Gold, Greece and the end of the era of the central banker as God

Greek protesters © Getty Images
Any bailout money won’t go to the Greek people – it will go to Greece’s creditors

Today I consider a subject that, until now, I’ve studiously avoided.

But it’s something I can ignore no longer – the small matter of Greece.

I consider it in conjunction with something I’ve done anything but ignore – the dense matter of gold…

A Greek default is anything but new

I need to weave some threads together. We’ll start with Greece.

This is not the first time that Greece has defaulted. According to ‘Reformed Broker’, Josh Brown, there are only two countries in the modern world that have defaulted on their loans more often than Greece – Honduras and Ecuador.

Greece has been in default to its creditors for more than half of the 185 years since its independence in the 1830s. There have been five actual defaults by its government – in 1826, 1843, 1860, 1894 and 1932.

It’s also no secret that the accounts submitted to join the euro in 2001 were, shall we say, creative. Goldman Sachs then helped massage the figures. Such was their ambition, that the plutocratic visionaries in Brussels turned a blind eye to it all.

I’m saying all this not to have a go at Greece, but to make the point than when an entity has both a history of default and cooked books, the probability of problems down the line is not inconsiderable. Lender beware!

I ask you here to also consider the Orwellian language that is being bandied about, and the accompanying misinformation. When you hear of Greece needing another bailout, that money is not going to the Greek people. It would be more accurate to say ‘Greece’s creditors need another bailout’, because that is where most of the money is going.

Why, I ask, should Greek’s creditors be given special favour? They went into the trade with their eyes wide open. It is symptomatic of the cronyism that is so loathed by both the left (nationalise everything) and the right (let them go bankrupt).

It’s as though the Greek people are being expected to pay through unemployment, poverty, lack of opportunity and debt servitude for the machinations of the European Union and previous governments, as well as for the bailouts of their crony-creditors.

Meanwhile, the European Central Bank prints money to buy bonds, as Tommy Cooper would say, “just like that”. Newly printed money fuels yet more asset-price  inflation and economic distortion, which further increases the gap in wealth between those that have and those that don’t have.

Did governments win the battle or the war?

So to thread number two: gold.

Think back to the great gold bull market of the 2000s. One reason people invested in gold was, simply, because the price was going up (as good a reason to invest as any). The gap between supply and increasing demand was another factor, which persuaded many to invest not just in gold, but in all commodities.

But there was another reason. Many – your author included – did not like, to misquote Murray Rothbard, what the government was doing to our money: unsustainable deficit spending; not measuring inflation properly; zero interest rate policies; unpayable debts; using money as a political tool; or the digital printing of money that we have seen since 2008 – and so on.

There were many ethical reasons for this dislike, but we also thought, sooner or later, it would all blow up in their faces. And so this narrative grew that we were headed for some kind of currency crisis.

We’d buy gold, wait patiently for it all to unfold, then, with our hoards dramatically revalued upwards, emerge from our bunkers like kings. Gold is insurance, gold is nobody else’s liability, gold versus house prices, gold vs US government debt, gold, guns and tins – they were all part of that narrative. My first book, Life After The State, was too. Even the invention of bitcoin was part of it.

Starting with 2008, then heading towards the first emergence of the Greek crisis in 2011, it looked as though that narrative really was playing out. And yet then – with that first emergence of the Greek crisis in 2011 – gold peaked. There were another 18 months when it yoyo-ed between $1,600 and $1,900 an ounce, and then the bear market properly bared its teeth.

As gold fell, that narrative began to look more and more deluded. There was a huge bull market in stocks. Interest rates never went up, they stayed low. Government debt costs got even cheaper, their bonds got more expensive. Even junk bonds rose in price. House prices rose. There was an economic boom. Fiat money didn’t lose its purchasing power – if anything, there was a whiff of deflation.

In short, governments won the battle.

And so this new narrative took shape. Governments – and, in particular, central bankers – acted brilliantly in 2008 and afterwards. Not only did they save the system, but their monetary policies created the boom that followed.

Central bankers were hailed. They really can fix things. Intervention works. That is the narrative now.

The potential shame of Greek success

And so to thread number three. The danger of Greek default is not so much to Greece as to its creditors and – most importantly – to the entire eurozone project.

Economies have a habit of doing rather well after a crisis. If Greece abandons the euro and tells its creditors where to go, there will no doubt be a period of turmoil. But, as blogger Otto Rock notes, if it then enjoys a period of economic success like Iceland and Argentina in recent years, or the Asian economies post-crisis, then suddenly the EU “we-must-stay-together” narrative starts to look flawed.

If long-suffering Italy, Spain and Portugal suddenly look east and see a booming post-euro Greek economy – while their own stagnation continues – they might suddenly think, “Actually, I quite fancy a piece of that”, and follow the same path. And the transition can happen more smoothly as Greece will have blazed the trail.

It’s hard to stress how bad things are in southern Europe. Economic migrants from these countries are everywhere. Not just in London, but now in other British cities and abroad. Thailand, when I was there earlier this year, was full of Italians and Spaniards, who’d all left home in search of opportunity.

I’m starting to think that this Greek crisis might be the point at which the current narrative – that of the economic interventionists and the central bank supremo – is coming to an end.

By extension, it may also mark the point at which gold starts to come good again – and the wobbles in the government bond market get bigger.

These things do not happen overnight; they take years. But I am wondering if we are seeing a so-called change in trend.

All eyes on how the Greeks vote this weekend.

• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.