The Austrian School of economics has a concept called a "crack-up
boom" in which a critical mass of people conclude that their government
is actively trying to devalue its currency.
Consumers respond by front-running the government, spending their
paychecks immediately in order to convert their soon-to-be-less-valuable
money into real things. Merchants, not happy about the sudden influx of
suspect currency (and sensing the panic of their customers) hold out for
ever-higher prices, causing inflation to spike. But it's a special kind of
inflation, driven not by a sudden increase in the money supply but by
collapsing confidence among holders of the currency.
In a very short time, so goes the theory, the supply of stuff available
for purchase dries up, prices hyperinflate, and the economy collapses.
Welcome, in other words, to Greece:
Greeks spend in droves,
afraid of losing savings to a bailout
(CNBC) - Business has been so brisk in the giant
Kotsovolos appliance and electronics store in this upper-middle-class suburb
of Athens that you might think a sale was on.
But, no. It is panic buying, those who work here say. Increasingly
concerned that greater economic trouble lies ahead of them, and limited in
how much cash they can take out of banks, Greeks have been using their debit
cards to buy ovens, refrigerators, dishwashers -- anything tangible that can
hold its value in troubled times.
"We have sold so much," said Despina Drisi, who has worked in
the store for 12 years. "We even sold display models. People have been
pulling at my sleeves. We're spacing things out now to cover the holes on the
shelves.
To the casual observer, the bustle of everyday life looks unchanged here.
Greeks, many of whom long ago traded in their cars for cheaper motor
scooters, clog the streets at rush hour on their way to and from work.
Tourists pack the Acropolis. Friends meet, greet and sit in cafes, looking
for shady spots against the heat.
But beneath the surface, Greeks are struggling with growing fear, the
strange ramifications of closed banks and the mounting potential for much
worse. They could face the unknown consequences of being pushed out of the
eurozone within the next week if Greece and its creditors cannot come to an
agreement.
Some are watching television and checking their smartphones constantly.
Others refuse to follow what is going on in Brussels at all. But either way,
many are doing what they can to protect themselves financially, buying
appliances and jewelry or even prepaying their taxes so they will have taken
care of one financial obligation if they end up losing some of their savings
to a bank failure, as happened to depositors in Cyprusunder a bank rescue
plan there in 2013.
"Panicked doesn't begin to describe how people feel," said
Antonis Mouzakis, an Athens accountant. "I have a huge number of
customers wanting to file their taxes right here, right now, to have the tax
calculated and paid instantly before a possible haircut. Even if the tax is
40 to 50 thousand euros, they pay it off in one go."
A Greek jeweler, George Papalexis, said a customer had approached him on
Wednesday wanting to buy a million euros -- about $1.1 million -- worth of merchandise.
But Mr. Papalexis, the chief operating officer of Zolotas, said he had
refused because he was more comfortable holding on to the jewels than having
money in Greek banks.
"I can't believe that there I was, turning away a million-dollar
offer," he said. "But I had to turn down the deal. It's a measure
of the risk we face."
Mr. Mouzakis said that many companies were also trying to settle their
debts quickly, not wanting to owe money if their deposits are hit in a deal
to rescue Greek banks. Others do not want to accept payments for the same
reason. When banks in Cyprus had to be bailed out in 2013, depositors with
more than €100,000 lost about 40 percent of their money.
A contractor at a Greek energy company, who spoke on the condition of
anonymity, said his firm had paid all its taxes for the year last week to
whittle down the funds that could be subject to a deposit tax.
"I'm even thinking about buying a car, although I don't need one, to
get my cash balance lower," he said. "People want their money in
physical assets, not in the bank."
But some who are unlikely to be troubled by losing a percentage of their
bank deposits are spending, too. Vassilis Bekiaris, 29, said he knew two
brothers who had gone on what was probably an ill-advised spending spree,
fearing a cut to their savings. One who had just €1,000 in his account bought
an iPhone. The other had €10,000 euros but, thinking he could lose 20
percent, bought €2,000 worth of clothes. "All they managed to do was
prop up the economy a bit," Mr. Bekiaris said.
While pensioners and others in need of cash struggled, some employers who
were behind in paying their employees surprised them by digging into their
safes and producing cash rather than risk losing money to the terms of a bank
bailout.
A few companies, prepared for the bank closings, were ready to pay cash to
their grateful employees. The family-owned Petsas group, which manufactures a
range of products from biodiesel to cotton clothing, paid all of its workers,
about 130 people, in cash.
When Greeks start clamoring to pre-pay their taxes, you know the end is
near.
But viewed through a Keynesian rather than Austrian lens, this process
actually looks kind of positive, like really effective stimulus. The Greeks
appear to have discovered the secret to convincing an over-indebted people to
keep borrowing and spending: Just telegraph the destruction of their savings
and watch the little folks consume.
In an era when new and wild economic theories are being tested on a weekly
basis, Greece is perhaps the most interesting laboratory of all. If this
sudden burst of consumption and tax compliance results in "growth"
and "a balanced budget" then don't be surprised if the people
running the eurozone, Japan and maybe the US come to the comical but from
their point of view logical conclusion that far from screwing up, Germany
actually did something right in Greece. And that maybe the rest of the world
should pre-announce capital controls and bank bail-ins to get their citizens
off their butts and into the mall.
Which, when you think about it, might be exactly what the war on cash
is setting up.
