January 21, 2009

New president needs to run up a frightening debt

Posted in Debt · 354 comments ·

President Obama Could Obama be remembered as the man who presided over the greatest hyperinflation the world has ever see? At the moment, with unemployment rising, companies going to the wall and prices falling everywhere, the mention of hyperinflation seems ridiculous, that is until you examine what the new president wants to do.

Obama plans to spend a phenomenal amount of money to re-boot the US economy. How does he plan to finance this spending? Where does he think he’ll get the money? What will the US’s latest splurge do to the trust the world has placed, up to now, in the dollar and American assets in general?

Rarely has one man assumed such a burden. It seems that an indebted, beleaguered America is looking to him to come up with the greatest escape act since Harry Houdini. The brilliance of Obama is that he seems unfazed. Watching him yesterday, he has obviously steeled himself for this moment and, as the ‘Financial Times’ stated, “the world needs Obama to succeed”.

However, the hope and expectation shouldn’t blind us to the difficulties. We hope for the best, but must prepare for the worse in order to temper some of today’s effervescence.

Everything in Obama’s programme for government will be predicated on his ability to get the economy going again. At the root of America’s problem, like Ireland’s, is bad housekeeping. The US lost the ability to balance their books and, in an effort to prolong the good times, it borrowed from wherever it could get cash and spent most of the subsequent overdraft on instant gratification. Its banks and its people overextended themselves, fuelled by the hi-octane combination of other people’s money and rapidly rising house prices. In the end, some of its banks went bust, overburdened by an array of financial waste. Now the US must clear up this mess.

Up to now, the Americans have tried throwing as much money as they can at the banks. However, a pattern has emerged over the past few quarters. Every time the government feels it has done enough for a bank by injecting new capital, the bad debts tarnish this new capital and the banks are back at square one. The Nobel prize winner Paul Krugman referred to this approach recently as Voodoo banking, where the state, in an effort to avoid nationalisation, keeps throwing taxpayers’ money at banks, which is essentially a gift to shareholders and, according to Mr Krugman, probably the only thing keeping bank share prices from collapsing totally.

Ben Bernanke is continuing with this policy. Having failed to stop the unravelling of the economy with a monumental interest rate cutting process from 6pc to 1pc, the panicking Bernanke is pushing US rates down to zero. The big problem is that for the US, zero is not low enough. By this I mean that the US needs negative real interest rates (the interest rate minus the inflation rate); in essence, it needs to pay people to borrow. The only way it can do this is to allow inflation to creep up, while keeping interest rates close to zero. This financial conundrum is made all the more tricky by the added fact that Obama is going to preside over a budget deficit of $1 trillion in his first year, using borrowed money.

Who is going to lend the US the money? And at what price, knowing the US will need negative interest rates? Additionally, if so much of the cash is geared at saving insolvent banks, is the US not throwing good money after bad?

Politically, these questions are predicated on the central assumption that the US intends to pay the cash back. What if the US has forgotten that borrowed cash has to be repaid? What does it do next and, more significantly, what becomes of the lenders in such a world? These might seem like outlandish contentions. Surely the US is not considering giving its lenders the two fingers?

Think about it. What country can lend this type of cash to the US? China is the only country in the world with its $1.9tn in foreign reserves. But the Chinese already own $700bn of US treasury bills. It may just be reaching US debt fatigue. Indeed, in November, ‘China Business News’ reported on this dilemma, saying, “the US must pay back its debts, and to do that, it needs to live a more frugal life, instead of others lending it money to maintain its over-consumption”.

If China begins to question the wisdom of putting all its foreign-exchange eggs in one basket, what will Obama do? If the Chinese say no, the market for US debt will collapse. The dollar will also fall like a stone and the US will begin to experience hyperinflation. With no-one to buy its debt, no appetite to reduce public spending and, most crucially, no memory of a time when the world’s financial markets ever rejected the seduction of the dollar, the US will simply start printing paper dollars and covering them with paper IOUs, flooding the market with worthless financial confetti.

All this implies that Obama could quite conceivably preside over a period of hyperinflation. Today this seems impossible but he has inherited such a mess from George Bush and his political need to get the economy going, if he is to deliver on some of his immense promise, might just prove too much. Don’t take my word for it, just look at what is happening to the price of gold — the only real hedge against hyperinflation.

Economic theory would suggest that after a period of hyperinflation, where all old US debts are wiped out and lenders to the America robbed, the dollar revalues as America reindustrialises under the green job agenda talked about by Obama.

History could well look on the end of the first decade as not just a momentous era which produced the first black president, but as a period of dramatic economic change. The debt-fuelled boom of the Noughties, leading to a rapid deflation and failed banking bailouts at the end of the decade, giving way to hyperinflation, which ultimately cleaned up the US’s balance sheet. Sounds fanciful? But then again, so, too, did a black president not so long ago.

  1. VincentH

    New tap, same old boiler. Same shop, different shelf.

  2. MK1

    Hi David,

    Yes, various countries will be using inflation as a ‘tool’ to help them re-value their cost base etc and get into a better financial position. The situation is a bit like a tug of war with opposing and indeed multi-directional forces acting such as currency exchange rates, interest rates, the yield curve (ie: differences between short money, 1,2,5 and longer money 10,30), etc. Economies can be “cajoled” only hopefully into certain directions by policy, but its clear that any policy does not result in unambiguous and predictable results. Economic control is not an exact “science”, nor even a fuzzy one!

    US government debt has been a problem for a long time that has been swept under the carpet. Its expansion rate is a bubble, which may “burst” when eventually international appetite for it is no longer there. My understanding is that it had slowed in the noughties, but with fiscal stimulus required it will grow again. But if you were in the market for a solid return, where would you put your cash for a state-guaranteed return: Iceland, Ireland, Singapore or the US? Many will still opt for the US.

