‘…the world is to the big and powerful states by necessity; and the little ones must come within their border or be crushed out of existence.’
George Bernard Shaw as quoted in Hayek’s The Road to Serfdom
It goes without saying that the markets loved news of a deal on Greece. European and US stocks finished the day up more than 1%. Aussie stocks are off to a flying start.
Money, or capital, has no morals.
Critics of capitalism think this is its fatal flaw. Maybe it is. But it’s probably a lesser flaw than those embedded in other forms of social and economic organisations, like communism.
If anything, the fatal flaw in any system is human nature. It’s the type of human behaviour promoted by each system that is important. For the most part, capitalism encourages personal freedoms — the ability to act without constraint, as long as it’s within the confines of a liberal legal system.
Part of that legal system involves protecting certain rights and upholding certain moral values. It’s this rule of law that also allows capital the freedom to move around where it sees fit and thus gives it value.
But all this went out the window yesterday. There was no morality to be seen in the complete humiliation of Greece at the hands of Germany in the latest round of debt ‘negotiations’.
I’m no politician. I’m more dreamer than schemer. So I really struggle to see any political logic in the outcome of the latest talks.
Today’s Markets and Money is not so much a comment on Greece or Europe. It’s a comment and a warning sign to all people who respect freedom and sovereignty. What’s going on in Europe now is little short of a dictatorship. The bureaucrats running the Eurozone from Brussels are turning into dictators.
This is what happens when you hand too much power to someone. As Lord Acton famously said, ‘All power corrupts. Absolute power corrupts absolutely’.
What am I going on about?
Well, Europe’s creditors, led by a hard line Germany, have just imposed a humiliating economic defeat on Greece. The deal for more bailout funds, reached in a sleep deprived state after marathon negotiations, requires even harsher austerity measures than were imposed on Greece previously.
Without a reduction in debt, Greece will slip further into a debt deflation spiral, rendering any reforms meaningless. The public debt to GDP ratio already stood at 180% at the end of 2014. It is no doubt worse now, as the country has ground to a halt in recent months.
Add more austerity and more debt to the mix and by the end of the year you’ll be looking at a ratio of 200%. That will crush any country. All this will do is incite violence on the streets and bring about the rise of even more extreme political parties.
Yesterday I said the aim of the Germans was regime change. They’ll probably get it now, given the Greek population will be furious at Prime Minister Tsipras for his total capitulation to the creditors.
But they won’t get a puppet government. The next political party in Greece is likely to be even more radical than Syriza. Youth unemployment is around 50%. Pouring more austerity on top of that is a recipe for political extremism, violence and revolution.
The creditors completely outplayed Syriza. Without a credible threat of Grexit, Greece had no bargaining chips.
It is impossible to see the logic of the creditors’ hardball tactics. The only explanation is that they want to force Greece from the Eurozone, a broken and crushed economy, as a lesson to the other indebted nations.
For now, the crisis is ‘solved’. Markets are in celebration mode. But we await the backlash. Capital may be amoral but it is also fickle and will turn on a dime.
The only certainty is that the crisis is not over. The only certainty is that this, which started out as a financial crisis, will soon morph into an economic, social and political crisis of massive proportions.
In terms of asset allocation and risk tolerance then, don’t let your guard down. The storm has not passed.
As an aside, did you see how gold performed on news of the ‘crisis resolution’? It fell sharply initially and then even further in early US trade, only to bounce back.
The failure of gold to break through the March lows around US$1,145 could prove ominous for those betting on more price falls over the next few weeks. As the below chart from Bullionvault shows, speculative short positions in the gold futures market (that is, bets on the gold price falling) are at an all-time high.
That a record number of short sellers have failed to push gold to new lows would be of concern to the bears. At some point, you’ll see a large number of these positions bought back, which will provide the fuel for the next rally.
If gold can hold onto current levels without breaking to new lows, there’s a good chance the bottom may be in. That’s in US dollars terms at least. As I pointed out earlier this week, in Aussie dollar terms the gold price is very strong. It’s currently trading over $1,560 an ounce.
Let’s see what the next few weeks bring.
Before signing off for today, here’s a little snippet from traveller.com.au. It rails against Australia’s nanny state while congratulating Europe for maintaining its everyday freedoms. Quite ironic, really, given the assault on freedom coming from the bureaucratic masses in Brussels right now.
I include it for you today not to romanticise about Europe but to maintain a guard about the removal of incremental freedoms ‘for your own good’. Why is it that the state knows more about ‘your own good’ than you do?
It doesn’t of course. But we are slowly heading down the slippery path of giving up freedoms and transferring personal responsibility onto the state, who care far more about what they get, not what they give. It’s enough to turn us all into a bunch of idiots…
‘Here’s the thing I’ve come to realise: Australia has too many idiots. We don’t have a lot of idiots; we don’t even have a middling number of idiots. But we still have enough idiots to reach a tipping point where things are being ruined for the rest of us.
‘This realisation came to me recently in Europe. Now, I don’t want to be one of those people who goes to Europe for the summer and comes home saying everything is better over there – but I’ve just been to Europe for the summer and everything’s better over there.
‘It feels freer. It feels more fun, more relaxed in places like Italy and Spain and France and the Netherlands. It feels like you’re given the right to make your own decisions there, and you’re given the trust to not stuff those decisions up.
‘You can ride a bike without a helmet in Europe, and you are trusted not to fall off (similarly, drivers are trusted not to run into you). You can wander freely onto public transport, and you are trusted to buy a ticket. You can drink a beer in the park, or on the pavement outside a bar, and you’re trusted not to act like a drunken fool.
‘You can’t do those things in Australia because we live in a nanny state with a lot of rules, and we live in a nanny state with a lot of rules because there are some people out there who really need to be nannied. We don’t all need it. But we have to put up with it because others do.’
For Markets and Money, Australia