The World’s Biggest Economic Fallacies… and How to Profit From Them

They’re the biggest risks to your financial wellbeing today… and the average investor is completely blind to them.

I’m referring to the enormous economic fallacies embedded in conventional thinking.

The crisis in Greece has helped reveal these “hidden” risks for all to see.

Many Americans think that because Greece is a distant country, what happens there doesn’t matter to them.

This is not entirely correct.

That’s because Greece reveals the deeply flawed nature of fractional reserve banking, Keynesian economics, and the supposed safety of government debt. These are all things that touch pretty much everyone on the planet.

Most people accept these concepts as a normal part of everyday life. They don’t have the slightest clue of the enormous risks they pose. That’s why the Greek crisis is so important… it exposes them.

I recently spoke with my friend Tom Woods about all this.

As many of you know, Tom is a New York Times best-selling author and staunch advocate of free markets economics. He has a superb podcast, The Tom Woods Show, that is definitely worth checking out.

I think you’ll enjoy our conversation.

Until next time,

Nick Giambruno
Senior Editor
International Man


Tom Woods: You’ve been writing about Greece over at Casey Research’s International Man website, so give me your overview on how you see things. What’s the problem?

Nick Giambruno: Greece is relevant because it reveals some of the biggest economic fallacies that are present in the world today. For example, the totally unsound nature of the fractional reserve banking system, which the whole world operates on. As the long lines at Greek banks and ATMs attest to, banks don’t really have all of your money.

Bloated government spending in Greece also reveals the failure of Keynesian economics, which advocates a large state role in the economy. It reveals the failure of the bailouts, which did nothing constructive. They only delayed the inevitable. Greece reveals that government bonds are not sacrosanct.

All of these things - fractional reserve banking, Keynesian economics, the false safety of government debt, and the bailout model - are firmly embedded in today’s conventional wisdom. They’re all enormous delusions… very destructive ones. The crisis there helps to illuminate these fundamental flaws in mainstream economic thinking. That’s why I think Greece is so important.

But despite the obvious economic insanity of the whole thing, it’s likely EU bureaucrats will continue to throw money into this bottomless pit.

There are geopolitical issues that might trump economic ones.

Greece is a strategic country and the EU and the US want to keep it in its Western orientation. We’ve also seen the Greek prime minister flirting with Putin in Russia a little bit. The last thing the US and EU wants is to see Russia peel away a NATO member.

So at the end of the day, we will probably see more bailouts for Greece even though it clearly makes no economic sense.

Tom: There are capital controls and a bank holiday in Greece. These sound a lot nicer than the realities really are. A bank holiday may even sound like a nice thing. What exactly is going on there? Why does a government do those things?

Nick: The term “bank holiday” is a good example of propaganda… a government euphemism. A bank holiday is obviously not any sort of thing you would be celebrating, popping champagne or shooting fireworks off or anything like that.

A bank holiday is not a happy thing. It’s where the government comes out in a surprise and shuts down the banking system. That means you can’t access your funds. It’s scary.

Imagine not being able to get the money you need to pay for food and so forth.

Calling the experience a bank holiday is like calling a street mugging a surprise party.

It’s all about maximizing the amount of money available for a government to steal. Once the banks are closed, the next step is to raid the deposit accounts somehow. Sometimes it happens with a currency devaluation. Sometimes it happens with a special tax. It doesn’t really matter what they do or what they call it. Depositors are going to get hurt.

Often you will hear the media and government talk about depositors taking a “haircut”, as if it’s some sort of painless process where the money will grow back. It’s another one of those propaganda terms.

Capital controls are just restrictions on moving money outside of the country. They can come in all sorts of shapes and forms but they all do the same thing, trap money inside a country. It usually happens in conjunction with the bank holiday and wealth confiscation. Again, the objective here is to maximize the amount of money available for a government to steal.

One more thing. A bank holiday, a wealth confiscation, and capital controls have to come as a surprise. Otherwise the people would take defensive measures - like moving money to an offshore bank account - that would limit their effectiveness. Money held in foreign countries is out of their immediate reach and is usually safe.

You’ll often hear government officials and central bankers deny that something bad is going to happen to bank depositors right up to the point in which they do the very things they were denying. In Greece, the government denied it was going to implement capital controls a mere couple of hours before they actually imposed them.

So if you hear politicians denying these things, take it as a big clue that they are actually imminent.

Tom: Is there any upside in Greece? Is there anything to do other than run away?

Nick: One thing Doug Casey and I do is survey crisis markets for investment opportunities. Buying when the blood is in the streets is when you can really find astounding investment returns.

Back in 2013, there was another crisis in a Mediterranean country… Cyprus. Despite all the ugly headlines, sound, productive, and well-run Cypriot businesses continued to produce earnings and pay dividends. Anyone with a little money and a cool head could have bought their stocks on the ultra-cheap. And that’s just what Doug and I recommended doing at the time.

One of the Cyprus companies we recommended has more than tripled. Another has more than doubled. Two others have come close to a double. Our readers have loved the experience. We expect that even bigger bargains are emerging nearby, in Greece.

But we’re not the only ones who see value in Greece. Recently, legendary investor Warren Buffett reportedly bought the Greek island of Agios Thomas for 15 million euros.

So where in Greece is it practical for the average person to invest in?

There’s actually one business that the Greeks do better than anyone else. They’ve been doing it for thousands of years... it’s in their soul. And that’s the shipping industry.

This is an industry that’s completely out of reach of the Greek government. It has a special arrangement where it’s not subject to taxation. And even if the Greek government decided it wanted to tax it, it would be very easy for those shipping companies to simply move to Dubai or Singapore. It’s a wonderful restraint on an otherwise out of control government.

The shipping industry as a whole has plenty of problems of its own. But there is one segment that’s a bright spot. It’s in this segment that you can find quality Greek companies trading at crisis driven bargains. The economic crisis and political turmoil in Greece is not going to affect these solid companies, except to make them incredibly cheap. We have found one that has a consistent double-digit yield. For more details, see the upcoming issue of Crisis Speculator.

Tom: Any parting words before we say goodbye?

Nick: I think the situation in Greece teaches us a couple of lessons. First and foremost, it shows the need to diversify internationally to reduce your dependency on any single country.

The Greeks had ample time to do take the most basic steps, like opening a bank account in another EU country. They had years to do this simple step. Had they done it, they could have really protected themselves from what is to come. I’d bet that it will not end well for the depositors in Greek banks.

So the lesson is don’t be complacent. Take action before it’s too late.

Nick Giambruno

Nick is Doug Casey’s globetrotting companion and is the Senior Editor of Casey Research’s International Man. He writes about economics, offshore banking, second passports, value investing in crisis markets, geopolitics, and surviving a financial collapse, among other topics. He is a CFA charterholder. In short, Nick’s work helps people make the most of their personal freedom and financial opportunity around the world. To get his free video crash course, click here.

Tags: greece, crisis investing, austrian economics,