February 26, 2006

Celtic pirates plundering credit

Posted in Celtic Tiger · 9 comments ·
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Throughout the 16th century, a monumental mass of stolen gold sailed across the Atlantic from Latin America to Spain. Estimates suggest that Spanish gold stocks were five times greater in 1592 than when Columbus set sail a hundred years earlier. Spain rapidly became the most bling nation on earth.

Had Hello magazine existed in the late 16th century, its spiritual home would have been the gold-embossed cribs of colonial Seville. The Spaniards devised an extraordinary system, which consisted of armed flotillas of up to 40 frigates each, which transported the plundered gold from their Inca colonies.

Once the precious metal was docked in Cadiz, Spain went on the batter, buying up almost everything it could get its hands on. Land prices went through the roof and the nobility started to build bigger and bigger villas, with more ornate bathrooms, ballrooms and dining rooms.

Visitors to Spain were amazed by the opulence. But Spanish chroniclers of the time worried that the gold-rich Spaniards – who had a long tradition of quality tradesmen – were giving up working hard, leaving fields fallow as they indulged their newly refined tastes for imported goods.

It was cheaper to buy from Holland, France or even England than make things at home. Given that the gold supply seemed limitless, the Spaniards could not see the problem. But the gold was disappearing out of Spain to pay for luxuries as quickly as it was coming in. In fact, gold went through Spain like a dose of salts.

However, during the gold period, Spain felt on top of the world and some people made fortunes.

The shipping companies or individual maritime entrepreneurs who braved the seas, organised the flotillas and docked the gold, amassed great wealth. For every ounce of Inca gold they delivered to Spain, they took a cut.

This business created the incentive for them to innovate with boat size and navigational techniques. Up until the late 15th century, boat design had not changed much in centuries, but then the Portuguese started building caravels (from the Arabic word Carib).These were long, narrow-hulled boats with the distinctive three triangular sales. They were built for speed, and more importantly, to carry heavy cargo for long distances. They were ideal for gold.

The Spanish merchants refined the caravels to suit their purposes. Not only did the merchants gain fortunes, but daring ships� captains achieved worldwide fame.

They were all part of the infrastructure which turned gold into money. They were the first global bankers, the alchemists, who by their efforts, turned a pretty metal into a currency which bought all sorts of goodies.

The landlord class in Spain, who swirled sycophantically around the king, also gained enormously. They saw their estates quadruple in value as the gold, when it was turned into ducats, caused a massive increase in the money supply. This drove all prices up. Spain was experiencing a massive injection of credit, not unlike Ireland today, and property prices did what they always do when there is too much money sloshing around: they went up.

Boom-time Madrid became swamped with Dutch, French, Italian and English tradesmen and entrepreneurs keen for some of the action. They took orders, sent them back to Rotterdam, Carcassonne or Norwich, made the stuff for half of what it could be made for in Spain, and took a cut.

The losers were Spanish manufacturers who saw themselves priced out of their own market. Their well-paid, uncompetitive workers eschewed trade for the promised fortune of speculation and exploring or simply just spending the cash that streamed in from the hapless, enslaved Indians of Peru.

As the leading economic historian Peter Bernstein said: ��There was an abundance of metals without any productive development, a rise in prices without any monetary alterations. In short, 16th-century Spain was characterised by a separation between money and merchandise.�

By the end of the 16th century, Spain began to revert to the pastoral backwater it occupied before the gold arrived, except this time without the wherewithal to pay its bills. It experienced repeated financial crises in 1596,1607,1627 and 1647.

Fast forward to today and some of this may sound familiar to you.

Three events last week should make us sit up and read a few history books. Look closely and the experience of colonial Spain is beginning to resemble modern Ireland.

The continued decline of manufacturing Ireland accelerated a little last week with the closure of NEC in Ballivor. If it were not for the multinationals, there would be precious little manufacturing here. On the other hand, the startling profits of AIB and the 23 per cent increase in new car sales in January show that the monetary or credit economy is booming.

Let�s go back to history for a second. In the ancient world, the most valuable commodity was gold. In the 21st century, the most valuable commodity is credit. Credit is a commodity and it�s time we looked at it in this light.

Countries import and export credit. For example, Germany and China export credit, Ireland and the US import credit. It is a commodity like any other.

It is internationally traded, it has a price and it bestows enormous advantages on countries (and people) where it is ample.

However, like gold of old, it is a double-edged sword.

