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THERE ARE 51 days to the Budget with much debate still to take place between now and 14 October on what the government should spend and cutback on.
In the third in a series of articles Dr Daragh McGreal, an economic advisor to the independent TD Stephen Donnelly, examines our country’s debt.
Just over 150 years ago, on August 4th 1854, the Ottoman Empire took on its first official foreign loan to finance its role in the Crimean War.
The Empire had resisted this for years: it feared its agricultural base and poor tax collection system would mean the loans would not be repaid. But it needed money and it needed to win the war and so it began signing agreements with European bankers, assisted by their national governments.
The war was won in 1856, but the Empire never recovered from its reliance on foreign capital. European economists and bankers arrived and set up a huge bureaucracy to monitor the state’s finances.
But with the collapse of the Empire and the onset of World War 1 the debt was never paid in full. The last payment was made 100 years after the first loan, in 1954.
What has this got to do with Budget 2015? Well, we’re paddling in the same pool as the Ottomans. We have heard a lot over the past number of years about Irish debt.
As can be seen from the graph, there is good reason for this: between 2007 and 2013 general government debt more than quadrupled.
As this debt accumulated, some commentators said that it approached becoming ‘unsustainable’.
But what does unsustainable mean? And where is the limit?
In truth, there is no technical definition. But if it becomes so costly for a country to service its debt that it has little left to fund basic services, then it’s fair to say that the unsustainable limit has been passed. At that point you’ve become a forgotten empire.
In Ireland, the Department of Finance expects Ireland’s debt to fall to at least 107 per cent of GDP by 2018. This is not because borrowing will cease, but because it will grow at a slower pace than GDP.
So for our debt situation to get better, and to approach the levels seen in other EU countries, we are banking on strong economic growth.
But is this possible? After all, for every €1 we took in last year, 13c went on paying back the debt we owe. And although this will fall over the coming years, we’re still stuck for money to invest in the economy and means that growth will be stifled. This, in turn, means that the debt-to-GDP ratio will remain high.
Breaking this cycle of debt limiting growth is a difficult challenge.
So what are our options?
One possibility would be to swap our IMF loans with typical bond market loans, which are currently available at about half the interest rate of our IMF loans. Doing that would reduce our annual interest payments by a couple hundred million. This would need the go-ahead from other EU states so won’t happen overnight.
Alternatively, one measure for Budget 2015 could be to initiate a programme of ‘social impact bonds’. These are a relatively new and low risk concept.
They work like this: the government hires an intermediary to raise capital to solve specific social problems, such as homelessness or recidivism; the intermediary hires an expert voluntary organisation to run the project; depending on the success of the project and the savings to the state, a dividend is paid to the investor.
All parties have an interest in the project’s success and the state avoids more indebtedness. Think of it as philanthropy with a profit.
A final option is to default.
Recently, almost 150 years to the day since the Ottoman Empire’s first foreign loan, Argentina defaulted on a portion of its debt obligations. Those affected were bondholders who previously turned down a bond-restructuring plan.
For Argentina, which is currently experiencing a recession and high inflation, this may seem like a small victory. But how might it escape the recession if lending facilities dry up?
Argentina’s battle with debt has been going on for 13 years. The US struggled with debt throughout the 1840s. The Ottoman debt problem ran for almost 100 years. Japan has unspeakable debt problems. And Ireland will not see normal debt levels until at least the 2040s.
This all shows that there are two constants to national economies: debt and taxes. Learning to live with both is a frustrating necessity in Budget 2015.
Dr Daragh Mc Greal is an economist and human rights consultant currently working with Stephen Donnelly TD on Budget 2015 and other policies.
Poll: What would you do to tackle Ireland’s debt problem?
The floor is yours. Let us know what you think in the comments…
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Irish sovereignty: won by patriotic men and women, sold out within 100 years by squalid, self-serving little gombeens.
London-Rome-Brussels, those have been our masters and freedom was just a con job by middle class wan£ers like john bruton and chums
How is Ireland not sovereign? We can spend whatever we want on whatever we want. We are only limited by what we can convince people to lend us…
We can also leave the EU tomorrow if he want but it being reality there are tradeoffs. But ultimately there is nothing stopping the Irish people doing whatever we want as a nation. We can have a deficit of 20% next year if we really want too.
