Belmont Club

The Wonderful Wizard of Oz

The Greeks have decisively voted to reject the EU bailout agreement.  The drama of the confrontation and the richness of its historical context (“Das ist … Sparta!!”) have overshadowed a potentially more consequential unfolding event: the meltdown of the Chinese stock market.  Nearly a quarter of Chinese investors have suffered 50% losses.  An estimated $2.8 trillion has already gone up in smoke.

This does not diminish the importance of the Greek tragedy.  According to some reports, there’s only a billion euros left in the Greek banking system — about 90 euro for every man, woman and child in Greece.  Unless the European Central Bank lends them money, there’ll literally be no money left on Tuesday for the ATMs to dispense. The Guardian says the economy is already freezing up.

Less than 72 hours have elapsed since banks were closed and capital controls imposed on Greece, but the effect has been devastating.

An economy, already labouring under an unprecedented liquidity squeeze, has come to a juddering halt.

Shops have closed, factories have stopped operating and firms have told employees to take enforced leave until the country holds a referendum on July 5 over the terms of further financial assistance from international creditors. Many larger companies have refused to pay staff altogether.

“Consumption has dropped by 70%,” said Vassilis Korkidis, who heads the National Confederation of Hellenic commerce.

“No one trusts anyone anymore, so no transactions are taking place between wholesale and retail,” he said.

Authorities in Athens have threatened to print scrip and EU authorities are meeting late Tuesday to decide which way to go next. Apart from the fact that there’s no money in the Greek banks, the next most pressing problem is decide what to do with the money that should be there. The widespread fear is that Greek bank depositors will be given a “haircut”, bankspeak for “your money ain’t there no more”.

Daniel Altman at Foreign Policy tries to construct a plausible “worst-case scenario” for coming week but cannot be certain of the probabilities, so great are the uncertainties.

Let me start by saying that I have no idea what the worst-case scenario looks like, as indeed no one does. Because of unexpected events — black swans, unknown unknowns, or, to use the term of the moment, Knightian uncertainty — it’s impossible to know just how bad things could get in the global economy. But a few dominoes could fall that might make things very uncomfortable in the markets, and it’s worth considering what the world would look like then,

Essentially Altman’s fears boil down to this: the fall of Greece will raise the cost of EU borrowing and knock other weak parts of the system into the trash bin. That will uncover faults in the Chinese economic which have till now, been papered over. This will in turn occasion investors to scratch the glittering surface of Obama’s golden age which may reveal only a layer of gilt.  If Oil prices then begin to soar on  instability in the Middle East then we’ll be in the soup.

So how likely is this scenario? This week, analysts gave Greece up to a 50 percent chance of leaving the eurozone. The Shanghai Composite has already plunged by 20 percent since June 12. Academic and government economists see little chance of an American recession now or in 2016, but the probability is still higher than it has been in the past couple of years.

These events are not independent; each one makes the other more likely. Still, the overall chance of this not-quite-the-worst-case scenario happening soon may be fairly small. But the scenario is so bad that it’s a risk worth taking seriously.

One might add that falling oil price would knock the economic stuffing out of an already desperate Russia, whose GDP dropped at a 4.3% clip in the first quarter of 2015.

Readers who have had a cardiosvascular stress test know that defects which pass unnoticed at rest often reveal themselves under exertion. For example Bernie Madoff could keep one step ahead of his victims while the system chugged along smoothly. But once the tide fell those swimming without trunks were fully exposed.

Mashable has a photographic tour of the wreckage of the Greek economy. It is eerily reminiscent of photo tours of the Ruins of Detroit. Tom Nixon at Forbes was reminded of the similarities between the Greek Model and the Blue Model.

Greece provides an object lesson in how bad government can ravage an economy and consequently, a country. Over the last 20 years governments have steered the Greek economy 180º away from the direction that increases growth and productivity, and they have stifled entrepreneurs. U.S. leaders are making similar moves to a disturbing extent. This is food for thought on the eve of our nation’s birthday.

Everything seemed wonderful until it was exposed to be a fraud. In Greece, the world is at the moment similar to when Toto pulled aside the curtain on the Wizard of Oz. The Narrative of a bright European future has turned out to be one more cruel lie. Ironically, it took the unbridled fantasy of the Greek left to pull the curtain aside.  Like Toto the dog,  the Greeks did not understand the Narrative should not be tested too literally.  They  alone were feckless enough to really believe that the world could indefinitely live on other people’s money.

In many other Western societies there is a subconscious awareness that socialism is a just a useful myth, like Santa Claus, not to be taken literally. A conservative Greek government could never have cast its bread upon the waters like the the believers of Syriza and cut the Gordian Knot as cleanly as they did.

The Greek socialists believed in the EU. The EU pretended they could lend Greece money and the Greeks pretended they could pay it back.

Who’s laughing now?

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