    Granted the US will print “money” (= expand money supply), but the dollar will trade well and will stay stronger for longer that it should in effective purchasing power terms. For many countries that trade with the US, such as China, US debt with stong yeilds will still be compelling. Remember, China has a symbiotic relationship with the US. If the US tanks, it will severly affect the manufacturing business in China. It is already doiing that so now China must support its symbiot host, which is in effect, supporting itself.

    > This financial conundrum is made all the more tricky by the added fact that Obama is going to preside over a budget deficit of $1 trillion in his first year, using borrowed money. Who is going to lend the US the money? And at what price, knowing the US will need negative interest rates? Additionally, if so much of the cash is geared at saving insolvent banks, is the US not throwing good money after bad?

    What you outline is exactly like Ireland. The US’s 1 tillion is about 6% perhaps, which is what we will be doing if not more. We are throwing money at our failing banks. Given the pariochial nature of Ireland, who in their right mind would buy Irish debt compared with US debt? If German debt is on the table, wouldnt that be a more stable option for any investor who’s looking at euro’s.

    Btw, I read this written by someone in Singapore where there economy contacted at a rate of -17% in Q4, the worst ever:

    “Singapore was arrogant and their attitude is their downfall. Without an organic economy, they are finished as most countries are going to re-trench and look inwards. With ridiculous, London-like housing and food prices, the economy is going to keep tanking. And since global banking is imploding, no more rich expats to spend. Just look to Ireland and Iceland as to what is coming.”


  3. goinghome

    “BACK in the 1970s, few people listened to scientists’ warnings about global warming. Even fewer heeded calls to curb economic growth so we could protect the environment. Today, these ideas are starting to be appreciated. We are hearing ever more about the contradiction between hanging on to a habitable planet and the expansionary demands of the global market.
    Yet as Tim Jackson outlines (see “What politicians are afraid to say”), people and their governments – which continue to urge the growth agenda in Canute-like defiance of the rising waters and raging heats they have been told will ensue – are still largely in denial about this conflict. A key factor in this is the widespread presumption that becoming more sustainable will inevitably make our lives worse, which leads to green campaigners being dismissed as regressive killjoys bent on returning us to a primitive existence. Perhaps to counter this idea, those who take global warming seriously tend to focus on technical fixes that might allow us to continue with our current ways…

    …A growing number of people are starting to realise that there may be more to life than working to spend. Troubled by the negative impacts of a high-stress lifestyle, they are simplifying their lives and rethinking their values and desires. If we were to shift en masse to a less work-intensive economy, it would reduce the rate at which people, goods and information had to be delivered, cutting both resource use and carbon emissions…

    …Shifting to a steady-state economy is a daunting prospect. Yet as Herman Daly outlines on The world bank’s blind spot, it is unrealistic to suppose that we can continue with current rates of expansion in production, work and material consumption over the next few decades, let alone into the next century.
    In a climate of financial turmoil and extensive cynicism about government commitments on global warming, more honesty about this might win cooperation and respect from the electorate – especially if politicians start to focus on the fulfilments of living in a sustainable society.

    From a Special Report, “The Folly of Growth” by Kate Soper on 15 Oct, 2008, New Scientist —http://www.newscientist.com/article/mg20026787.000-special-report-nothing-to-fear-from-curbing-growth.html

    Daniel Kahneman is a psychologist who won the 2002 Nobel Prize for economics for demonstrating common irrationalities when it comes to spending money. His findings also suggest the wisdom of changing our priorities and the whole paradigm framing what our economy should be about:

    …”A. It’s nonsense to say money doesn’t buy happiness, but people exaggerate the extent to which more money can buy more happiness. Happiness is determined by factors like your health, your family relationships and friendships, and above all by feeling that you are in control of how you spend your time.
    Q. Can buying things make us happier?
    A. There’s an important difference between pleasures and comforts. Pleasures are things like flowers, feasts, vacations – investments in family, friends and memories. Comforts are material goods like a big new car or a giant plasma TV or –
    Q. – a renovated bathroom.
    A. That’s right. Comforts always seem like a better idea before you buy them than afterward. Trust me, you will get more durable satisfaction out of the money you spend on pleasures. “

  4. gadfly55

    This is a game, the game is over, new money is printed, we start again by hyperinflating our way out of debt. The savers are sacrificed, the debtors win. Moral hazard has prevailed, the master of the universe is Mammon. Where does invocation and benediction enter the equation? Lip service to the old values, as Obama described them, and a smokescreen behind which the failed financial order is junked, and all the same suits proceed to open a new casino to keep the punters playing. Property doesn’t go away you know, as Pat Kenny, keeps chirping, and someday it might be worth what it was, except of course nothing will ever be worth anything it was, because you can never step into the same river, all the water moved on, although the geography remains the same, until global warming, earthquakes, and tectonic shifts change the shape of things, and there we have a new age, when the disparity between the rich and the poor, the owners and the buyers becomes so extreme that eruptions of violence, planned and unplanned, crime and terrorism, state wars, and state terrorism are symptomatic of koyanisqatsi, a life out of balance.

    Economists really need to learn more history, philosophy and science to start making sense of what is going on. By the way, David, the Krugman article made incisive points about assigning “fair value” as the next big fraud to be perpetuated on the taxpayer. Morgan Kelly has upped the ante in commentary. It is time to go for the jugular in a single devastating slash, rather than more glancing cuts.

  5. Lorcan

    The $ is still the world ‘reserve’ currency.