If Ireland wasn’t sovereign, it would have got itself in such a debt mess.
So the idea is preposterous.
Paddy prefers politicians bribe him with his own money, promise the world & kick the can down the road for someone else to pay.
Squalid little self serving ELECTED gombeens, the bland leading the blind.
Sovereignty is a theoretical concept, so it is rather difficult to debate on.
Business Cat, you personify the arrogance of the banking sector. You work in an institution that by capitalist ideals should be closed due to gross mismanagement. Yet you are on here calling people “Paddy”. You should be on your hands and knees thanking the tax payers of this country for keeping you in a job, albeit in a failed business.
You should rename yourself “Failed business cat”. To think you believe you know anything about business is laughable in the extreme.
We need to grow a pair and demand a restructure on our debt. We’ve done everything that’s been asked of us now it’s time to play hard ball. Sadly the country is run by spoofers and I’d say they’re afraid to even ask because they haven’t a clue how the system works!
That worked out great for Argentina and Greece…..
Greece never defaulted
More often sovereign default is avoided to preserve political careers rather than for sound economic reasons.
” The conclusions are: the economic costs of sovereign default, as estimated by scholars, are found to be less drastic than most believe possible. The political costs of default, on the other hand, are non-negligible.”
http://www.economicsinpictures.com/2011/04/rabobank-to-default-or-not-to-default.html?m=1
We have been sold into financial servitude to protect the wealth of the powers that be. And I mean political powers. They were never going to endanger their gold plated pensions.
Heres another point, why aren’t there any articles on how to become a high paid civil servant? a politically appointed board member on one of our many public boards? A politically appointed Judge? Oh no, those roles are preserved for the ppl in the know “wink, wink”.
Debt will be restructured all across Europe.
There is no growth in Europe worth speaking of and even that is falling again.
Inflation is barely there.
Debt levels are high and growing due to deflationary pressures.
The debt in banks and states in Europe needs to be restructured because the debt is growing faster than it can be paid back with balanced books.
German and French banks and regions have unstable debt.
The question now is have Europe left it too late.
The rest of the world is pulling away, while the Eurozone is still stuck in the hole of 2007.
The Euro was a gamble to maintain Europe’s economic power, it has backfired on the continent.
We can’t really have a such a big problem with debt , our politicians and public sector are the highest paid and pensioned in Europe with Brendan Howlin restoring pay cuts in 1916 . Our social welfare system is generous . We’re still giving more to foreign aid than a lot of solvent countries are , hard to understand how all this is possible if we’re so much in debt …
It’s not as dire as all that. We’re seeing the end result of supply side economics, and we should be at the point where we realise the limitations of that way of thinking. The EU isn’t in full blown deflation yet, it stands at the precipice.
3 things are needed:
1) The moral superiority and divisiveness needs to end. We are all in a union, and all in a community. You can only either have customers with money in their pockets to buy your products, or you can have your moral victory and stagnation. Those who don’t want to shoulder the burden of helping poorer or more indebted nations out of trouble are probably better of on their own outside the EU.
2) Stop supporting trickle down ecomonics. We need a large stimulus, but that stimulus needs to go directly into the hands of consumers and SMEs, from the bottom up and not top down. It needs to focus on getting people buying again, writing down SME debt, and states spending money on social expenditure to pull heavily indebted citizens out of danger. This would include writing down mortgage arrears. We should have learned from the 80s that giving money to banks and capitalists and expecting them to do something positive to the economy doesn’t work because they don’t do those things with it.
3) Start working on changing the economy type from open to domestic. Rather than allow multinationals to do whatever they want, and to hope that FDI will bail the country out, tax regimes need to change to from a tax haven model to one that expects those who use Ireland to reach EMEA markets to contribute more than token numbers of call centre jobs. In fact, if Ireland would stand up to the US gov’t about data privacy, it could create a data haven that would give big tech companies like MS and Google a place to operate without pressure to hand data over to the US govt. Ireland should charge a premium for that and could become the centre of the EU data world, but on positive terms instead.