Not enough of it and the country never gets off the starting blocks. Too much of it and the country goes into reverse, inebriated by its excesses.

Now examine the similarities between both ages. Those who import credit, facilitate its distribution and get a cut from this activity are today�s banks. They are the 21st century equivalent of the merchants who plied the Atlantic. Realising that this was a good business, they too have made innovations, not dissimilar to the maritime advances of the old merchants.

In the same way as the purpose of building faster boats was to get as much gold as possible from the Americas to Spain, the aim of financial engineering, equity release, car finance and multiple credit cards is to get as much credit into the economy as possible. The more credit, the greater the return.

In the old days, gold allowed the Spaniards to buy fine clothes, trinkets, ornaments, armour and exotics.

Today, credit allows us to buy fancy cars, slate wet-rooms, shaker kitchens and Neff fridges. Credit drives up prices as far too much money chases far too few goods.

This is particularly evident in property, as it was in colonial Spain.

As prices increase, workers either look for higher wages or leave industry to get on the speculation bandwagon. Real businesses that make real stuff get priced out and eventually close down. As happened in Spain, the credit runs through the country like a dose of salts, leaving inflated expectations and underwhelming ability in its wake.

When we read about the economy here, we are really reading and living in two distinct entities – one is the credit economy, the other the crushed economy.

The credit economy dominates the crushed economy and ultimately squeezes the life out of it through a combination of finance, prices and human psychology. We have seen this down throughout the ages and, although history may not always repeat itself, so far economic history certainly has.


  1. Rahul

    Hi David,

    I have been reading your articles about the state of the
    property market in Ireland with great interest over the past
    few months. One issue that I think that has not been
    properly explored is to do with what will happen if there
    was a sudden correction in property prices. In particular,
    what ramifications will this have for the thousands of
    immigrants working in this country? If the Irish Ferries
    dispute is anything to go by then we could have a serious
    race relations problem on our hand.

    At the present time (as has been pointed out by many
    commentators) there is a very large number of people working
    in the construction and related industries. And I am not
    just talking about mortgage brokers; law firms etc. but also
    people employed in the Retailing Sector, DIY Stores and The
    Spar Generation. Most of the latter are immigrants who are
    from Eastern Europe and other Non-EU countries.

    If we were to envisage a scenario where activity in the
    construction sector was to slow dramatically, there would
    suddenly be intense competition between the locals and the
    immigrants for the same jobs. We would see many of the
    accession state nationals packing up their bags and heading
    to greener pastures leaving thousands of empty apartments in
    their wake. However this still leaves thousands of Non-EU
    nationals (such as Nurses, IT Professionals, Hotel and
    Restaurant Workers etc) who have no intention of leaving
    Ireland. This is bourn out by the fact that they have been
    increasingly buying into the Irish property market in recent
    years.

    The question is what will happen in such a scenario where
    there is a scarcity of jobs and as far as the employers are
    concerned they want to hire the people who are willing to
    work for the lowest wage. In such a scenario will the
    government then go for a Enoch Powell solution and entice
    these aliens to leave these shores with some monetary
    incentive? I think not!!

  2. Laura

    Back in 1997 I remember applying for a credit card. At the
    time I had an income of around 11k pa which at the time
    wasn’t particularly low. I remember getting a letter from
    the bank basically telling me to piss off or get a letter
    from my employer confirming my wages (this was in the days
    when I still got a pay cheque). 6 months later I changed
    jobs and got a raise of about 6k on my previous job (though
    much of that was down to a lot of freelance work that I did
    back then). Despite the fact that at the time none of this
    work was permanent I applied out of curiosity to the same
    bank and my other bank and was immediately sent out two
    credit cards with at that time the generous credit limit of
    1k each. In the space of about 12 months between mid 1996
    and 1997 the credit situation in Ireland turned on its
    head. I remember being stunned at the sheer number of new
    cars on the road (back in those days people drove the same
    car until it literally keeled over). I remember in those
    days that it was very difficult to get credit if you were
    on a low income or in unstable employment – or self
    employed.

    Secondly I think much of the hyper-pushing of credit is
    coming from banks/institutions with large UK presences –
    and this market is near to, if not at saturation. Those
    wishing to squeeze the last bit out of the English speaking
    market will turn to Ireland to get that bit more profit.
    The fact that the Irish are notoriously accepting of rip-
    off merchants (look at the fact that the most expensive
    bank is also the one getting the lions share of new
    accounts as evidence) is helping them even more.

