I have to admit something – I’ve become thoroughly bored with all the coverage of Greece and its impact on the global economy. You’ve probably noticed that I haven’t had much to say on the topic and that’s primarily because I think that there isn’t much more to be said on the topic. This doesn’t mean that the situation in Greece isn’t important. I’ve spilled tons of ink on this topic over the years and I’ve sort of made my peace on it – Greece is going to be at an economic disadvantage relative to other EMU members until they resolve their internal rebalancing problem. That is, they require some form of fiscal transfers to boost demand or they need to suffer through continued internal rebalancing. I also think it would be colossally stupid for the EMU to allow Greece to leave the Euro – so stupid that I don’t see how it can be allowed to happen. Europe has scrambled the monetary egg with their construction of the EMU and there’s no unscrambling it now without potentially disastrous results.
Despite the seriousness of this situation, I think the idea of a Grexit (a Greek exit from the Euro) has been consistently overdramatized. And I think the financial media has substantially contributed to this overdramatization because it is an extremely scary situation that would result in big time ratings for the financial media. Basically, Greece is the next potential crisis that can garner attention because it’s a fear based theme. And fear sells well in financial circles because consumers of financial media are excessively emotional. Basically, we’re being sold what sells even though we have very little reason to buy it.
But here’s the thing. We’ve had multiple comments from leading officials stating that Grexit was never on the table. Here’s Christine Lagarde this morning:
“[Grexit] is not on the cards, and it is not being discussed.
Last week was a triggering point where there was a collective determination to listen, to build trust, and to do the best to stay together.”
And here’s Yanis Varoufakis in early January:
“Greece will neither want to leave the euro nor threaten to do so”
The odds of a Grexit were never really all that high in my opinion. Yet the coverage of this event seems to have dominated the financial airwaves in a way that would lead one to believe that the odds were closer to 100% than they are to 0%. This doesn’t mean I haven’t assessed the risk and even positioned myself to be protected from it, but I think we’re looking at an event with an exceedingly low probability of occurring and yet many are focusing on it as though it’s a high probability event. In fact, I think some financial media outlets are even hoping it happens (you know who you are).
It’s not irrational to understand and assess low probability events that could have tremendously negative impacts on the economy. But we have to be extremely careful about letting these sorts of events dominate our financial lives. The financial media is out to sell you fear so you’ll stay tuned in. But sometimes it’s best just to ignore the media so that your emotions don’t result in irrational actions that could actually do more harm than the actual negative event itself.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.