There’s probably lots of other ideas. You just have to do the opposite of what has been done, and work to break the status quo. Our polity has done nothing but look to maintain it.
Just one thing the poor won’t be gettin any richer Water charges , property tax , bin charges, people please wake up
Wake up to what? We know we’re all getting screwed by various taxes. Do you think this is something people don’t know about.
Instead of stupid comments telling people to “wake up” how about you present your alternative.
If you lived in NI these are grouped together and you pay rates. My rates bill this year is £3.8k. No modern society in the world gives these services away for free like RoI. Grow a set and stop bitching about ‘poor you’
Bazalini it’s not free, nothing in socialism is free they have already taken your money
How is it free, Bazilini? We’ve been paying for years, it’s the double and triple taxation that annoys us and it isn’t just the incoming water charges. Look at the Vehicle Registration Tax which is illegal under EU law. Look at the TV license which is unlikely to be removed when the Broadcasting Charge comes in despite the fact that we already pay private companies for the privilege of television and the internet. The level of tax we pay in this country is a joke.
“Look at the Vehicle Registration Tax which is illegal under EU law. ”
I’ve never seen this reported previously. Which EU law is it illegal under?
“The level of tax we pay in this country is a joke.”
Genuine question: have you ever lived elsewhere?
@Vinheffer89 How could we be paying for the services already when we have to borrow every year to fund the budget?
Also the broadcasting charge is replacing the tv license. We will not be paying both.
So, we have yet another clueless or neo liberal brainwashed ‘economic advisor’.
Yet again, we have all this guff about this debt needing to be paid back with all the usual ignorant inferences that it’s like a ‘household’ debt.
It does not need repayment, nor will the principle ever be repaid over the long run – merely rolled over into new ‘debt’ bonds which are in reality an interest bearing (gift) +deposit+ account facility to the finance sector.
It can & does increase in nominal terms as economies always grow in the long term, & even in the short & medium term when not being deliberately vandalised in boom & bust cycles that the Capital owning top few percent profit from both ways.
Eurozone government debts are no higher (& mostly less) than those of comparable non-Euro, sovereign currency countries. (Yes, including Ireland..)
Yet there is none of this ‘unsustainable’ Gov debt obssession, except by right wing and/or gold bug nut jobs. The only reason Euro government bonds can be subject to bond vigilantism & finance sector rip off is because of a deeply dysfunctional, by design (of bankers), shared currency system.
Sovereign currency issuing countries +always+ determine debt ‘bond’ interest rates, not ‘markets’. And those rates are +always+ on the floor when they need to be in a downturn – exactly as we see currently in the US, UK, Japan etc etc.
There is only one real MACRO economic problem in the Eurozone – MASS UNEMPLOYMENT. Which shows that our economies are operating way under capacity.
Sort this out, and even with a dysfunctional Euro currency system, the Gov ‘debt’ is no issue at all. (Since the ECB finally made its ‘…do whatever it takes…’ speech & de facto forced markets to limit interest rate demands to 5% or less… or the ECB would use its keyboard to buy any and all bonds…. because if it hadn’t done this – behaving like a proper Central Bank – the Euro would have collapsed.)
We have mass unemployment as a result of the deliberately reduced aggregate demand by totally unnecessary ‘Austerity’ policies.
The Depression in the Euro area since the 2008 Finance pyramid fraud bust is actually going on longer and deeper in GDP terms than that during the 1930s.
And still the mainstream neo liberal educated economics clowns continue to justify this Euro zone mess…
(Real) macro economist, Wynne Godley described +exactly+ why the Euro zone would fail at the first downturn, over 20yrs ago. He’s been proven absolutely correct.
http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that
Not sure if that was aimed at me or not but I said nothing about having to pay debt back, I just said it was wrong to say that we were paying for water already as we have to borrow to pay for our services.
I also got a bunch of red thumbs for it despite the fact that nobody can tell me why I’m wrong
@ Ryan Ash.