    I was of the opinion that it should have started tanking last summer, but it has stubbornly refused to do so.

    I think there are a few factors at play here that do not ‘fit’ with normal currency models.

    Commodities (from oil to coffee) are traded internationally in $. So dollars are used to trade between countries for goods, even when none of the countries involved are the US.

    A stable dollar is in the interest of all parties involved in international trade. China, by protecting the dollar is protecting its own interests, likewise the oil exporting countries.


    In the 1960s, Robert Triffin identified a problem with the Bretton-Woods gold-backed dollar. Under the system the US had to maintain a balance of payments deficit (ie be a net exporter of $s) to provide liquidity to the international economy. But, it also had to maintain a balance of payments surplus to maintain confidence in the $, and its gold value. Obviously the US couldn’t maintain both and what became known as the Triffin Paradox led to the collapse of Bretton-Woods in the early seventies.

    The $ is now backed by confidence, not gold. But the paradox still remains. For the $ to retain its status, the US has to remain exporting $ by maintaining its balance of payments deficit. The more people outside the US holding $s the less likely it is to collapse. The worst thing for the US might be running a balance of payments surplus. The more $ imported the less relevant it will become. Only then might it start to behave like a ‘normal’ currency.

    David > Surely the US is not considering giving its lenders the two fingers?

    In the 1970s the world live in a cold war era of mutual assured destruction (MAD). The weapons then were nuclear. Today we have economic MAD, only now the weapon is the $. If the rest of the world refuses to buy US debt, the US economy will fall, taking the $ with it. But if the $ falls, it will take the rest of the world with it.

    So anybody giving anybody the two fingers will be shooting themselves in the foot.

    • gadfly55

      The rest of the world is learning how to get along quite well without the US dollar. They now have the technology, they have the organisation, and they have more than enough dynamic, intelligent, enterprising individuals to generate growth for the next 100 years. The US and Europe are decadent, self-indulgent, aging societies whose day is done.

  6. gadfly55

    Harper’s ran a Stiglitz article on debt in the US, about 35 trillion at the moment, about 2.5 GDP US. We have borrowed the future and now want more future. Money does not make time. The problem has always been borrowing against the future. Not for nothing was usury a mortal sin. This system has collapsed and it cannot be fixed. There is no chance that developed countries are going to sell their infrastructure to bidders from sovereign funds or China/Japan. They will let them take the hit. China can develop its own markets in the developing world, in Africa and South America, where interdependence between resource exploitation and manufactures has been extensively developed, more reliably than the arrogant, colonial exploitation of the West.

  7. Malcolm McClure

    David said: “The dollar will also fall like a stone and the US will begin to experience hyperinflation. With no-one to buy its debt,….. the US will simply start printing paper dollars and covering them with paper IOUs, flooding the market with worthless financial confetti.”
    The NWO master plan isn’t quite as haphazard as David suggests. Sure, there will be a quick bout of very severe inflation, sufficient to make most people debts affordable again. Then the plan is to draw a line under the dollar as a currency and replace it with a joint USA-Canada-Mexico currency called the Naller (North America Dollar –geddit?) each worth about $100. Then the whole merry-go-round will start spinning again for another couple of generations.

    Rationale: Lets say houses have a dropped in real value by 80%. So 100% mortgages have to diminish by 80% to reflect reality.
    To achieve this enough dollars need to be printed to increase wages and prices by enough, not just to reach the ‘old max mortgage’ target, but to match what it has reached as a result of swingeingly high interim interest rates. This implies an inflation factor of about 100 over seven years. (Allowing Obama to reboot the system before the end of his second term.)

  8. gadfly55

    The deposit guarantee effectively nationalised the banks, after that it is mere technicality. The government conned people and companies into transfer of deposits, as you can see by the disproportionate number of non-Irish accounts in Anglo about 170,000 as against 72,000 Irish. They are committed to defending these deposits, against failing bank assets, and the government cannot borrow enough to cover the deposits, hence nationalisation and losses transferred to the people. Ireland is now effectively bankrupt, end of story. Next chapter, the classic, float your own currency and print money. All persons holding euro accounts should make orderly withdrawals in cash and prepare to charter fishing boats to depart the island.

  9. Philip

    Interestingly enough, a drop in real value of 80% would bring houses back to what they were worth in the late 80s when all this nonsense started. I wonder if the cycle will repeat itself in exactly the same way this time? There are a lot of differences.

    - New emerging and now well established economies. Everyone can export high value and buy it as well. Multipolar world is not going away.

    - More people living healthily into their 50s and beyond than ever before. Meaning a better grasp (my personal biased opinion or course) of day to day realities in terms of what can really be achieved. Less childish hunger for material goods and more measured outlook.

    - Better education and increased emancipation throughout. Face it, it’s better. Woman Power/ Black Power, people speaking out more in China/ India and the rockier ride for the “EU federalisation hopes” as people start to demand a more direct voice.

    Investors are going to have a lot of choices. But my guess is that the day of the high growth breakaway stock is a thing of the past. The pitch is now very level and in that sort of game, team playing wins out over individualism every time.

    Expect different yardsticks for growth to emerge. Merely having all the gold in the world will not be sufficient.

  10. Furrylugs

    From todays Indo;

    “US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

    “I’ve found that credit losses could peak at a level of $3.6tn for US institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai yesterday.

    “If that’s true, it means the US banking system is effectively insolvent because it starts with a capital of $1.4tn. This is a systemic banking crisis.”

    I have to confess that the macro-economic questions posed by Davids article are slightly beyond any meaningful contribution by my good self save the question;

    Should Brian Cowen write to Professor Nouriel Roubini and tell him to shut up and stop rocking the boat?

