While I follow several economic and financial related publications, this week John Mauldin’s e-letter, titled ‘Unconsidered Consequences’, contemplated intriguing and timely observations regarding the proposed debt resolution issue facing the Greek government and the role of the European Central Bank (ECB). Below are a couple excerpts that caught my eye.
“As noted above, ECB financing, which amounts to almost 8% of peripheral countries’ bank financing, has offset foreign (to the home country) debt that is leaving. Since that exodus is accelerating, the word fleeing may be more appropriate.”
The important issue he cites is the mobility (fleeing) of capital, and the propensity for savers to protect their capital when they deem it in jeopardy of being treated with hostility. This is what caused the huge spike in demand for gold over the past few years – savers protecting their assets by converting from other savings vehicles into this time tested asset class. Of course, savings converted into gold deprives the economy of that investment capital to fuel further economic growth and is considered a negative development.
Also, I found this passage, regarding how Greece might solve its crisis, interesting: “Drop your tax rates to the lowest in Europe and then enforce them. The lower you make them, the more money you will raise in taxes.” Sound familiar? It reflects our recent blog on the subject of the goal of tax policy (maximize revenues or create equal income outcomes). What do you think Greece prefers? The US? Should it not be the same for both (all countries)?
We welcome comments or questions.
Robert M. Bilkie Jr., CFA