Vehicle Registration Tax is Excise Duty with another name. This is illegal under EU law. Just because you give it another name doesn’t make it any more legal than charging Excise Duty for goods within the EU.
@cooperguy:
So you’re telling me someone else, aside from myself, pays for my internet bill and TV license?
There was a VAT increase some decades ago with water treatment and provision given as the reason. You’ve been paying for years. Clearly the pipe system needs to be refurbished but can you honestly try to tell me that this VAT increase since the late ’70s and the incoming water charges are not an example of double taxation?
As regards the TV License being replaced by the Broadcasting Charge question, Rabbitte as Minister for Communications completely side-stepped that question. The BC is being withheld until next year to allow for the incoming water charges. What does that tell you?
So, yeah, you are wrong. Pretty categorically wrong.
Patronising so and so… I think people are well aware of the mire we are in…
@Vinheff89
When I Google the broadcasting charge the first article that comes up, from July of this year, says it will replace the TV licence.
If it turns out not to be the case then I will completely agree with you that it’s wrong.
That VAT increase may have been to fund water services but as you said yourself the water infrastructure needs replacing, the money was never there for that and if it was it ended up being used for other services (therefore not paying for the same thing twice).
Either way the money taken in tax does not cover the cost of the services provided. So if you don’t want to pay a water charge we could call it an emergency services charge and put it towards funding the Gardai and Fire Brigade? I’m not trying to be a smartass with that comment, can you see the point I’m making?
Some things like water should be paid for/ it’s delivered treated to all our houses. We in Ireland are extremely wasteful with water. Bin charges are the same- the less waste you produce, the less you put out your bin. I object to paying for Anglo Irish private bank debt but I’m not sure we can do anything about it now.
Here we go again…….
It’s like a broken record year after year.
I thought that was a dreadful article.
We know what happened we know what should have happened and the fact is that we don’t have a government or alternative government that either has the balls the will nor the intelligence to march to the ECB and say sorry, that debt is banking debt. You didn’t do your job in regulating the banks that’s your debt you can have it back now.
And what would happen if Ireland separated the banking debt and called it nationalised banking debt and said to the world we re not paying this?
Nothing!
The markets would re act favourably because it would be re setting the button it reduces current and future borrowing risk.
Who takes the hit on the chin? The ECB and Germany. How to they stead their ship? By printing money! Something that the ECB are on the verge on doing anyway.
I think they would say you didn’t do your job of regulating your banks so it’s your responsibility. I think they should accept a share but bulk ours I’m afraid
Have we held anyone to account or implemented new laws to stop it happening again? The DoF allowed a bank to take a billion of taxpayer funds to put into a pension to allow a retirement program rather than statutory redundancy.
DoF are in the banks pocket.
The ECB refuse to take action as well.
Look at Italy it has a primary surplus in its budget, yet its debt is rocketing as it is trapped in the Euro straight jacket.
We are one of the better prospects in the Eurozone at this stage, we at least have normal growth, a very rare thing in the EU.
I agree with you that we should default, but not for the reasons you list. I think all your stated reasons are wrong, and that the things you believe would happen in fact wouldn’t.
When the govt says it expects ‘export led growth’ and FDI to help the economy grow, it can be read as saying that the State cannot support domestic demand and needs help from the outside. That’s exactly what the situation is now. Growth across the EU is flat and bordering on deflation. Both wages and consumer demand are suppressed. What we know is that this is the natural result of the austerity policy: when you push taxes and cut spending, you suppress demand.
Ireland will struggle under this weight for decades because it relies on consumer and SME growth to support demand. Improvements it makes under the current strategy will not be uniformly felt; multinationals and wealthier capital holders will profit while those in lower positions will not.
Where you go wrong I think is in saying that this is solely a matter of political will and that if Ireland defaulted it would both be well received and have no consequence. It would have neither.
Oscar Wilde once said that it’s immoral to give a man charity because you prolong his suffering. You help him for a day, but do nothing to fix the circumstances which are responsible for that suffering. When Ireland keeps paying its debts in the way it is, the only thing it does is extend its suffering. It desperately needs to renedy the reasons why it is under privation. You are right in that there is little political will for that under the present polity.
