The curtain has just about come down on the first act of the tragedy that has become Greece, seems there are insufficient funds in the national bank. As you, dear reader, may or may not know, banks serve a purpose other that taking deposits and granting loans. Our Federal Reserve was set up to insure liquidity in the monetary system. That ten dollar Federal Reserve Note in your pocket it liquid, that is, it can be exchanged for a lunch or a few gallons of gasoline. If we were in a barter system then you would have to convert what ever item you had in your possession into some item the seller wants for the item you want to buy. I have apples, you have bananas. I want a banana and in exchange you want an orange. If I still want a banana then I must find someone with oranges who will trade an orange for an apple so I can trade that newly acquired orange of one of your bananas. In a barter system there is no liquidity per se. You either have the right item or you must trade for it. And if you can’t find someone to trade with you, well, you do without. Central banks are usually responsible for insuring there is enough liquidity in the banking system.
The small town bank does this to a certain extent. It takes in deposits and loans out a portion of those deposits to earn a profit for you and itself. Of course it takes the lion’s share for being the deal maker. But it tries to keep enough currency on hand to meet the needs of those who do not pay for everything electronically. Think about that for a minute. If no one accepted credit cards or debit cards or checks, then all of our everyday transactions would be with currency. You would need to keep sufficient currency to meet your everyday needs just and the grocer and butcher wold. Of course the retailer would need to keep sufficient cash on hand to make change for all the transactions. You buy an item for one dollar and pay with a twenty dollar bill, the retailer must give you nineteen dollars back. If he didn’t have enough currency on hand his position would be one of being illiquid. He would have to go the the bank and pull cash out of his account, assuming that the bank had sufficient cash on hand. But there have been times when there wasn’t sufficient cash on hand and banks actually coined their own IOUs for local customers to trade. That may seem a bit strange when the Federal Reserve Note is a government IOU itself. At one time our currency was redeemable in silver, the pure metal kind. Now it is redeemable for another IOU or promise to pay. And that is what the Euro is, an IOU or promise to pay.
So what does this have to do with Greece? The Greek Prime Minister, the Finance Minister, and the Foreign Minister have learned that the Bank of Greece, which is the central bank of Greece, has almost no money in it. The EU has been funding it with payments of 59.5 billion every year and has just decided to raise that funding to 65 billion euros a year. But shouldn’t there be deposits from the government in the way of tax revenues collected and fees charged and paid? And what about the local banks, aren’t they required to keep a portion of their capital in that bank to guard against failure? Ah, there’s the problem. What did the Finance Minister say to the German Finance Minister? Greece is bankrupt. Greece has been bankrupt even before all the great EU/IMF/ECB bailout settlement in 2012. Of course almost all the banks in the Euro Zone are insolvent, that is, if all the depositors wanted their money there is no way that the banks could pay that money in full. They were given a reprieve when the ECB recently bought much of their Greek government bonds from them but a good many have lent 90 to 100 percent of their deposits and hold as much as 25 to 30 percent uncollectable or non performing loans. So much of Europe is a game of financial musical chairs and the banks and governments are trying to keep the music playing. And the Bank of Greece is holding, most ironically, a goodly number of worthless Greek government bonds. The greek people have been avoiding in one way or another paying their taxes when possible and in doing so, have made it very difficult for the government to pay out the money needed for servicing its government bonds. It has had to reduce its work force, reduce its pension payments, reduce its welfare subsidies, and many other of the functions of government. Without money government comes to an end. And that money comes primarily from its people.
The other fact of life is that there have been runs on the various private banks to the point that the country has been stripped of its collective cash accounts. This is what happened in Weimar Germany after the Great War as a result of hyperinflation. Those who could withdrew their funds from savings and checking accounts in their local banks and put the monies into foreign banks. Will hyperinflation take place in Greece? No, for the simple reason that their currency is the Euro and they cannot print as much as they like. The reason why so much outflow from the banking system has happened is that the Greek people fear that what happened in Cypress will happen to them. Those individual who had funds of 100,000 Euros or more found themselves giving the government half their accounts to shore up the banking system. It was called a bail-in by depositors to bail out the banks. You see, gentile reader, the main purpose of a bank in the community and even country is to direct the investment of capital. You and I at one time used to have savings accounts that paid us a nice return if we ignore inflation. In turn, the local bank might then make a construction loan to a developer to build a certain number of houses to sell to the local people who wanted and needed a house of their own. Once built and sold, the very money that the mortgage that financed the new house paid off the developer’s loan. The liability was transferred from one individual to another, just a stroke of the pen, so to speak. But if the townspeople keep their savings (which is considered capital) boxes under their bed, then new investments in the community are not possible unless the individual has saved the appropriate amount of capital to finance it all himself. As I have said, money or currency, if you wish, is a medium of exchange. It provides liquidity for everyday transactions as well as investments that help to create more wealth within the community.
What all this mean for Greece now that their government has effectively caved in to the demands of the EU? Well, the country is still bankrupt and will remain so. The best that can happen for Greece under any new agreements is that the dedication of the percentage of government surplus will be reduced from 4% to 2.5 or 3%. This would give the Greek government the ability to hire a few more necessary people and pay our a few more euros yearly to its pensioners. BUt the ultimate reality is that of financial failure. The Greek GDP has fallen by forty percent since 2012 and there is no indication that there will be any improvement, that is, real growth. Growth in an economy comes from spending by personal consumption and from an increase in employment. People need jobs to earn the money to spend of necessities and whatever luxuries they believe they can afford. But jobs are made by manufacture or services to sell and those who wish to sell goods and services must have customers who wish to purchase such goods and services and can afford to pay for them. You see, an economy is circular. It takes money to manufacture goods or provide services. But if no one buys or can afford those goods or services, then it all stops. Economics has always been taught as if all the economic actions in an economy were strictly independent and that is not so. Unless we are pillaging the resources of another economy, everything in our own economy is an interdependent transaction. We depend on each other to produce and consume what is necessary to keep our economic cycle going. This cycle has broken in Greece and will not be repaired for a very long time. If one is willing to accept the constant effort to repay the loan sharks as one continues to have fewer and fewer resources to pay, then the end becomes very painful. Greece has become the EU’s third world country. The correct action is for Greece to say no thankyou to the EU and default on their bonds, their debt. Yes, it will be painful.
You see, the current thinking is that without the EU through the ELA constantly pumping money into the central bank of Greece there would be no more money in Greece. But the facts of life is that there are billions being withheld from the banking system by the general public, form small depositors to large investors or the multi millionaire and billionaire type. What’s more, by rejecting the Euro those small depositors stand to gain considerably and will most likely spend this extra bit of wealth in the economy. With the Drachma established, all that hidden wealth will start to reemerge into the economy. The transition will be very painful but considering the long term starvation of the EU’s manner of stupidity, I don’t see that Greece will have much choice in one or two years from now. All the EU has show those countries such as Spain and Italy and Ireland is that one needs some sort of economic base o restore one’s economy, otherwise the EU bankers will get everything and then no one will have anything. That is the problems with monopolies, they kill the very enterprise they think they are preserving.