Tuesday, October 18, 2011

The cries of Plutus – Why Greece should exit the Euro

With each passing day the Greek economy is pushed deeper into to the abyss, a country halted by strikes; people burdened with taxes; a government saddled with debt and a nation with uncertain fate.

Not only is it unfair for the common Greek citizens to pay for the folly of the bankers but living under a flawed economic structure – “The Euro” that is destined to create disparity instead of parity, they are also paying for the misjudgments and hubris of their politicians and economic elites.

A single currency area is equivalent to a monopolised business where the consumer is at the mercy of the industrialist only that this type of system can be termed as a "foreign social monopoly”. As one can see that the name itself encapsulates all the possible social and economic evils. By giving away the right to the printing presses not only the Greeks and other European countries have given away their economic fates to foreign masters but have also possibly given away their democratic ethos.

Let me elaborate, a currency may be a store of value for an individual but for a society at large it is nothing but a way to transfer wealth. Remember a currency is nothing but a short term government liability and so a currency note printed by the Central Bank and given to banks increases the assets of the banks but at the same time increases the liabilities of the government by an equal amount, so net impact on global wealth; “zero”. However this increase in government liability now has to be serviced by ordinary citizens; and how do we expect the citizens to service it…. Well by either putting in more hours than usual at work at same pay or giving away more from their existing share of their income to the government in form of taxes. The net effect of this whole guerilla circus is that the citizens end up giving more of their personal income to the banks in form of taxes or in form of harder workload.

So an increase or decrease in the currency supply doesn't actually change the overall wealth of the society; it simply moves it from one person to the other. This phenomenon of wealth transfer is quite apparent and common these days when the Central Banks prints a lot of money so let me explain what happens when this supply reduces.

So let’s assume that 2 people A&B have one euro each and vie for a product, they both can acquire it for a euro each. Now as fate would have it, A loses his euro; it simply vanishes from the world, has the world become poorer... NO, as now B can buy two of the same product with his euro, in other words wealth has not been destroyed, just transferred from person A to person B. Governments and Central banks already have monopoly over money creation and thus can easily transfer wealth these days by creating money (here capital owners and debtors benefit over labours and savers) or by destroying it.

By giving away the power to print money this transfer of wealth is now happening not just between individuals but also between countries in Europe. Euro on a consolidated basis is a weaker currency for Germany and a much stronger currency for Greece in other words there are too few euros for Greece and too many for Germany, remember a loose currency transfers wealth from labour to holders of capital and strong currency transfers it back to the labour.

So with such a strong currency there is little incentive for the capitalists in Greece to setup industries and employ people as a result the government ends up employing too many people (over 40% is government contribution to Greek GDP) and government true to its nature ends up making lofty promises, running exorbitant debt that now it cannot repay. Such a condition is advantageous for a country like Germany; this is not to say that Germany and German workers are not good at their work but this provides an even extra edge as with little competition from Greek internal industries it ends up selling lots of its products.

Had Greece been able to use its drachma it would certainly have devalued its currency by printing more money and thereby transferring some of the wealth from its labour to its capital holders, thus unleashing the country’s entrepreneurial spirit and giving an incentive for more people to start industries.

A monopolised currency system in any case is flawed but a common currency area is structurally and economically wrong and as we are seeing today has disastrous consequences. This would never lead to convergence but always a divergence away from the normal equilibrium. The leaders must accept their past mistakes and bring an end to this euro experiment else it will not just bankrupt many nations and benefit just a few but it could seriously jeopardise not just our economic but even our democratic setup. It was this land of acropolis which was the cradle of our modern day democratic system; today Greece should again pick the baton to preserve the same very values that it stood for. It’s time for Greece to exit this common currency experiment and in the process pave the path for others to follow.


J said...

Very good blogs. I find your articles interesting. I like reading about finance and economics but I dont get around to read books.

Stochastic Process said...

Thanks for your kind words... Which industry/area do you work in, if I may ask....

Jagdish said...
This comment has been removed by the author.
Jagdish said...

Dost I am Jagdish .. remember our schenanigans in infy? you sent every one to bhubneshwar :) I am in software (presently in MD, US)....

Stochastic Process said...

O.. Kya haal hai dost, long time!!!