    As for the excesses of the property market: if (and only
    IF) there is a crash, by what value will properties fall?
    5%? 20%? 40%? And in what areas? My opinion is if this
    happens it will not be evenly spread accross the market,
    but will be cruelly selective. Ironically, it may well end
    up benefitting those most gouged by the property market –
    the private tenants. In the cruel world of last in, first
    out, the main and only victims could be those who bought
    houses most recently – but whose to know how far back this
    may extend? IF it happens.

  3. Nilsson Denver

    I have pondered what if the property market crash. Where
    would all the people who have bought a property to actually
    live in go?

    If they can’t afford the mortgage repatments and they lose
    their job, no matter how hard they try they will not pay
    back their credit excesses.

    They can’t pay for house, bank left with bad debt. They must
    sell their car, garages cant sell new cars, finance guy cant
    give loan, house improvements not needed, builders have no
    work. The combinations, everytime come back with
    catastrophic results. Does no on else with influence see this?

    Everyone knows what could, may or will happen, but what is
    the solution to allow a slow deflation rather than a large
    pop. My only thought is a dictatorship or a Taoiseach with
    guts, but also voters who care more about the country’s long
    term prospects and not just their own pocket.

  4. michael geraghty

    Hmm. Thought provoking. The facts must give us pause for
    thought. But what to do? What level of control does our
    Government really have when we are the most open economy
    in the world? And are we not increasingly dependent on
    credit not just for luxuries but even for basic needs like
    for housing? The following are a list of suggestions as to
    ways forward out of our dependence on credit:
    We need to:
    1)Reduce the price-wage squeeze that is increasingly the
    lot of common people(ie small farmers and small businesses
    aswell as workers, minority groups and the
    unemployed ).Tackle house and land prices, insurance
    costs, commercial rates, stealth taxes, outsourcing of
    jobs etc.
    2)Reduce the shortsighted obsession with competition and
    the profit motive, with their need for year on year
    improvements in profit margins to please the interests of
    shareholders.
    3) Move up the value chain, by investing in education,
    infrastructure, research and development etc.
    4)Conserve, develop and trade on our own natural
    resources.
    5) Tap into our other great resource: community pride and
    power?
    6) Focus on the needs of our community, with its aging
    population,and the potential of health and quality of life
    as fulfilling, equitable and financially secure sectors of
    employment?
    7) ?

    There is a need here for joined up planning,and for
    radical reform I think, in certain areas of company,
    property and planning law and in Government policy.Am I a
    hopeless dreamer? No. Am i a socialist? You bet.

  5. Pete

    An excellent comparison, showing that some things never
    change. I particularly liked the explanation of why banks
    continue to force credit on people in such a reckless
    manner – importing and selling credit is their core profit-
    generating business!

    One enormous difference between imported credit and stolen
    gold is that credit has to be payed back.
    When the gold stopped arriving in Spain, asset prices
    plunged and people had to slash their living standards and
    re-discover how to do productive work.
    When credit stops flowing freely into Ireland, asset
    prices and living standards will plunge, but people will
    find that no amount of productive work will get them out
    of the debt hole they have dug for themselves,
    particularly as interest rates will probably be much
    higher than now. What will they do? I don’t know, but it
    won’t be pretty. And I can’t help noticing that interest
    rates are creeping up worldwide, even Japan is talking
    about an interest rate rise soon, is this a sign that the
    global credit taps are slowly being turned off?

  6. sean

    last week a report was published, that said that Ireland had
    a lot of workers paid below the EU average.

    I wonder what will happen when the debts have to be paid.

  7. adrian

    A friend of my brothers, a well known basket case
    financially speaking would occasionally seek advice on how
    to get out of ongoing debt, a good enough job in the civil
    service, no financial discipline none the less, cards
    always maxed out, loans to clear loans, 25k of unsecured
    debt!
    I hear today he bought a house.

  8. eoin

    Adrian.

    Similar story in the Irish Indo. A guy with 25K of debt was wondering whether
    he should try for a 125% mortgage ( or was there such a thing?) since he
    needed to get on the ladder. You really dont need to be Warren
    Buffet.

    by the way, has anyone noticed that our elites have given up pretending that
    they see overpriced houses as an issue anymore. they seemed to be worredi
    in 2001 – 150K, or so ago, on average – but no more. Now it is a cause for
    celebration that houses are rising, wages are stagnant, and interest rates set
    to return to long term normalcy.

    Any guess as to why this is?

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