The German view on the Ireland problem is that it is a moral issue. Ireland needs to suffer as punishment for its behaviour until its penance is done, and it can rejoin the community. It’s only now that they are starting to experience contraction: their customers don’t have any money to buy their products.
The only moral solution is actually to crash the system. This is especially true because the sources responsible for the predicatment are operating ‘business as usual’ and measures to prevent a recurrence have really not been enacted. When we should have be re-examining every nook and cranny of the financial system, we just took their word for iit.
If Ireland finally had the courage to bring the system down in order to rebuild it fairly, the markets would not receive it well. The Euro, troika, and ECB, everyone would be plunged into crisis. The existence of the Euro itself would be in jeopardy. But that’s the right thing to do, and its Ireland’s only leverage. The EU community cannot thrive in the future as long as it is unequally split between creditors and debtors and policy protects the one at the expense of the others. But don’t think for a minute that it would be a simple and easy transition. It would stop the motor of the EU itself.
Excellent point about the ECB. It’s their job to set interest rates, control inflation and regulate the flow if money/credit. It was extremely negligent in the 3rd and only worried about inflation in the euro area as a whole. Ok, Irish bank regulations was poor, but where did Irish banks get their credit from? A lot was from German banks chasing a higher return. For every bad borrower, there’s a bad lender. So that should be great basis of restructuring our debt. But that takes balls and vision.
It is quite worrying that almost 40% think defaulting is actually a good idea.
Have we learnt anything from the Argentinian case?
Different case. Argentina used default as temporary relief without dealing with the problems which caused it in the first place. Ireland has at least addressed the input side, if not made a serious attempt to tackle structural spending. Additionally we owe a lot of our debt to a supranational body which is supposed to create a single internal economy, and then a big chunk to our own Central Bank, which is then supposed to just burn the money. This is madness, and it’s at least arguable that we could selectively default without damaging our reputation.
OTOH presenting default as a universal cure for everything makes no sense.
Default could have perhaps worked out better than the route we chose.
But since we have gone so far down this route it would make no sense to default now.
Iceland defaulted and it worked nicely
No, it makes more sense now, because we won’t suddenly have to find €10B a year just to keep the lights on. Defaulting while you’re in current account deficit is much more risky.
*Same caveats as above.
Iceland isn’t the same as Ireland though. There are less consequences for them defaulting.
I’m not sure it worked nicely for them either. http://www.iea.org.uk/blog/iceland-versus-ireland-lessons-from-the-banking-crisis
We didn’t default ultimately because we are dependent on foreign investment and cannot put in place capital controls without leaving Europe. Defaulting could have a nasty effect on FDI sector and IFSC and the ability of the Irish government too borrow in the future.
Emily, that’s a very simplistic view. Our bond rates are historically low because we didn’t default. Any default will raise those rates enormously or make borrowing impossible.
If we default we have no more debt which wasn’t ours anyway… The whole bailout was a swindle from day one, if it was a genuine bailout loan to banks we have been told by merkel repayment is not happening
Great borrowing is stupid
Paul, yes it’s simplistic, but the whole issue is more complex than Default Good / Default Bad. Our ability to finance ourselves depends on confidence in the fact that we’ll repay debt in the future. The markets don’t really care about the past. Conversely, a turf war with the EU is unlikely to help FDI.
The point is that we shouldn’t rule out a selective default based on another country’s bad experience with a general default. Each situation is different.
How will most of Europe avoid default.
The ECB has killed growth and inflation so even reasonable debt is going to be onerous.
Our bond rates, all of Europe’s are historically low because the ECB has said it will back stop them no matter what.
The yields of European bonds would be more apt for low debt, dynamic economies.
It is just another EU fantasy, denial and deference of reality.
It will be countries like Spain, France, Belgium and Italy that will be having the defaults in years to come, defaults by other names maybe but that is what will happen.
German regional Govt’s and their banking sector will have to be dealt with as well.
There will always be the default nutters. And they usually have nothing to lose themselves…
The Eurozone has no growth, we have but most of it does not.
