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Greece Enters Its Crack-Up Boom

The Austrian School of economics has a concept called a “crack-up boom” in which a critical mass of people conclude that their government is actively trying to devalue its currency.

Consumers respond by front-running the government, spending their paychecks immediately in order to convert their soon-to-be-less-valuable money into real things. Merchants, not happy about the sudden influx of suspect currency (and sensing the panic of their customers) hold out for ever-higher prices, causing inflation to spike. But it’s a special kind of inflation, driven not by a sudden increase in the money supply but by collapsing confidence among holders of the currency.

In a very short time, so goes the theory, the supply of stuff available for purchase dries up, prices hyperinflate, and the economy collapses.

Welcome, in other words, to Greece:

Greeks spend in droves, afraid of losing savings to a bailout

(CNBC) – Business has been so brisk in the giant Kotsovolos appliance and electronics store in this upper-middle-class suburb of Athens that you might think a sale was on.

But, no. It is panic buying, those who work here say. Increasingly concerned that greater economic trouble lies ahead of them, and limited in how much cash they can take out of banks, Greeks have been using their debit cards to buy ovens, refrigerators, dishwashers — anything tangible that can hold its value in troubled times.

“We have sold so much,” said Despina Drisi, who has worked in the store for 12 years. “We even sold display models. People have been pulling at my sleeves. We’re spacing things out now to cover the holes on the shelves.

To the casual observer, the bustle of everyday life looks unchanged here. Greeks, many of whom long ago traded in their cars for cheaper motor scooters, clog the streets at rush hour on their way to and from work. Tourists pack the Acropolis. Friends meet, greet and sit in cafes, looking for shady spots against the heat.

But beneath the surface, Greeks are struggling with growing fear, the strange ramifications of closed banks and the mounting potential for much worse. They could face the unknown consequences of being pushed out of the eurozone within the next week if Greece and its creditors cannot come to an agreement.

Some are watching television and checking their smartphones constantly. Others refuse to follow what is going on in Brussels at all. But either way, many are doing what they can to protect themselves financially, buying appliances and jewelry or even prepaying their taxes so they will have taken care of one financial obligation if they end up losing some of their savings to a bank failure, as happened to depositors in Cyprusunder a bank rescue plan there in 2013.

“Panicked doesn’t begin to describe how people feel,” said Antonis Mouzakis, an Athens accountant. “I have a huge number of customers wanting to file their taxes right here, right now, to have the tax calculated and paid instantly before a possible haircut. Even if the tax is 40 to 50 thousand euros, they pay it off in one go.”

A Greek jeweler, George Papalexis, said a customer had approached him on Wednesday wanting to buy a million euros — about $1.1 million — worth of merchandise. But Mr. Papalexis, the chief operating officer of Zolotas, said he had refused because he was more comfortable holding on to the jewels than having money in Greek banks.

“I can’t believe that there I was, turning away a million-dollar offer,” he said. “But I had to turn down the deal. It’s a measure of the risk we face.”

Mr. Mouzakis said that many companies were also trying to settle their debts quickly, not wanting to owe money if their deposits are hit in a deal to rescue Greek banks. Others do not want to accept payments for the same reason. When banks in Cyprus had to be bailed out in 2013, depositors with more than €100,000 lost about 40 percent of their money.

A contractor at a Greek energy company, who spoke on the condition of anonymity, said his firm had paid all its taxes for the year last week to whittle down the funds that could be subject to a deposit tax.

“I’m even thinking about buying a car, although I don’t need one, to get my cash balance lower,” he said. “People want their money in physical assets, not in the bank.”

But some who are unlikely to be troubled by losing a percentage of their bank deposits are spending, too. Vassilis Bekiaris, 29, said he knew two brothers who had gone on what was probably an ill-advised spending spree, fearing a cut to their savings. One who had just €1,000 in his account bought an iPhone. The other had €10,000 euros but, thinking he could lose 20 percent, bought €2,000 worth of clothes. “All they managed to do was prop up the economy a bit,” Mr. Bekiaris said.

While pensioners and others in need of cash struggled, some employers who were behind in paying their employees surprised them by digging into their safes and producing cash rather than risk losing money to the terms of a bank bailout.

A few companies, prepared for the bank closings, were ready to pay cash to their grateful employees. The family-owned Petsas group, which manufactures a range of products from biodiesel to cotton clothing, paid all of its workers, about 130 people, in cash.

