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Tuesday, July 28, 2015
Jim Rickards Webinar Breakout: Thoughts on Greece
The recent webinar that Jim Rickards did contained several very good questions allowing him to go into a lot of depth in his answers. What I decided to do is to breakout the best questions and answers in this webinar and do a separate blog post for a major topic discussed in the webinar over the next three days. We will look at Greece, China, and Jim's recent conversation with Ben Bernanke.
This format makes it easier to read and spend some time with each topic. First up is the conversation on Greece. I added bold type where I felt some key points were being made.
JW: Greece has been the hot topic until just a few days ago, but as you predicted, there has been no Grexit. In fact, it transpires that the Greek government, for all its bluster, really had no serious contingency plans for leaving the euro. I’m left wondering, how close did we come to an actual meltdown here?
JR: It’s a great question, Jon, an important one, and you’re right. Remember that this whole Greek sovereign debt crisis started in 2010. There’s nothing new about it. It’s been going through stages of quiet periods and intense periods for the past five years.
Beginning in 2010 and continuing through this past weekend, I was one of the voices saying that Greece would not leave the euro. I think most voices were on the other side. They didn’t see how they could stay in. Even today, I saw that Austan Goolsbee, who was one of the members of the Council of Economic Advisers to President Obama, published a piece saying they’re in for now, but in the long run, they can’t possibly remain in. He listed a bunch of reasons although I thought he left out a couple.
The point is, no matter how many challenges you overcome, people just can’t get their minds around the fact that this is Hotel California. You get in; you can’t get out. There’s no treaty provision, no legal provision, for exiting. Now, that wouldn’t stop a sovereign power from simply unilaterally declaring they were breaching the treaty. That is possible, even though it would be messy. I’ve always understood this not as an economic project but as a political project. Once you see it as a political project with other goals in mind, then you can understand that the political will is there to keep it together, and indeed it has stayed together.
That’s fine as far as it goes, and I will say it’s nice to get these things right.Some people have complimented me on that. The temptation is always to take a victory lap, but the fact is, this was a lot more dangerous and came a lot closer to a Grexit than I would have thought. In other words, I got the result right, but the process was a lot more challenging.
I was up late Sunday night New York time which was early Monday morning in Brussels. The summit conference actually set a record for the longest euro summit conference with almost 24 hours of continuous meetings. There was some pretty good reporting. You could pick things up on Twitter from reporters who were outside the room, so you were getting as close to real-time information as you possible.
I always felt that Germany and Greece would both blink, that they both considered a Grexit – Greece leaving the euro – would cause more harm than whatever it was they had to do to keep Greece in. But in the end, Germany didn’t blink, at least not very much. It was Greece that had to do all the concessions, and it became apparent that Germany was prepared to see Greece leave.
I’ve been in a lot of tough negotiations, and the only way you get a good result in any negotiation is if you’re prepared to walk away. If you make it clear at the table that you’ll pay any price or do anything, whatever it takes, to get a deal done, then the other side will take advantage of you one way or another. To get a good deal, you have to be prepared to let the deal go down.
That was always dangerous as far as the euro was concerned. I took the strong view that there would be no Grexit, but I also said that if I was wrong and there was a Grexit, it wasn’t going to be contained. It wasn’t going to be the non-event a lot of people were expecting, and that it would be catastrophic in its consequences.
That became very apparent Sunday morning when markets seemed to be a little bit complacent. When it became obvious that Germany was prepared to see Greece go, then you start to think through what that meant. The only way I could understand it was that Germany understood the consequences but felt it would be really bad for the rest of the world. In other words, it might be the United States and certainly the Greeks themselves who would have to bear the brunt of it, rather than Germany.
There might be some truth to that, but the good news is that Greece did not leave. There was no Grexit, and the eurozone has held together. I expect that will continue to be the case and that they will add new members.
I went through this in some detail in Chapter 5 of my book The Death of Money. Anyone who read the book last year would have seen this result coming because I outlined it in detail. I expect that will continue to be the case, but it was a far more dangerous situation.
I will say that late Sunday night New York time was the most critical, most dangerous moment in global capital markets since the Lehman Brothers weekend in mid-September 2008. It didn’t result in a collapse; the world didn’t actually fall apart, but it came dangerously close. I guess I would say that I’m glad we got the call right, but it did look a lot more dangerous than I thought, and that’s something that should bear watching in the future because the danger has not really gone away.
JW: There’s one footnote to the Greek story that you picked up in your newsletter, Strategic Intelligence. You report that in response to the crisis, Greece banned the sale of gold to its citizens. This may be a point of interest to our listeners here. Do you have any comment on that?