The default will be a slight of hand, giving them back devalued money in years to come via QE. Parking debt in to special vehicles for decades and letting it burn away, might not work in dysfunctional Europe.
Europe is years and years away from normal growth.
The Euro crisis has only been deferred, certainly not solved, the ECB does not solve or face up to problems.
The comparison with the Ottoman empire make absolutely no sense. Ireland isn’t the Ottoman empire with a loosely held and multi-ethnic empire stretching across thousands of miles and dangerously exposed to the rise of nationalism. Quite bizarre comparison to be honest.
An example much closer to home of the UK is more appropriate. The UK has had public debt explode above 150% and even 250% of GDP after the Nine years war, the Seven years war, the Napoleonic wars, the first world war and the second world war. This with a far cruder financial system than we have now.
Of course a debt level of over 100% is sustainable for a young country like Ireland. The real issue is the lack of demand creation in Europe and the incompetence of the ECB.
You keep mentioning the “debt we owe”. It’s like a broken record – separate out the sovereign debt and the private debt that Michael Noonan (as proxy for the ECB/IMF/EU) is trying to hide in our sovereign debt, then you will have sustainability.
We have TDs, MEPs and some fellow European MPs and MEPs (not to mention Ballyhea Bondholders protest every Sunday) constantly reminding you, but this mantra of “it’s your debt, but look at the fun way we can help you pay it” is sickening.
“Philanthropy with a profit”…..
Not philanthropy then?
Queue more over paid consultants crawling from the woodwork to claim inflated expenses for “stating the bleedin obvious”
Let’s go cap in hand to the Sheiks and with some creative negotiating the newly rebranded Etihad Ireland will be completely debt free!
Enda we need that seismic shift you talked about 2 year’s ago now not at the end off 2015 just in time to buy the next election
Debate and common sense matter not a jot in the run up to an election. Sure common sense doesnt get you votes….. stupid, costly and non sensible, yet popular with the public decisions will get you votes.
“Social Impact Bonds….” give me a break….the clowns running the various housing associations in this country got the job instead of the councils because they were going to be more “efficient.” They were going to deal with anti social behaviour, difficult to house families etc..etc…What happened is that they simply cherry picked their tenants taking the easiest to house and leaving the rest……This will be repeated along with the Irish Water type tsunami of consultants and inflated management structures….or again as the new and totally inefficient Driver Licence Agency has shown, when or, god forbid, if, this social impact bond fantasy ever gets off the ground.
When it all falls flat you will find that the “social entrepreneurs” will like the bank fraudsters, property developers, insurance company shysters, PPS scammers and others be deemed “too big to fail.” The PAYE taxpayer will then be told to pay for this new group of corporate parasites along with all the others government created Holy Cows set up over the years.
It’s really only the Eurozone countries that are required to borrow their own currency in the market at an interest rate determined by the market. Fiat currency issuing nations like the U.S and U.K do not need to obtain dollars and sterling from the bond markets to finance a budget deficit for example. When they do choose to issue government bonds the primary objective is to implement monetary policy (e.g. drive their chosen base interest rate to target) not as a necessity to raise revenue. In addition, when those countries do ‘borrow’ in the market, they effectively decide what the yield/interest will be unlike the Eurozone nations subject to the tender mercy of the speculators.
In fact with the fiat floating currencies we’ve had since the 1970s there is no need whatsoever for a currency issuing government/central bank like the U.S. or Japan to ‘borrow’ at all in its own currency. They can simply create the currency at will. This is a major factor in why sovereign currency issuing governments actually control bond interest rates regardless of the state of their economies. The government ‘debt’ market is in reality an extremely generous, risk-free, interest bearing deposit facility for the large financial institutions and ultra wealthy. Continuing this neo liberal agenda, the Eurozone was deliberately designed to allow private banks (markets) to profit to an even greater extent from member state debt and so allowed them to set the borrowing rate for Euro countries on an individual basis.