When Greeks start clamoring to pre-pay their taxes, you know the end is near.

But viewed through a Keynesian rather than Austrian lens, this process actually looks kind of positive, like really effective stimulus. The Greeks appear to have discovered the secret to convincing an over-indebted people to keep borrowing and spending: Just telegraph the destruction of their savings and watch the little folks consume.

In an era when new and wild economic theories are being tested on a weekly basis, Greece is perhaps the most interesting laboratory of all. If this sudden burst of consumption and tax compliance results in “growth” and “a balanced budget” then don’t be surprised if the people running the eurozone, Japan and maybe the US come to the comical but from their point of view logical conclusion that far from screwing up, Germany actually did something right in Greece. And that maybe the rest of the world should pre-announce capital controls and bank bail-ins to get their citizens off their butts and into the mall.

Which, when you think about it, might be exactly what the war on cash is setting up.

28 thoughts on "Greece Enters Its Crack-Up Boom"

  1. Imagine the amount of cash waiting at the exit as world investors are not buying bonds anymore. They are waiting for alternatives to rush into. All asset prices are already over valued except for precious metals. Anything that appears to be good investment will have the momentum trade when this money rush out. Some people try to confuse others that there is not enough gold for investment. This is complete nonsense! The scarcity can be resolved by price increase. To cater for this humongous amount of money waiting at the exit means gold price will head for the stars.

  2. This does not seem to be a crack-up boom, since the currency is not losing value (granted that the situation might eventually downgrade the Euro, just not right away and not very much compared to hyperinflation). In fact this makes no sense at all. Even if Greece exits, the Euros in their wallet retain their value, if not increase it.

  3. DOT: There is a name for it, Gresham’s law, and you have it actually perfectly stated.

    For you all without a degree in business here is the quickie wiki:

    “When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”[1] It is commonly stated as: “Bad money drives out good”.

    What it really means is that if you for example have one million US dollars that are constitutional money as in grains of gold or silver as set forth in our constitution, and you have one million Federal Reserve Notes made of paper and only backed by full faith and credit, which are you going to keep safe and which are you going to try to use/spend/get rid of first?

    In the modern case of Greece, if I were Greek right now I would be attempting to hang on to as many Euro as I can knowing that there is a great chance of a drachma that will hugely devalue the day it is issued. Of course many are spending like mad because they are afraid the shelves will be empty and no amount of any money will get them the things they will need in future.

    They will look like Argentina in a couple of years, a currency that is not convertible, and a blue market exchange rate that is several times the official exchange rate. The government will look the other way to these “illegal” transactions because their legal tender isn’t convertible and this will be the only source of hard currency from outside. This makes Argentina today and Greece in the near future a major bargain for travelers and expatriots.

  4. A crack up boom is an inflationary event of increasing volume of money in circulation. Greece is having a scarsity of money in circulation. This is a Deflationary
    Depression and will be a period of high unemployment and starvation as there is no money to buy food.
    Products will get cheaper as there will be no money to buy them and products will get scarce as there is no money to restock the shelves.

    goldassayer

    1. Hyper inflation is a social event not a monetary one. It is when people lose confidence in the currency which makes prices rise because no one wants to accept it. The money supply may be rising too but not necessarily as fast as prices at that point. That’s the crack-up boom.

      1. Hi Bruce
        OK if you want to view it from the peoples point of view. I agree that when people lose confidence in the money it is a crack up boom which is inflationary.
        However, the Greeks have not lost confidence in the Euro currency. They have lost confidence in their banks which are closed, bankrupt and may not return the depositors money.

        so the situation in Greece is NOT a crack up boom.

        Sincerely
        Pete

  5. In the end, anyone with any sense knows that tangible assets are always ‘safer’ that digital digits ‘printed’ by unaccountable PhD’s with failed economic models.