JR: I did notice that, and it’s very typical of what governments do in a crisis situation. We all know that the banks were closed and the ATMs were reprogrammed to allow 60 euros a day. We all saw the queues of Greek citizens lined up to get 60 euros – roughly $100 or so – out of the banks.
When I saw those pictures a week ago Sunday, I certainly felt a lot of sympathy towards the people in that situation, but I thought to myself, “Gee, what were you waiting for? You could see this coming a mile away. Why weren’t you at the ATM a month ago, two months ago, six months ago or a year ago getting some cash and putting it in a safe place of contingency for exactly this kind of thing?” This has happened in Cyprus, it’s happened in Greece, and it will happen again. I can see this happening even in the United States in the next financial crisis, one that I expect will be worse than 2008.
That brings us to gold. You get your money if you can – that’s easier said than done – but what do you do with it? Authorities did not want people buying gold. You could say, “I’m going to get my euros out of the bank. I’m a Greek citizen; I don’t trust the Greek banks, so I’m going to get my euros out of the bank.” But what would happen if Greece was kicked out of the euro and the euro itself collapsed? Now you’d have two layers of risk: one, your own banking system, and two, maybe your euros aren’t going to do any good because those two things are correlated.
It’s a lot like when you work at a company and they offer you a generous stock purchase plan. You buy the stock thinking that’s a good investment much like the employees at Enron. Then you wake up one day and find that the company has failed. Well, you get a double-wipe out — you lose your job and your net worth at the same time. By buying your own company’s stock, you’ve doubled down on the company, and if it fails, you lose both your job and your investments. There’s a conditional or hidden correlation there.
The same thing could have been true for Greek citizens. They were lucky to get euros out of the bank – the ones who could – but just because they had their euros doesn’t mean they were home free, because if Greece quit, then the euro itself could have failed. They were doubling down in a way.
What’s the way out of that? One way out is in buying gold, to be protected against both – the Greek banking system and the euro failing – because gold is not correlated to either one of those things. In fact, I think gold could be expected to go up in that kind of catastrophic outcome.
The authorities don’t like that. They probably weren’t happy with the 60 euros a day or anyone who was hoarding cash, but they at least felt, “If we stabilize the system and do the deal with Germany, then those people will show up and put the money back in the bank.”
By the way, that’s exactly what happened in the United States in 1933. As this Greek bank holiday was going on – it was day 5, day 6, day 7 – I was reminding people that, so far at least, the Greek bank holiday had not lasted longer than the U.S. bank holiday. In March 1933, the U.S. closed all banks. Of course, there were no ATMs then, so you couldn’t even go the ATM and get $100. President Roosevelt just closed every bank in the United States by executive order. When they closed, they did not say when they would reopen. It so happened that they reopened about nine days later, but they didn’t say that at the time. They just said the banks were closed until further notice and would let people know when they would reopen.
The reason they closed them was because there was a run on the banks. People had completely lost confidence in the banking system and were running down to get all their money out of the banks. They were putting it in coffee cans and shoeboxes, burying it in the back yard, hiding it under their beds and mattresses or whatever.
As they were taking money out of the banks, a funny thing happened. There were “bank holidays,” so you couldn’t get your money out any longer. During the next nine days, the government went through the exercise or the appearance of examining all the banks. I don’t think they examined very many, but they were at least able to go through the motions – à la Tim Geithner’s stress test – and then announced that the banks that were opening at least were sound. At that point people lined up to put their money back. The banks were closed because of a run on the bank and everybody taking their money out, but then, after they reopened because confidence had been restored, people put their money back.
I’m sure the Greek authorities were hoping for the same thing, meaning people would take the money out, but once things stabilized, they’d come back down to the bank and put money back in. But there’s a problem. If you buy gold, that’s it. If you own gold, you’re not going to walk up to the teller and hand them your gold, so the authorities wanted to ban the sale of gold. Gold is a one-way street. You can always sell it, but you’re much more likely to hang onto it as a form of insurance, which in fact is a good reason to own it.
Authorities – central bankers, bank regulators, and mainstream economists – hate gold, because once people buy gold, they tend not to sell it. They tend to hold onto it to keep as protection against various catastrophic outcomes. I believe we’ll see that again.
I look at Greece and Cyprus as dry runs for the same thing on a much larger scale. Whether it’s in the U.K. or United States or Canada – it could be a lot of countries around the world – these things are being tried out on a small scale. Bail-ins, reprogramming of ATMs, and the ban on gold sales will be used on a much larger scale in the next financial panic.
Going back to the people lined up at ATMs, I say, “What were you waiting for? You should get your cash now if you want cash. Get your gold now if you want gold. Don’t wait for the lockdown.”