I recently finished Thomas Piketty main book «Capital in the 21st Century» which contains a series of very interesting observations on the dynamics of wealth and (labor) income. The one that struck me the most is the fact that in cases where income and population growth is low (something that was basically true for the most part of human history until the Industrial Revolution), inherited wealth becomes very important for wealth holdings. Exactly the opposite happens when population growth is large (hence most children inherit almost nothing) and when income growth is significant and thus wealth accumulated through saved income becomes important in determining total wealth.
The above dynamic is quite evident in the case of Greece. First of all, population is actually falling with fertility rates at 1.3 children/woman. This means that most children grow up without any siblings and thus end up inheriting all of the family wealth (75% of all households have no more than 3 members):
Moreover, median income has fallen back to 2004 levels. The very large debt burden, high NPL ratios and the requirement for significant primary surpluses for decades to come indicates that Greece faces a significant risk of walking an Italian path in the following decades: Income growth will be stagnant while debt loads will stay high with a large part of income devoted to servicing old debts instead of financing investment and growth.
In such a setting, past wealth and assets become the determining factor for a person’s total wealth with current income not being able to create new saving and wealth flows. Actually, as I outlined in a previous post, Greek households are consuming past wealth on a grand scale in order to be able to finance current consumption, a reasonable outcome of the 26% fall in median income since 2010. According to recent figures, gross saving was a whooping -7% in 2017.
According to BoG Financial Accounts, more than 60% of household financial assets is in the form of currency and deposits and another 23% in unlisted shares. The rest of household wealth is probably in the form of housing. Listed shares (which typically are the assets that have the largest growth potential) are only 3% of total financial assets (they were 40% in the height of the 1999 stock bubble and close to 10% during the golden Euro years).
Roughly ¾ of Greek households own a primary residence with median total net wealth of 90,000€. The main residence has a median value of 70,000€ making it the most important asset while median financial assets of all households are only a couple of thousand €.
For a risk-averse person (such as the Depression hit Greek population) the main priority is wealth preservation instead of a growth potential (especially if the latter comes with a probability of a destructive tail event). Thus most people would probably prefer a low-yielding Euro asset instead of a re-denomination of wealth in drachmas. An early Grexit might have avoided the 25% drop in output and the current low-growth potential yet, as long as the Greek Depression is now considered a «sunk cost», wealth preservation takes priority and staying in the Euro becomes an attractive option, even if it coincides with low income levels and growth. The «attractiveness» of the Euro option most probably increases with wealth levels which means that it becomes a «hard-line choice» for the ruling class which has most wealth to lose/redistributed in a Grexit scenario.
The Grexit option might as well have come and gone.
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Νοέμβριος 19, 2018 στις 17:59
alexx668
I can only speak for myself.
In 2015, during the referendum era, I was against grexit. A while earlier, I had sold an apartment. The price was hugely depressed compared to what it would have been prior to 2009, but it was still good money. So, who would want to convert hard euros to soft drachmas? Not me, or so I thought.
Almost four years later, having lost a sizable chunk of that money on obligations (a large part of which is taxation), I am having second thoughts. Frankly, I am scared watching the speed at which these “low yielding assets” are getting diminished. This is the negative saving that the author talks about. It’s anxiety inducing.
So, speaking about myself, I am reevaluating the attractiveness of grexit (I am 40 years old, so I’ve spent a large part of my life under drachma, no fear of the unknown). As for the ruling class, sure, they have to most to lose, but as we see in brexit, Italy, and even the mighty USA (Trump), they are not omnipotent.
Νοέμβριος 19, 2018 στις 21:40
kkalev
Actually, property values are slightly rising during 2018 after dropping more than 40%.
My basic point is that the available options are evaluated in a different manner when the depression is on the rear view mirror rather than when GDP drops 7% in a year. The Euro is the «known stagnation» while the Drachma a «known unknown» with large upside and downside scenarios.
So long as the large losses in income and wealth are considered «sunk costs», people will tend to become more risk averse and opt for preserving whatever they have left. 2015 led to a large part of Greek society to «internalize» the MoU and accept its major «reforms» as irreversible. In my view, pessimism for the future coincides with a turn towards wealth preservation through avoiding the downside risks of re-denomination, especially since birth dynamics mean that wealth will tend to become more concentrated with each generation.
Νοέμβριος 20, 2018 στις 12:00
alexx668
Imo, in order for your scenario to materialize, two things need to happen. First, GDP not only needs to stabilize and grow, but also to be distributed in a more equal manner (a topic of some of your previous posts). As a consequence, employment and income needs to grow. If income doesn’t grow, even those that have wealth will find it difficult to preserve it. In case I haven’t made it clear, I fit in this category. My income isn’t high enough to preserve my wealth (and I actually have wealth to preserve), hence grexit has reappeared in my mind as an attractive scenario, despite it’s risks. PS – It is fully understood that any such scenario depends on the Europeans, to whom we owe gigantic euro-denominated obligations, which cannot magically transform to drachma-denominated ones (even though the opposite happened when Greece joined the EMU).
Νοέμβριος 20, 2018 στις 15:05
kkalev
I am not so sure about the future growth prospects. Greek households had already consumed €34bn by the end of 2017 through negative saving while the figure will most probably grow to a total of €40bn by the end of the year. Given that the median financial assets are only 2,000€ my view is that either the cyclical recovery will manage to increase incomes sufficiently or at some point private consumption will have to adjust in order for the saving gap to close lowering growth (and investment) considerably. With a less than 10,000€ median wage I will probably not place a bet on the former.