  6. One of the oldest economic truths: When you have bad money you get rid of it as fast as you can by buying something tangible. In the runaway inflation of 1923 in Germany (different because it was an intentional inflation), people ended up getting paid twice or three times a day, then running out and spending the ever-more-worthless paper on anything they could get. In Zimbabwe, the currency was printed with no denomination on it and the amount it was supposed to be worth was stamped on it at the time of issuance. If the ECB decides to shove some euros into the Greek banks, it’ll only be a minor reprieve. One of the main props under a fiat currency is the faith of the citizens that it will be stable enough to trade in the future. In a runaway currency failure, citizens get rid of that worthless paper as fast as they can. Now that they have lost confidence, it will be tougher to institute either drachmas or go back to euros. In Zimbabwe, they just gave up and retired from having a national currency and the citizens went to using other currencies like dollars. In Germany, they had to issue a new currency after defaulting on their debts. All savings in the older currency were wiped out, as well as all debts, thus shafting the creditors. In the U.S. in 1935, there was a bank holiday followed by devaluation (since the dollar was at that time tied to gold), plus making it illegal to hold gold and invalidating the government’s promise to pay debts in gold (shafting the creditors with gold payoff contracts). The problem is that if there are currency controls refusing citizens the power to move their euros into dollars or some other currency, then we see what we have now. Who knows how many euros the ECB needs to infuse into the Greek banks? That in itself is inflationary since the more units of a currency the less each unit is worth. If the currency controls were lifted, perhaps there would be a drift toward the use of other currencies since the euro is traded. But, in order to open the banks there either has to be dishonor of the depositors or a massive infusion of euros to stop the inevitable run (if it can be stopped). What happened in Cyprus is certainly a possibility and the smart people in Greece would have seen that as a sign that the Greek banks would have the same problem as default approached. Smart Greeks would have removed deposits from the banks at that point. Now, people are trying to use the electronic card to remove their deposits, only it’ll take longer for the same result to occur. But, in the meantime the citizens will have the tangible thing instead of the worthless paper.

    1. “One of the oldest economic truths:…”

      If you’re a history buff then what kinds of “tangible” things are usually bought?

  7. “When Greeks start clamoring to pre-pay their taxes, you know the end is near.”
    Actually, Greeks are very good at avoiding taxes, especially wealthy Greeks.

  8. So the people in Greece are doing what the rich have done throughout history .. change paper for tangible assets like land, paintings, precious metals .. etc .. smart ..

  9. not really a crack-up-boom, but similar in function. Its like those cashless society schemes where cash shrinks a percentage if you don’t spend it right away, cash with a shelf life.
    If Greece starts up the old Drachma press….then you’ll see a crackup boom

    1. It will be interesting to see how the euro-to-drachma(?) conversion unwinds. Basically every investment that Greeks have – both personally and institutionally – pays out (i.e., income and capital gains/principle) in euros, and so the conversion however “low”/”weak” drachmas become will be cushioned. In other words this is not a “binary” event. There necessarily has to be a transition that may make this “uncharted” event less onerous than “the Troika” wants Greek citizens to think. We shall see.

  10. I’m amazed that the conversion to PMs wasn’t mentioned. Either most people must be so conditioned to think of “assets” as things like cars and appliances, or they fear that PMs will somehow be a bad deal if they bought them. Maybe they fear usurious premiums, or confiscation, or high taxes upon conversion, or that PM prices will somehow decline relative to their fiat. Whatever it is, I’m surprised (but, then again, maybe not) that these things are not even being discussed or mentioned in the media. Maybe it’s going on but not being reported.

    1. its the fear that the money will instantly get cut by half or a third….you’ve saved, maybe resisting buying new appliances….then all of a sudden, your money maybe gone and, the washing machine may be gone too….the store might close, or not be able to get money to a importer/supplier/manufacturer to replenish its stock……you think ” I’ll kick myself if I didn’t get this new machine, then lost the money AND the opportunity to buy it anywhere in Greece” if you had gold, maybe you would be capitol controlled in some other way from cashing it in, and even if you did, the machine wouldn’t be availible to buy.

      1. Good points. Another could be – or will be – that (just as with the jeweler) PM dealers would rather keep their stock of PMs rather than exchange them for a bunch of crappy paper currency or even government IOUs.

        1. I tend to agree with you Bruce. Every time I go to my local bullion dealer and trade him some fiat for metal, I feel like I’m getting something for nothing. At time like these, I think the bullion dealers will probably start to feel the same way.

    2. I think what has happened, all over Europe, by accident or design, is that the people have already been bled dry of their gold and silver. Consider that the PIIGS have been in a severe recession since 2008. People desperately want to hold onto their homes, and they like to eat occasionally too. Now that the gold savings has been extracted, the Troika is ready to cut them loose.

      Spain, Portugal, and Italy won’t be far behind. You didn’t think the Troika was planning on paying top dollar for gold, did you?

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