    Seems to have worked here.

    • gadfly55

      Sooty and Sweepy should invite the good professor and Paul Krugman to address the FF party. St.John’s ambulances with heavy sedatives should be in attendance.

  11. Very interesting article. It will be interesting to see if US economists recognise the danger here. Will there be more maturity and honesty under Obama as commentators like Peter Schiff have consistently accused the fed of trying to mislead the american people regarding the true level of inflation. Mechanisms to do so include altering the basket of goods used for the consumer price index. It seems to me that we’re now stuck in a strange limbo situation where the divide between first world and developing world regarding what’s affordable has never been greater.

    We’ve embraced inflation as the solution to all economic ills except those caused by inflation (of course). For that we need hyperinflation! The end result of all this is that western economies are struggling to be “competitive” without currency devaluation. We’re suffering from too mych inflation, relative to the rest of the world. Our temporary solution has been debt but this won’t work forever. We need to rethink this model as the “valve” that most western countries have setup to control inflation has failed us.

    Inflation is like a drug. It makes us feel good as our assets and shares increase in value. The numbers get bigger and we feel like we’ve achieved something. It’s illusory. We can get addicted to inflation and need more of it to cope with the stress of our lives. We’ll invent bubbles of inflation that small groups of us can share. We consume it, get high and forget our problems. That in a nutshell is the celtic tiger problem. Localised and unsustainable inflation which made people behave irrationally, just like a drug.

    We need to address the issue of global inflation and its relativistic effects in some kind of new Bretton Woods. Otherwise we’ll only stave off disaster temporarily.

    • Malcolm McClure

      Shane Dempsey: Its only numbers. Debtors love inflation; savers hate inflation; investors in well-managed blue chip stock just shrug and repeat ‘Its only numbers’.
      There’s no moral dimension to inflation. It’s just another tool in the economist’s rag-bag. Money greases the wheels of commerce. Inflation, like WD40, just thins down the grease to make seized up wheels spin smoothly again.

      • It’s not only numbers if it has a significant effect on temporal spending power. E.g. David’s Jagger and Juggler’s. A whole economy can rise or fall on the relativistic affects of inflation.

        China has a saving culture but saving isn’t fun. I’m not sure we save that well in many European countries and in the US. Greenspan wasn’t describing irrationally exuberant saving. Also low interest rates encourage people to spend as the return from saving is traditionally lower whereas debt is cheaper. Until it’s not…

        Then there’s the issue of what’s a well managed blue chip? A lot of what we thought were blue chip institutions turned out to be over-leveraged over-exposed disasters.

        I’m inclined to believe that many semi-d owners who found themselves paper millionaires based on property price inflation felt intoxicated by their new wealth. Inflation bubbles do have a psychological effect which gives rise to a moral conundrum.

        A certain amount of inflation is viewed as having a positive effect on national morale. David has written about this. Niall Ferguson has, it’s accepted that some asset appreciation encourages us to believe that all is well with our economy and our society. In that way, it’s a bit like alcohol. However, some people become alcoholics even though it’s not socially acceptable. Inflation is legal and socially-encouraged opium for the people.

        I found this article a while back and thought it was insightful

        I also got an ironic kick out of this 2004 paper from the Central Bank of Iceland
        Anyway, back to my number crunching :)

        • Malcolm McClure

          Shane Dempsey: perhaps I should have added to a well managed blue chip company– ‘that makes stuff that people want to buy in good times and bad.’ (Oil, minerals, chemicals furniture, cars, computers etc.)

          I agree with most of what Karlsson had to say about inflation being largely beneficial, although it hurts savers.
          However, I prefer to encourage investors as above rather than savers because industry that involved risk is a worthy pursuit but saving is just a form of passing the buck.

          Savers, when the interest rate is 1% or less are like the servant who received one talent and went and digged in the earth, and hid his lord’s money. Same goes for gold hoarders. See Matthew 25: 14-30.
          “Cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth.”

  12. Philip

    Gadfly – stop worrying about the banks. They are money churners (essential, but simple information routers of value). They merely allow business to be transacted. And they are just businesses like any other. The housekeeping was a disaster and its cleanup is without justice and looks hamfisted. That’s what cheeses us all off.

    As for the dollar? Well, whether we like it or not, the US can give the 2 fingers as it’s real big on all fronts. Oddly enough, it wont. It would only make it weaker. And I for one believe that protectionism will not be on the agenda. Expect networking like you have never seen it before.

    And if you get on a fishing boat, where are you going to go? – expecially at this time of the year with the high seas we have right now :)

    In the end, we need business to generate wealth which can pay for services which can keep us all in health and reasonable sanity. Poeple need to reach out to their local community/ work and muck in. Attitudes only change by example.

    • gadfly55

      First of all, a fishing boat can take you to France, and from there you can live in the eurozone. The banks are the core of the system, and because they over borrowed against inflated assets, which must be paid for with interest, the economy as we have known it, is destroyed. People who borrowed for houses or cars must pay these debts off in the next 5, 10, 40 years. Businesses who borrowed for property or development are going bankrupt, and the banks will never be paid, and since we now effectively own the banks, the depositors must be paid from Irish government borrowings, which in turn must be paid back with interest. This comes from taxes, and reduced government expenditure, which completely changes the operation of the economy. Less government pay to public service employees, less money in the ecomomy, and more tax from the private sector. More tax from the private sector to pay for government borrowings, less money in the economy. Less money in the economy, depreciating prices for property, and on and on. If you can understand this series of connections between bad banks and the ordinary person, linked by this government, perhaps you can appreciate the significance of the abyss into which we are falling at the speed of light into a black hole.

