THE BOYS' BRIGADE

Greek finance minister Wolfgang Schäuble has a sense of humor. Today he said to U.S. Treasury Secretary Jacob Lew: I’ll Trade You Greece for Puerto Rico.

Who knew Wolfgang Schäuble, Germany’s prickly finance minister, had a sense of humor?

At a news conference on Thursday, Schäuble chided U.S. policy makers, who have been urging Greece and its creditors to agree on a new bailout, saying they didn’t understand why a ban on bailouts is vital for the functionality of a currency union.

Schäuble then shared a proposition he had made to U.S. Treasury Secretary Jacob Lew: The eurozone would take in Puerto Rico, if the U.S. would allow Greece to adopt the U.S. dollar. Dow Jones Newswires reported on the news conference.

Assume for a second the offer is legitimate. Should the US accept it?

MarketWatch Answer

The Puerto Rican government’s debt-to-GDP ratio is about 60%. But if you include the island’s unfunded pension liabilities and the debt of its public enterprises, that figure rises to about 150%, according to data provided by Goldman Sachs.

Greece owes 315.5 billion euros in sovereign debt, which equals 177% of its 2014 GDP, according to Eurostat data.

So judging by the figures alone, the trade would be a winner for the eurozone.

MarketWatch Blew It

Actually, the trade would be a good deal for the US. The key is in the wording of the proposal.

The Eurozone would be stuck will all of Puerto Rico's debt while Greece "adopted" the US dollar.

Technically speaking, Greece could "adopt" the US dollar today.

Schäuble never said that the US would have to bail out Greece, Nor did he say Greeks would have the ability to print US dollars.

So how would it work then?

The answer is the same way it does in Zimbabwe. Recall that Zimbabwe phased out local currency at 35 quadrillion to US$1.

Zimbabwe has started retiring its almost worthless local currency in favor of the US dollar. Today, 35 quadrillion Zimbabwean dollars are equal to US $1, as a result of hyperinflation which hit the country in 2009.

The demonetization process of the Zimbabwe dollar started on Monday and will run till September 30.

People with accounts of up to 175 quadrillion (175,000,000,000,000,000) Zimbabwean dollars will be paid $5. Those who preserved bills at home will receive a rate of 250 trillion to $1 for their 2008-issued notes and 250 to $1 for their 2009-issued notes.

Zimbabwe has been using the US dollar since 2009 when the use of the Zimbabwean dollar was abandoned. A multi-currency system has been in operation for the last six years, with the South African rand and US dollar in use since 2009 and the Chinese yuan, Australian dollar, Japanese yen and the Indian rupee joining the list of accepted currencies in 2014. Formally, the national currency was also in circulation although Zimbabwean dollars were marginally used, mostly as souvenirs for their gargantuan denominations.

Zimbawbe Adoption

Zimbabwe "adopted" the US dollar in 2009. Technically, nothing stops Greece from doing the same today. Practically speaking, Greece would run out of dollars just as it ran out of euros, but that would not be our problem.

So here is the bottom line: In return for absolutely nothing, Schäuble proposed the "eurozone would take in Puerto Rico".

Economically speaking, we should accept the offer as proposed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.