Modern fiat currency money is created at will on computer keyboards by the institutions public and private that are authorized to do so. As explained, currency issuing nations like the U.S and U.K do not need to borrow their own currency in the market to finance a budget deficit for example. The Federal Reserve and the Bank of England can simply create as much money as required by pressing keys on a computer. In practice, they are a little more discrete in their money creation. The usual mechanism is that the government will issue new bonds and sell them to the commercial markets. The primary function of this exercise is to drive the base interest rate to the desired target rather than any real necessity to raise revenue from private sources. The central banks can then at a later stage exchange the previously issued government bonds in return for central bank reserves (base money) in an effective asset swap with the commercial banks. The central bank reserves are created electronically at will by the central bank as necessary to maintain liquidity in the interbank market. In this way a sovereign country can never really default on its own currency denominated debts as the central bank can always ‘buy’ back the debt with newly created central bank reserves which every commercial bank requires to function.
It is also important to add that the creation of new money is not in itself inflationary if there is sufficient real wealth (goods & services) to buy with that new money. This is especially true if the new money is directed to the productive sectors of the economy which leads to GDP growth and so more availability of real goods and services to purchase. The World Bank has recognized this as the primary factor behind the phenomenal growth seen in the post Ww2 economies of Japan, Taiwan etc. Another key factor which prevents inflation is large scale unemployment where the productive capacity of the economy is not close to its peak. In this scenario which we currently face in Ireland and across Europe, the labour of the unemployed can be purchased with newly created money with no risk of general inflation.
Article on this subject from Forbes magazine:
http://www.forbes.com/2011/03/18/deficit-cut-danger-budget-jobs-leadership-managing-employment.html
The world’s central banks can and do create new fiat currency at will. Since the 1980’s however, the creation of new money (broad money) has been largely privatised and the bulk of new money is now produced by the commercial banks when they extend or create credit, either through making loans or buying existing assets. In creating credit, banks simultaneously create brand new electronic deposits in our bank accounts. Again all that is required to bring new money into existence is the simple act of pressing keys on a computer keyboard.
“By far the largest role in creating broad money is played by the banking sector…
when banks make loans they create additional deposits for those that have borrowed.”
Bank of England (2007)
http://www.neweconomics.org/publications/entry/where-does-money-come-from
This has seen an exponential increase in the broad money supply since the banking deregulation of the 1980s. As well as being the originators of most of the new money in circulation, the commercial banks also determine where in the economy the money is allocated. Even though extractive banking and monetary policy sees a large portion of the new money created by the private banks routed to non productive speculative activity, it still has not resulted in significant monetary debasement (general inflation) as modern economies produce sufficient real wealth to purchase with the extra money in circulation. It does however produce asset bubbles like the recent Irish property bubble and inevitable bust as the banks are incentivized to invest in these sectors rather than the productive economy.
The real tragedy is that none of the current imposed austerity is economically necessary. The shortage of money is in fact a political choice here and in Europe. Money doesn’t grow on trees but if you hold a banking licence it grows on your IBM. Money is not a finite natural resource (e.g. oil) and the creation of new money does not cause price inflation in the real things that people need (e.g. food) unless there is a shortage of those goods and services available to buy with that increased money supply. Real wealth (e.g. energy, housing, a health service) on the other hand cannot be created at will and comes from the work which man brings to bear on the raw material of the planet. Money is just the mechanism by which people can access the real wealth of goods and services produced by human endeavour and intelligence.
One of the great cons of modern capitalism is that the power to create money has largely been ceded to private commercial banks who have utter disregard for the wellbeing of society as a whole and care only for their own bottom line. They have created a vast tsunami of new money and funnelled into speculative financial instruments and present this as wealth creation when it nothing of the sort. The hedge funds, currency speculators, private equity funds, commodity speculators etc do not create an iota of real wealth. All that they do speculate on the work of others. At its peak, the size of the global derivative market was around $750 trillion which compares with the total GDP for the entire planet of about $60 trillion. Theoretically over 12 years of every scrap of wealth produced in the known universe was tied up in financial derivatives like Sean Quinn’s infamous CFDs. This demonstrates the sheer folly of handing the money creation privilege to the markets as we found to our great cost in the financial meltdown of 2007/08. The power and privilege of money creation needs to be taken from the parasite banks and returned to the rightful ownership of the state and its citizens so that it can be utilized to restore the real economy and create employment. Instead of allowing the banks to loan interest bearing debt money into the economy via the banks, the state should be creating and spending free non-interest bearing money into the economy on socially and economically beneficial and sustainable projects like infrastructure, housing, education, renewable energy etc. This is one of key steps necessary to allow us to address the economic crisis and begin again the task of building an equitable society and economy which meets the needs of all the citizens. A sovereign currency issuing state can create as much money as is necessary in order to achieve this objective.