  13. Ryan D

    Although an avid follower of this web-blog from the North of Ireland, I have never felt the need to leave a comment – probably due to an eternal inferiority complex i have regarding anything related to economics (i blame a really intimidating A-Level Economics teacher!!) – so apologies in advance of any naivete.

    David and others talked about inflation/hyperinflation and how a sustained period of such will reduce in real terms the extent of individual / business debt. How in practical terms does this be realised? Obviously the price of goods and services increase but how? Do shops and business just start charging more (bearing in mind there will always be someone to undercut)? Are workers brought in for pay reviews and given salary increases? Or is it more of a slow-burner where we start to see prices creep up intially?


    • gadfly55

      Very simply, let’s say you owe 100,000 cookies. At present you are paid 10,000 cookies, and living frugally you pay back 5000 at year, In 20 years, you will pay back the cookies. Now, the government cuts the cookie in half, and gives you 20,000 cookies, or your employer who is using the new half cookie to pay you. You continue to pay half your annual cookie salary, now 10,000, and in ten years, you have paid off your debt. Of course, people with complete, untouched and whole cookies come into the country, break theirs in half and suddenly they can buy things for half nothing. Then whenever you go to their country to buy anything, you have to present whole cookies. If we could just stay in half-cookie land, and never buy anything in the real world, things would be fine, except for all those people who put full cookies in our banks, and expect to given full cookies, plus interest. Otherwise, they will never, ever, give us any of their cookies again, and we will be very sad, and very poor, though not starving, because at least we can eat cookies. Money however is not a consumable and nutritious substitute.

  14. AndrewGMooney

    Inflationista! Deflationista! Stag-Deflationista! ‘ka-poom!’

    “The worst problem of the C21st is that many people want positions of leadership, but they don’t want to make difficult decisions.”

    Carlos Ghosn, President/CEO of Nissan, on the difficult decisions he had to make in order to save Nissan from bankruptcy.

    In this engaging article, I suspect David is playing the pessimist for ‘hangover effect’ after yesterday’s jubilant scenes. But then, he is an Economist, so I guess he must attempt to re-assert the primacy of The Dismal ‘Science’ over Obama’s Cultural Renewal.

    Nothing is certain in life, but I had a visionary experience of Obama as ‘The Black Swan’: Calm, unruffled on the surface, but furiously active beneath the water to move the Ship of State forward. I’m not alone in feeling that America has been blessed with the best possible President at this most perilous of times.

    If Warren Buffett believes America is experiencing an ‘economic Pearl Harbour’ but also believes that Obama is “the absolute right Commander-in-Chief” to guide the world to a safer harbour, then that’s good enough for me!

    Obama has surrounded himself with top-drawer talent to consult with before he makes his decisions. Ok, maybe question mark against Hilary. But they’re not sycophants. Not partisans. A balanced 360 degree canvass of all available options, risks, possible rewards. It’s time to get on with the show, at long last.

    Other than wishing to commit economic suicide, it’s hard to see why either the Chinese or the Gulf states would suddenly exit the Dollar. Perhaps in 10 years when there’s been an economic and geo-political realignment to a multi-polar new world order. But now? I doubt it.

    China bet the shop (literally) on the American Consumer. In order to keep functioning it has to help put a floor under American assets. Also, China’s in a much bigger mess than America, it has poisoned it’s water supplies for short term ‘economic growth’.

    The one-child policy is a chicken waiting to come home to roost in terms of demographics, family and social cohesion. China will be looking to American technology to save itself from catastrophe. De-coupling? Not this time around.

    Even Jim Rogers finally accepts all is not propitious with ‘the miracle of China’. That’s why he lives in Singapore, because he won’t poison his babies by living in a Chinese megalopolis. Sensible choice – if you’re a bow-tied billionaire. We’ll see how long the average Chinese citizen is gonna put up with this pollution crap and being lectured by Jim on how grateful they should be for their ‘miracle‘. China looks to America for it’s future. That’s assuming China doesn’t disintegrate like the USSR. With oil at $34 (or is it $3:40?) The Gulf could go tits-up anytime.

    “the world needs Obama to succeed”.

    The next bubble is, indeed ‘The New Green Deal’ and it has to be inflated to avoid a death-spiral vortex of deflation which will wipe out the good, bad, and indifferent with equal disregard. The Creditors (whether China, Gulf States or Germany) will fund the Big Daddy of all Debtors (America) or they will doom themselves to oblivion.

    It’s always fun to read Peter Schiff and Mike ‘Mish’ Shedlock, but they are not in power so their ‘liquidate the farmers!‘ Austrian Solutions now seem an irrelevant intellectual sideshow. Obama is in Power. He will make his choices. And I think we’ll get through this. I used to enjoy being an apocalyptic pessimist when everyone else was fighting over the punch-bowl, but no ‘everyone’s’ Chicken Little, it’s time to move on. Glass Half-Full.

    Finally, Ireland WILL find a way to benefit from Obama. The Blessed Bono has already played in front of The President, this most eminent and wonderful Irishman will surely have the ‘soft power’ to persuade Obama to ease up on the aul tax-haven cull. Or he could just threaten to refuse to release the new U2 album or tour in the States. America can cope with much hardship but not with that catastrophic loss. Has anyone heard the new single? I bet it’s as good as all the others. Identical, in fact. But I digress.

    Sensible Irish investors and entrepreneurs will be readying themselves to find a niche haven within Obama’s overall game plan. And the next Irish Government, having finally thrown off delusional cultural mind-sets of historic cronyism and corruption, will lead Ireland into the sunlit uplands of wealth as opposed to mere profit. So stop worrying about empty ATM’s and troops on the streets, it ain’t gonna happen. Lenihan and Cowen will be moved to their new places on the chessboard by the real power players, regardless of their posturing and fulminations. Ditto, Brown, Sarkastic, Madame No! and the rest of the ‘supporting cast’.

