number of hedge funds and sovereign wealth funds from stepping up and buying bits of it. And, if the Grexit results in a drachma worth pennies on the Euro it is a dandy bet that plenty of Germans, Brits and French people will be only too delighted to buy that Greek villa they were priced out of previously.

A fire sale is not likely to be politically popular in Greece, but there is not a lot which a government can do to prevent private transactions between consenting adults. Especially in a country where the law is breaking down.

From the world wide perspective, Greek default is unfortunate but a long way from tragic. From a Greek perspective, it is probably the only way out. The only people who are likely to suffer really nasty consequences are the Eurocrats whose mantra of “ever closer” will lie broken at the side of the road. I shall try to work up a tear, but I doubt I will succeed.

On Greece

There were no houses for the newcomers, and living as they did during the hot season in badly ventilated huts, they died like flies….For the catastrophe was so overwhelming that men, not knowing what would happen next to them, became indifferent to every rule of religion and of law…As for the gods, it seemed the same thing whether one worshipped them or not, when one saw the good and the bad dying indiscriminately. As for offences against human law, no one expected to be brought to trial or punished…All the funeral ceremonies which used to be observed were now disorganised, and they buried the dead as best they could. Thucydides, History of the Peloponnesian Wars

The Greeks are running out of power, medical supplies, money. They are having an election. There will be no winners until the Greeks regain mastery of their own house.