If Greece decides to exit the Euro and return to its historical fiat currency the Drachma, NIA believes that hyperinflation is likely to occur in Greece almost immediately. For the 30 year period of 1971 through 2000, when Greece was using the Drachma – the country experienced an insanely high compound annual price inflation rate of 14.10%. Over the following 15 years, as part of the Eurozone, Greece has experienced a compound annual price inflation rate of only 2.23%. Greece experienced 6.32X higher price inflation with the Drachma than the Euro.Between April 1981 and December 2000, while the price of gold in US Dollars declined by 43.1% to $274.45 per oz – the price of gold in Drachmas increased 305.8% to 104,176 per oz. The Drachma during this time period lost 86% of its purchasing power vs. the US Dollar.
In the 1Q of 2015, Greece’s government debt/GDP ratio reached a record high of 202.34%, up from only 94.98% in 4Q 2008. Most of it is owed to foreigners and denominated in Euros. Therefore, even though returning to the Drachma would give Greece control of its own money printing press – it would not be able to pay off its debt through monetary inflation.
Germany has the most influence over the ECB, and most Germans were taught growing up to fear price inflation. While all Americans know the Great Depression as being the worst economic event in US history, all Germans know the Weimar Republic Hyperinflation of 1921 through 1924 as being their worst economic event in history. It’s always possible for an economy to recover from a major deflationary event like the Great Depression, but hyperinflation in Germany totally destroyed the wealth and savings of all its citizens.
Greece today is facing a situation very similar to Weimar Germany in the 1920s. Including private debt, Greece currently has total debt equal to 320.9% of GDP. Germany in 1922 had war reparation debt equal to 325% of GDP that it was required to repay in gold-backed foreign currency – and couldn’t repay in newly printed fiat Marks.
Germany’s hyperinflation led its middle class citizens to turn to Hitler, who rose to power due to the confusion and devastation of Germans losing all of their savings and wealth as a result of hyperinflation. Greece today has its own neo-nazi politcal party Golden Dawn that now controls 17 seats in the Greece Parliament – making it Greece’s third most powerful party. Golden Dawn was founded in 1987, but up until a few years ago was only supported by 0.3% of the Greek population. Today, Golden Dawn – who has hailed Hitler as a “great personality” – enjoys double digit support and is rapidly gaining power.
The only reason Greece was able to borrow so much money to begin with is the fact that prior to the 2008 financial crisis, global bond investors incorrectly perceived all Euro-denominated bonds to be guaranteed by the ECB. Now that they know otherwise, the spread between Greece and German debt has exploded 100-fold in recent years – from a low of 13 basis points in 2005, to a spread of 1,467 basis points today!
A return to the Drachma will not solve anything for Greece and will cause a crisis similar to Germany in the 1920s. Despite being unable to monetize its debt, Greece will be tempted to print money – believing it will provide the economic stimulation it desperately needs. Although the Euro has major foreign demand as a store of value, there would be no foreign demand for the Drachma – and any major money printing will lead to immediate hyperinflation.
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