    Roll on Obama Presents ‘G20‘ Live in London. April 2009. Yay!

  15. Deco

    David, you can see the implications of new Administrations concentration on spending it’s way through the recession. It will be inflationary. Leaving things in their current status is deflationary. The problem is that the political system is designed to be inflationary – the politicians compete with each other in a competition to be the best Santy Claus !! It is not just Jackie Healy-Rae who behaves like Jackie Healy Rae.
    You cannot have something for nothing in this world (despite what politicians like Brian Lenihan, Gordon Brown, and Joan Burton seem to promise). And this especially holds in economics.

    The real losers in an inflationary environment are those whose assets are in the currency. And this is always those who apply their energy to earn currency. Inflation favours asset holders. Deflation favours savers. And the big saver is China. So I do not know how China will react to the Obama plan. China was very content to go along with both Clinton and Bush. But, how will Beijing react if Washington starts inflating it’s currency ?? Will Beijing feel cheated ?
    Bear in mind that the new administration will have a different relationship with China – the Bush Administration talked tough and in a unilateral manner on just about everything. But they also behaved like Nixon in respect of China, doing deals, consulting the Chinese, and actin in concert with Beijin all the way. The Republicans found that the Chinese far more cooperative, in their game of international influence and realpolitik, than the EU. The Democrats will consult other Western countries, long before they consult one-party states like China and Russia. They will simply not trust the motives of Beijjing. The Democrats are going to more concerned about the trade issue, Tibet, China’s deals in the Third World (including it’s one sided deals with Zimbabwe and Sudan), and the currency exchange rate. I predict that the new administration will have a much cooler relationship with the Chinese (and Russia) – along the lines of that which existed during the Clinton Administration.

    Inflation might alleviate America’s debt problem – but what sort of problems will it cause ? An oil crisis, more investment bubbles, a rocketting increase in the cost of living of basic resources ??

    More specifically – how will Ireland deal with a declining dollar, and a declining British currency. Ireland’s biggest external policy issue in coming years will not be the Unionists in the North, but the continuing malaise in Britain. The return of British inflationary policies, a massive drop in British living standards, and a stronger Euro will be an ongoing headache for the government, and private sector here.

  16. gadfly55

    The pressure to exit the Euro will become relentless and inevitable, The phrase from Lenihan last night on Prime Time, “fight the good fight” reveals the basic Anglo-American genetic tendency to put on the war paint, strip, and intimidate the enemy, who of course, is our own testosteroned demonic alter ego. Not for nothing have Anglo-Americans laid waste to countless peoples in pursuit of their domination of humanity. We Irish have totally bought into this and now will suffer, from our own leaders, a fate worse than death, total humiliation and penury bestowed on our children and grandchildren. All of the elite must be swept aside, for their deficiencies and wrongdoings are beyond forgiveness and redemption.

  17. Sam

    Underneath is a link to UK forward Swap rates. You will notice that they have already begun to factor in inflation. After a period of contraction the long Swap rates are now beginning to rise – matching inflation expectations.

    It needs to be said that this is great news for any borrowing property developer, who can (if they are smart and quick enough) still lock into historically low long term borrowing rates, while waiting for the inflation which will raise the value of their property asset.

    It’s all going to come together quite nicely. No need to go bust at all.


  18. anto

    A query for sam.
    as a novice in matters of economics,are periods of “high”/hyper inflation not usually accompanied by “high” interest rates?.
    or will it be that because of the present dire circumstances,inflation will be let run unchecked,as a deliberate policy measure?

  19. Sam

    In all periods of high inflation the interest rates rose to reflect that. But there is a window of opportunity here.

    Short term interest rates are low reflecting anticipation of deflation in the near term The long term interest rates were (and still are) low, but they have just begun to move higher reflecting the expectation of inflation in the longer term – and correcting an anomaly in the marketplace. This anomaly may remain for a time, as the short term rates have further to fall, possibly bringing the long term swaps with them on a temporary basis.

    But for property developers who want to lock in, and who are wise enough not to try to call the bottom – Opportunity knocks, but not for long!

  20. Sam

    In reply to Anto.
    Yes, It is deliberate policy to let inflation run – by printing money. They have no other solution.

  21. John ALLEN

    Bank Regulator – it appears to me that the chairman of the regulatory authority is only intending to amend the laws insofar where it matters where they were ‘caught out only’ and to ignore all the other weaknesses where very serious fraud can occur by bankers again . Should that be allowed to happen we will soon be facing another catastrophy and soon .It would also mean our amended laws would be out of line with the international norm.
    Had the regulator read the bank fraud submissions made to the National Crime Forum the mess in Anglo would not have happened .Anyway it is my belief he is not aware of their existence .We should harass the regulator to ensure that the new to be amended laws are scrutised before adoption .

    • b

      John ALLEN you have an inflated notion of yourself. We have been fooled time and time and time again by the Anglo shower in various guises since I can remember. At least since 1984. The regulator didn’t read it and won’t read it.

      What we need to do is to draw a line under Anglo, throw out FF and get the hell away from American companies because exposure to the US dollar is toxic.

      I am going into short term business selling wheelbarrows to the Americans as that is how they will have to pay for things! If I mess it up I will demand to be nationalised.

    • Deco

      John Allen – I fear that your prognosis is 100% correct. Reform from the government, Irish Central Bank, IFSRA, will come when it can no longer be avoided.

