Greece, Germany, Gold, Oil and the Dollar

Basically, Greece is broke. The Greek politicians spent too much money. (Really? Who would’ve thought?) Aided by the wizards of Goldman Sachs, the monetary magicians managed to mask the Greek problem for 10 years or so. But now the solvency problem in Greece is too big to sweep under the rug.

Unlike in the past, the debt markets won’t just roll all that Greek debt over to some future time. No more kicking the can down the road for others to deal with. Beware of Greeks bearing gifts, right?

In Greece, they’re faced with the hard fact that they have too much government and not enough productive economy.

Even with their backs to the wall, the Greek politicians won’t make painful budget cuts. Greece needs a miracle — if not a bailout — just to keep the lights burning and the civil servants paid.

Oh, and just as an aside… Does this seem similar to what’s going on in California, or New York, or Michigan, or maybe even the whole United States of America? As that ancient Greek philosopher Plato once noted, “If the sandal fits, wear it.”

What’s happening in Greece is a dress rehearsal for the tragic drama that’ll play out in the U.S. over the next generation or so. Too much government, too many obligations and not enough money to pay for it. To use a Greek concept, it’s destined. Something has to give, and my bet is that sooner or later, the U.S. dollar will go Greek on us.

Now for some irony. (That’s a Greek word, from eirōnikós, meaning dissembling or insincere.) The Greek bailout has led to a drop in the value of the euro relative to the U.S. dollar. So the Greek monetary crash has been bad for the euro and good for the buck — for now.

But people everywhere want only so many dollars. Then what? Greece’s problems have created a floor under gold and silver prices, and by extension beneath the precious metal miners. That floor is spreading outward, and supporting energy prices as well. (So what’s bad for Greece is basically good for the OI portfolio.)

After Hubris Comes Nemesis

Where do things go from here? We’re in the opening scenes of this Greek drama. There’s much more excitement ahead.

The European Union is 10 years into its common currency, the euro. And the bad habits of decades past are starting to show up and spoil the party.

British commentator Ambrose Evans-Pritchard unloads with both barrels. “The last two weeks have cruelly exposed the Original Sin of monetary union,” he states, “that EMU [European Monetary Union] was launched without an EU treasury or debt union. This will be tested again and again by bond vigilantes.”

Europe, Greece and the euro should be so fortunate as to have to deal only with bond vigilantes. James Howard Kunstler posed the question a different way, asking, “What happens to the vaunted peacefulness of contemporary Europe now that the narcotic of universal prosperity is wearing off… New animosities [may] burble out of those lovely old streets.”

“Narcotic” or not, there’s open speculation that the euro will fail as a currency. British Member of Parliament Daniel Hannan, writing in the U.K. Telegraph, leaves no doubt about his opinion. ”The euro won’t last!” he declares. “It has only ever known prosperous times! This is its first trial, and it will fail! After its hubris comes its nemesis! Woe, woe, woe sings the chorus.”

Not to be outdone by the chorus, the German Bundestag has drafted an opinion stating that a grant of aid to Greece is illegal. Thus, per German diktat, state bodies are forbidden to purchase the debt of another state in any manner whatsoever. Thus do the Germans dig deep — to their inner Prussian desire for order — and hurl down the gauntlet. Nichts for the Greeks.

Can you fault the Germans? Germany is a nation of high industrial productivity and strong monetary discipline. It can’t abide, and will not subsidize, the free-spending habits of the fiscal libertines down in Greece (not to mention Italy, Spain and Portugal). The usually polite German magazine Der Spiegel pulls no punches last week, entitling one article “Lies, Damned Lies and Greek Statistics.”

Another German newspaper, the Frankfurter Allgemeine, summed up national sentiments when it asked why German taxpayers should bail out a country that thinks it impolitic to raise the retirement age to 63. “Should Germans have to work in the future until 69 instead of 67 so that Greeks can enjoy early retirement?”

Who wrote that, Count Bismarck? Ouch.

The German Comparison

Compared with Greece — and with most other countries of the world — Germany has its economy and government spending under control. Not only that, the German fiscal and monetary house is in order after paying out big money for the past 20 years to integrate the former East Germany into the unified nation. It’s been a long, expensive, even painful effort.

Meanwhile, Germany has achieved national prosperity by following a path that seems odd in this age of globalization and guilt-free outsourcing. For example, Germany has strong labor unions. The unions have bargained for high wages and excellent benefits for industrial workers. It makes for expensive production costs.

And Germany has a strong environmental movement. Among other things, the Green Party has been instrumental in Germany closing down much of its nuclear power capacity. The environmental emphasis makes for another element of economic handicap in a cutthroat world where pennies count in every element of unit cost.

Then there’s the fact that Germany imports most of its raw materials, certainly a lot of its energy. Germany even imports large amounts of natural gas from Russia — a nation with which the Germans have had some unpleasant dealings over the past century. So energy and input costs are high, as well.

When you look at it, the Germans are not at all out of line to balk at bailing out Greece. But it still gets back to what it means for the future of the euro. And if the euro fails, what does it mean for the dollar? By extension, if the euro fails, what does it do to precious metals, energy resources and the firms that extract these substances? It’s something to think about.

Until we meet again,
Bryon King

February 22, 2010

The Daily Reckoning