Finally, it’s no accident that the majority of the general population have no real understanding of where money originates from. This is incredible when you consider the central role that money plays in our lives. The vested interests want us to believe that monetary and banking systems are beyond our comprehension. The majority of people will understand perfectly these monetary & economic concepts when they are clearly presented without the jargon and propaganda that is used by the vested financial and political insiders to exclude people from the debate on the future of their own society.
Professor Mary Mellor (Northumbria University) explains the topic much better than I in a series of 4 video lectures here:
https://www.positivemoney.org/2012/12/understanding-money-prof-mary-mellor-videos/
The only way out of this mess is to adopt the same method as hitler creating jobs with a second national internal govt backed currency for completing public works and getting the country working, 5 years it took him to drag Germany from rags to riches, before he started killing people that was of course
Hitler defaulted on the loans and then began a stimulus prog. that is what saved Germany from the deflation of the Great depression.
It was deflation that led to Hitler not inflation, that was what killed Wiemar .
It was also one of Germany’s numerous defaults in last 90 years.
We ignore how Germany is a serial defaulter and that when it does default it usually sets global records for default, we also forget that Germany received incredible stimulus.
Germany forgets how it got its start in life again.
They are stuck with the Euro now and have do idea how to manage the contradictions in it so the decline of Europe continues and growth is a memory for most of the country.
Europe has at least another decade of this to come, by then we’ll have pulled away and most of Europe will be years behind the world. People are eventually going to want to get off the Euro cart and have a chance of a decent life again.
It was hyperinflation not deflation that destroyed the Weimar economy. ‘The Real Bills Doctrine’ guided monetary policy in the Weimar Reichesbank.
The Fed was guided by the same doctrine prior to the Wall Street crash and western monetary policy since end of the Breton Woods arrangement.
If our politicians were to adopt his program I definitely feel they should stop before the killing millions of people bit..
Hyperinflation was under control by the mid 20′s, it had destroyed the credibility of the Wiemar Republic. Deflation though is what threw millions out of work and brought the state to revolution from the left and right.
Austerity and cutting with no logic or counter stimulus based on a moralizing masochistic vision after the wall street crash across the Western world.
The same approach that the ECB, at Germany’s behest has taken in the last few years.
Great numbers of people failed to see it coming. “My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice,” said one well-connected woman.
“You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged — not in the streets — but by making casual visits. One knew too well what they had come for.”
Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who — by luck or design — had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.
A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as “Judefetzen” (Jew- confetti), hinting at the chain of events that would lead to Kristallnacht a decade later.
Tax 2nd, 3rd, 4th etc homes and properties. They are now furling another crash with tax incentives for their friends with land and property. It needs the opposite approach so everybody can afford a home.
Instead of tinkering with it you left out the most important option to get our debt levels down to sustainable levels, and that is to grow our way out,increase the country’s GDP by encouraging local manufacturing and startup business enterprises that take people off the dole is one sure way to decrease the country’s debt levels, but unlike other country’s a default would have far more severe consequences for this state because of our over dependence on FDI,and seven years after the bust we are still adding to the enormous debt mountain by still borrowing billions every year just to keep the welfare and hospitals afloat.
Interesting reading Darragh keep up the good work
Great article
The plan to replace the Euro loans with bond loans at a lower rate sounds great but I’m sure the eu won’t go for it as it would involve them losing interest. They want their loans back in full with interest. They dont just give money away for free without conditions attached. Also if we did manage to do it wouldn’t it weaken the link with our primary creditors. I’d say there’s less chance of haggling a reduction in the amounts owed if it’s to a private bond company not that the eu has been all that amenable.
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