      They simply do not understand (because of stupidity) that Prevention is ALWAYS better than Cure !!! So we get accumulating blunders and problems. And solving the problem is virtually impossible – there are simply too many vocal, well placed opponents of reform, to allow any sort of ‘containment’ to occur – until it is a crisis. It is like as if they are all cranially challenged in the Dail of understanding this. Classic example is the banking crisis.

      Though it seems to be widespread in state policy. And we seem to tolerate this approach again and again. And then when it reaches crisis – we panic, like the last passengers on a sinking ship looking for a lifejacket.

  22. Paul


    Can someone expain a few things to me in simple englsih with an example.

    1. What does the US need negative interest rates.

    2. How does hyperinflation take off. Whether the US borrows from china or writes IOUs to itself, both increase the US dollar money supply. Why does one cause hyper-inflation and the other not… Can so explain this more.
    I understand one is weimer germany scenario but what causes the hyper inflation? v’s if the moeny was just borrowed from China.

    3. Also why would the dollar drop like a stone of this happened.

    4. How does a country inflate away its debt… ??

    • McGoo

      Hi Paul,

      >1. Why does the US need negative interest rates?

      They’re trying to get people to borrow and spend, but even with interest rates dropped to zero it’s not working. So interest rates need to go lower, ie. below zero. Or to put it another way, people need to know that they’re not actually going to have to pay back all the money that they borrow. The conventional way to achieve this is by inflation, which reduces the real-world value of money (ie. savings) and debt. Saving becomes dumb, borrowing becomes smart.

      > 2. How does hyperinflation take off?

      I think I’ve described one mechaism by which hyperinflation takes off in my 6.55pm post.
      The difference between printing and borrowing from China is that printing is basically free and can go on forever, while borrowing is (theoretically) expensive and temporary. In practice, you may be right, there may be no difference.

      > 3. Also why would the dollar drop like a stone if this happened.

      Dimonds are expensive because they are hard to come by. If you had a machine on your desk that could extract carbon from CO2 in the air and create dimonds as fast as you could find sacks to put them in, the value of dimonds would drop like a stone. Same with money.

      > 4. How does a country inflate away its debt… ??

      Example: You owe me one sack of dimonds. You turn on your desktop dimond-making machine and create one sack of dimonds instantly at virtually no cost and give it to me. You are now out of debt. You have also halved the value of dimonds, and made me want to kill you. I will never lend to you again, because I lost money on the deal.

  23. Philip

    Gadfly, we live is a global environment. The Abyss is being faced by all. Nowhere to run. Nowhere (except perhaps in a fishing boat off the coast of somewhere with the radio turned off). The Euro may indeed crack up if the Germans are excessively hurting becasue of the EU and their supportive part in it. Also, you are assuming there is a coordinating intelligence for this mess. I would not credit Anglo American or any other culture with anything good bad or indifferent relating to this. This is just a muddle of events and individual activity leading to a global reset. Organisations of all forms follow this trend. Nothing remains permanent.

    May as well enjoy the ride!

  24. Furrylugs

    Bumbling old day on the markets. Everyone waiting for Barack to announce the size of his stick.

  25. Philip

    Negative interest rates is just an extrapolated consequence of monetarism. Either you inject credit you have backed (by depositors, investors, borrowings and such like) by dropping rates or you inject credit you promise to back (if the effen economy starts producing again).

    Productive capacity needs to ramp with minimum shackles. It’s the only source of true wealth. Not gold, not land or anything static that was there before we came into being. These latter are merely for temporary value storage to allow you to activate more production. (i.e. anything that betters a community – the money part is just a tool which people worry about too much).

    Tax can be the enemy of wealth production when leveraged from production. It can be a great friend of wealth production if used on land or other sources of economic rent. My main gripe is that we will see it applied in Ireland in exactly the reverse mode to keep the coffers stable and kill production and true wealth in the process.

  26. Lorcan

    See David is being selectively quoted on Bloomberg TV.

    And in an article on the website.



    1. The US needs to get credit moving. The normal way to get this done is to make money cheap, or (as it is currently in the US) free. The Fed cannot cut interest rates below zero, so to make money more attractive it needs positive inflation rates, making the real interest rate negative. e.g. I borrow $100 at zero percent. Paying it back in a year costs me $100, but in that time my income has risen 5% in line with inflation so I am paying back less than I borrowed in real terms. Zero rate + inflation =negative intertest rate. So easing the credit market. And getting the economy moving.

    2. If the US is borrowing money, the counter-party has to have faith in the strength of the US dollar. It imposes some level of fiscal discipline on the US.
    But if the US decides that instead of going to the market it will just print the money, there is no imposed discipline, so no imposed control. The presses can keep running until the desired effect is achieved.
    In the first scenario an equilibrium is possible – supply of US debt and demand for it.
    In the second one there is no equilibrium, so supply of dollars can quickly outstrip demand.

    3. In a situation where there was an excess supply of dollars, the purchasing power of each dollar would fall. These less valuable dollars would be ‘turned-over’ in the economy more quickly because people would not want to be stuck with them. As people convert their dollars into gold/foreign currency to protect their wealth, the dollars left in the system become increasingly less valuable.
    As the dollars become less valuable people will need to be paid more of them to maintain their standard of living. But as people get paid more prices will also go up. Leading to the classic wage/price spiral that is a main cause of Hyper-inflation.

    4. US sells $1 trillion of 5 year bonds at 5%, for example. But it then allows inflation to run at 25% for a few years. When the bonds are due, they will cost the US $1 trillion to repay (ignoring annual coupons). But in the five years the US dollar has depreciated by ~66%, so in real terms it only costs the US 1/3 of what it recieved from the original bond issue to pay off the bond. So it inflated away 2/3 of it’s debt.

