An illiquidity trap in Greece
from Merijn Knibbe
I’ve been naïf. Based on this information, I stated that total debt (government, households, companies, banks) in Greece was comparatively low. But it isn’t. Total formal debt is low, indeed. But informal debt is increasing fast. And it’s increasing because Greece finds itself in the very opposite of a liquidity trap: an illiquidity trap. This is a vertical supply function of money. Even very high interest rates do not entice lenders to lend to Greece, or to Greek households or companies. Cash is scarce, credit and even debit cards don’t work anymore and people will therefore tend to hoard cash – just like they did in the seventeenth, eighteenth and nineteenth century (well, ‘they’, I mean the non-poor). And the Greek economy is responding to this eighteenth century illiquidity situation in an eighteenth century way.
According to today’s De Volkskrant, a Dutch nespaper, a kind of ‘tally stick’ credit system was dwindling rapidly but still somewhat functional in Greece, before the present crisis. A charming ancient relic of a world which in fact already had disappeared. These ‘tally stick’ credit systems – which were commonplace in eighteenth, nineteenth and even twentieth century Europe – are not based upon formal banking credit and bank accounts but are based upon personal contacts and ‘individual banking’ – providing credit had not yet disappeared as an economic function of the household. ‘Regular laborers’ for instance often received their wages once or twice a year, when their boss had finally got his money from his debtors (according to the accounts I have investigated this could even take as long as three years in bad times). The laborers were implicitly lending quite some money to their employer. The other side: they also received credit from the local bakery, butcher, landlord and the like.
This still happened in Greece, to an extent. Wages were, according to the newspaper, often paid too late. To state this the other way around: employees were lending money to their employer. Guess what happens in the present illiquidity trap: this system is making a come-back and expanding rapidly. Guess what households will do – these will, in their turn, extend their lines of formal and informal credit to the breaking point. Guess what happens when the taxman comes – who won’t take no for an answer and who only accepts formal money – workers will be forced to accept 20 or 30% rebates on the money due to them. Whoever told you that nominal interest rates can’t turn negative?!