Debt Crisis Worsens: Syriza Wins Greek Elections, ECB Prints More Money, Gold More Valuable

Is there a link between the ECB decision of Thursday January 22nd to stimulate the economy with 1 trillion euros over a period of 18 months and the Greek elections which show that the radical left party Syriza is the big winner?

Yes, there is a link. And the short answer is “the debt crisis.”

The long answer is slightly more complicated, in the sense that one needs to dig a little bit deeper to have an understanding of how both events are associated to each other. The framework in which this is taking place is the unfolding debt crisis, and the associated currency wars. Governments are responding to the nasty effects of the debt situation with measures which appear to cure the issue on the short run but which, in reality, worsen the situation on the longer run.

Looking at Greece, it is clear meantime that Syriza is the big winner of the elections. This is what the party’s spokesman just said on one of the Greek TV stations: “What’s clear is we have a historic victory that sends a message that does not only concern the Greek people, but all European peoples. There is great relief among all Europeans. The only question is how big a victory it is.” He added to it that the election results heralded “a return of social dignity and social justice. A return to democracy. Because, beyond the wild austerity, democracy has suffered.”

Looking at the current situation in Greece, without taking its history into account, it is indeed true that the country has been hit by a violent social shock. It is true as well that the austerity measures as proposed by the European Union appeared to be more destructive than constructive. The austerity measures were based on calculations of the IMF; the projections of the IMF’s research department did not take into account the destructive side effects of extreme austerity. There is nothing wrong with austerity, on the contrary even, but extreme austerity has indeed destructive effects.

Greece’s economy has been paralyzed in the last years. But the real story started in the 90ies, when the country was flooded by loans out of the Europe Union. Because of short sighted government policies, channeling the newly acquired funds into social security as well as overly recruiting civil servants (Greece had 30% of its active population working for the government at its peak in 2007), there was a huge expansion of the welfare state. By 2009, the country has €299.7 billion of debts, equaling 130% of its GDP. Especially the middle class saw a boom in their wealth.

But as of 2009, it was payback time. And that is the issue with debts: they have to be paid back at a certain point in the future. Also, by abusing debts, one gets the illusion that wealth can arise out of nothing. That is a danger. One has to create value, as an individual or as an organization, in order to create wealth. In the case of Greece, the government had transformed their citizens into a population that had become unaware to which extent they had been pampered, and where the debts came from and had been (ab)used over time.

Now Tsipras is pledging to reverse many of the reforms. The country’s creditors insist Greece must abide by its commitments to continue receiving support, and investors and markets alike have been spooked by the anti-bailout rhetoric.

The point is that someone has to pay for the acquired debts: either the creditors or the debtors. It’s simply as that, purely 101 economics. But diging into Syriza’s program reveals that there is no clear policy. The radical left party has promised to negotiate a “haircut” with the European Union (EU), and ask the EU at the same time for additional support because voters were promised higher wages and pensions. Essentially, positions are very far apart, and currently unbridgeable. The issue is that there is no plan, and what is at risk is additional suffering of the Greek population.

How does all this relate to the news of the European Central Bank (ECB) which unveiled a monetary stimulus program only 3 days ago. In it, the ECB committed to purchase $68.4 billion a month in bonds from local European banks? To get an understanding of the future effects of these measures, we summarized an excellent interview from Claudio Grass, managing director of Global Gold Switzerland, on

The ECB will be buying assets from the balance sheets of the local banks in Europe to increase liquidity. In doing so, the ECB hopes that the banks are going to lend more so that the new money will reach the real economy. The issue here is someone is going to pay for it at a certain point in the future. The net outcome is that the Euro is being depreciated to make the Eurozone more competitive.

This links back to the ongoing currency war. The Euro has declined, which is exactly what European leaders want. Every single economy currently wants a weaker currency to stimulate exports. Claudio Grass does not believe that the weakening of a currency is fruitful. If it would work, then Zimbabwe, being the prime example of currency devaluation, would be the richest country in the world. Obviously the citizens of Zimbabwe became multi-millionaires, but at the end of the day their purchasing power of Zimbabwe dollars collapsed.

The key question is how this will affect consumption, which is the key component in the economy. In other words, how will European citizens be impacted by the decision of the ECB? Claudio Grass compares it with playing Monopoly. When the money supply in the game goes up, the prices of all assets rise as well. A spike in asset prices is the likely result of the ECB decision. In monetary terms, one could say that the debt bubble is going to increase. For holders of euros, it implies that they will be able to buy less over time, as the value of the Euro depreciates. Therefore, people who have a salary, a fixed pension, or savings, will lose their purchasing power. Consequently, as soon as people start realizing this, they are probably going to decide to spend it, which is exactly what the ECB is hoping for.

In 2013, the G-7 leaders said that they would not interfere in currency rights, as currencies should be determined by the market. But today, those same leaders agreed to intervene anyway, no matter prior agreements. The ECB is printing money, local governments are manipulating interest rates (and are not shy of negative rates), etc. Mankind is simply going through the largest debt crisis in history. It is impossible to fight the debt crisis by creating more debt, according to Mr. Grass.

The results of the Greek elections and the ECB’s monetary bazooka are all symptoms of the same underlying problem. Debt is not only destroying the value of a currency, but is also destroying values of a population. Governments have not been “managing” the effects when they acquired the loans, but one way or another they feel the need to “manage” the destructive effects when it becomes payback time. And what is the answer? Simple, creating even more debts and devaluing currencies even further. When one country does this in some sort of hypothecial vaccuum, it could theoretically work. But it does not work at all when all regions worldwide are implementing the same policies, simultaneously. The middle and lower class of society are the ultimate victims.

The debt situation will go on for longer than most of us believe, until it cannot go on anymore. There is no magic formula to solve the effects of a big debt crisis. There is, however, an asset which can provide protection when things would go wrong: gold. One does not hope to use the protection of gold. But just like an insurance policy, one is reliefed to make use of it  when an accident occurs. The current road of central policy makers is one of a very big accident at some point of the future. With currency wars destroying the value of currencies, the ultimate protection will be gold. History has proven, time and again, that gold offers monetary protection during debt and currency crises. It’s just that the ongoing crisis is much worse than everything we have seen in the past.

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