The Existential Danger To The Euro Is Elections
By Daniel R. Amerman, CFA
Below is the 2nd half of this article. If you would prefer to read (or link) the article in single page form, the private one page version for subscribers can be found here:
All It Takes Is One Election
The single most important take away from the current Greek crisis is not the immediate effects of this crisis, nor is it the effectiveness of the financial defense mechanisms that may in fact be able to contain any damage in the near future.
What really matters is that the "powers that be" have been powerless to stop it.
Obama, Kerry, Merkel, Hollande and Cameron had no ability to change the results of the election in Greece.
Just as Yellen and Draghi also lacked that power.
Just as the New York Times and Washington Post lacked that power.
Just as Goldman Sachs, JP Morgan and Morgan Stanley also all lacked that power, as did the International Monetary Fund, and the World Bank.
We have this enormously powerful collection of financial institutions, governments, media and international organizations, all of whom were powerless to stop what triggered the current crisis. Which was simply a nation holding elections, and appropriately enough in this case, whatever else you may agree or disagree with, this did occur in the cradle of democracy.
And what that tells us is two things:
1) the defense of the financial stability of the eurozone is and always has been based on political consensus; and
2) Greece proves that this political consensus is an assumption that can't actually be controlled.
It is a proven wildcard that can bring the whole house of cards down.
Now again, we don't know if Greece will do it. Nor do we know what will happen in Spain. Or what will happen in France or other nations.
But what is plain to see is that there is a continuous and ongoing risk over the coming years. For what needs to be recognized is that the current dominant power structure can win the next 10 relevant elections, where the status quo is at risk but is preserved – and it won't necessarily matter in the end.
Because all it potentially takes is one key election.
Let's say the status quo manages to win every election between now and December of 2015 or June of 2017 – and then one party in one nation, be they of the right or the left that was supposed to never get elected – does get elected.
Right there, at that very point, regardless of how many previous elections the status quo had survived, everything we think we know about the euro could be turned upside down. With ripple effects that would quickly travel around the world and affect every other nation who is a trading partner with Europe – which we all are.
And once that happens, because the defenses of this experimental currency – as well as the global financial system – are based on political consensus, a severe crisis could develop very quickly indeed.
What is worth remembering is that politics is the "dog" and central banks and financial institutions are the "tail". Now for periods of time it may indeed appear that the tail is wagging the dog.
But, ultimately it's always the dog that wags the tail, and it is the central banks and banking systems who exist at the sufferance of whomever holds the raw political power.
Anyone who loses track of the underlying basics of the situation may find themselves facing the biggest financial surprise of their lifetimes, and perhaps much sooner than they expect.
And if such a scenario were to occur, there would be not just a massive loss of wealth – but there would also be a extraordinary redistribution of wealth, as we will explore in part two of this analysis.
What you have just read is an "eye-opener" about one aspect of the often hidden redistributions of wealth that go on all around us, every day.
A personal retirement "eye-opener" linked here shows how the government's actions to reduce interest payments on the national debt can reduce retirement investment wealth accumulation by 95% over thirty years, and how the government is reducing standards of living for those already retired by almost 50%.
An "eye-opener" tutorial of a quite different kind is linked here, and it shows how governments use inflation and the tax code to take wealth from unknowing precious metals investors, so that the higher inflation goes, and the higher precious metals prices climb - the more of the investor's net worth ends up with the government.
When we look at all government retirement promises over the coming decades – the total is simply unpayable. As explored in the "eye opener" linked here, this means that there is a high probability of an eventual tax code "revolution" that could rewrite all the rules when it comes to the future treatment of our current retirement accounts.
If you find these "eye-openers" to be interesting and useful, there is an entire free book of them available here, including many that are only in the book. The advantage to the book is that the tutorials can build on each other, so that in combination we can find ways of defending ourselves, and even learn how to position ourselves to benefit from the hidden redistributions of wealth.