    The quantative theory of money can be simplified as MV=PQ. M=money, V=the velocity. PQ is price by quantity. So PQ is GDP of the economy. If the economy is shrinking, increasing either M (the money supply) by borrowing or printing should cause a rise in GDP. By the same measure increasing V (how many times each $ is turned over in the economy during a year) will also increase GDP. Credit is the best way of getting money moving, thereby increasing V and leading to an increase in GDP.

    Hyper-inflation can occur when measures are taken to increase the Velocity of money (cutting interest rates to zero, for example), and these measures are not given time to ‘play-out’ before the Money supply is increased. By this I mean that zero interest rates may not have an effect immediately, but will have an effect at some stage. If the Money supply is eased before the full effects of interest rate reductions has been felt, the two may ‘hit’ together, leading to a rapid increase in prices (price bubble) and possibly a wage/price spiral as above.

    All very good in theory, like most economics.

    If anyone has a better explaination, feel free.

    • Paul

      3. In a situation where there was an excess supply of dollars, the purchasing power of each dollar would fall. These less valuable dollars would be ‘turned-over’ in the economy more quickly because people would not want to be stuck with them. As people convert their dollars into gold/foreign currency to protect their wealth, the dollars left in the system become increasingly less valuable.
      As the dollars become less valuable people will need to be paid more of them to maintain their standard of living. But as people get paid more prices will also go up. Leading to the classic wage/price spiral that is a main cause of Hyper-inflation.

      Why so? How does the dollar deprecaiting effect the locals in America. Theyre purhcasing power for goods within their owne country has not been decreased.??

      4. US sells $1 trillion of 5 year bonds at 5%, for example. But it then allows inflation to run at 25% for a few years. When the bonds are due, they will cost the US $1 trillion to repay (ignoring annual coupons). But in the five years the US dollar has depreciated by ~66%, so in real terms it only costs the US 1/3 of what it recieved from the original bond issue to pay off the bond. So it inflated away 2/3 of it’s debt.

      I can see how the lender lost out here as the currency depreciated against the foregin currency. Buy how did the borrower (the US gain) it still had to pay out €1Bn after the 5 years. exactly what it borrowed.

      • Lorcan

        3. The Dollar is a Fiat currency so it has no value in itself. ie, it cannot be exchanged for a fixed amount of gold/silver. If the US enters a high inflation period, the population will not save, because the ‘real’ value of their money will fall. If a loaf of bread costs $1 today, but will cost $2 tomorrow, why would I save the dollar until tomorrow when its value would have halved by then?
        The purchasing power of the population will only be maintained if their income increases at the same rate as inflation.
        The uncertainty caused by hyper-inflation spirals. People will eventually stop using the dollar, but between the start of the hyper-inflationary period and the end, the economy will collapse. The dollar will cease to function as a store of wealth, one of the main functions of any currency, and because of this normal economic activity within the US will be impossible.
        That’s why many people are already talking about other stores of wealth (gold/land etc.) as an alternative to the Dollar.

        4. Within the US the Dollar has depreciated. In the example above the dollar has fallen by 66% in value. So as I have outlined, prices have increased by the same amount, as have wages in the US. The nominal amount is the same ($1bn) but the cost to the US in ‘real’ terms is 1/3 of that.
        The average US worker will have to do 1/3 of the work to earn the money to repay the debt because his wages have tripled in the intervening 5 years.
        Yes, the nominal sum is still the same but the value of the money has changed.

        • Paul

          I seee what ou are saying regards inflating away your debt. So basically inlfation in your country will make money less valuable, However infating away your debt is based on the assumpotion your salary will increase with inflation to get the benefits. so you will be able to pay back the money easier..

          However how come the people who lend the money dont account for this and tie the rate of return on the bond yield to your inlfation rate..??

          What other tatics can a lender like china or Saudia apply to stop you inflating away your debt and devaluing your currency…. ??

  27. If you want money one possibility is to sell a commodity that the world wants. A vast horde of gold is available so sell some and make it useful.

  28. (just incase you didn’t hear)
    NY Uiversity PROFESOR Nouriel Roubini who predicted last year’s economic crisis said:
    US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” .

  29. Malcolm McClure

    Lex in todays FT recommends Tips–US Treasury inflation protected securities. He thinks inflation scenario is further down the road than i suggested above.

  30. McGoo

    Of course they’ll try to inflate away debt, by “printing money”, but getting that new money out into the economy is actually quite hard.

    In a deflationary environment, people won’t borrow it, and if you pay it to them in higher wages or just give it to them for free, they use it to pay off debt, or save it, instead of boosting the economy by spending it. Economists refer to this problem as “pushing on a string”.

    Adopting a sledgehammer approach, dumping so much money on the economy for so long that inflation becomes irresitable, causes a rush by everyone to spend their savings and get into debt again, sending the effective money supply through the roof, causing uncontrollable hyperinflation.

  31. Colin

    David says “If China begins to question the wisdom of putting all its foreign-exchange eggs in one basket, what will Obama do? If the Chinese say no, the market for US debt will collapse.”

    Are the Chinese gonna get burned, and left with nothing except a legacy of treating their own people life slaves? Commentators have gone very quiet about India also, is the Indian summer over?

    Are those pundits who were claiming the 21st century to be a Chinese one, like the 19th was British and 20th American, now wrong? I reckon China will be the biggest gay power since Sparta – and not much else, judging by their one child policy and abortion rates for unborn girls.

    Has anybody got any predictions for what state the world will be in at the end of Obama’s presidency (2013 – I believe since he cannot possibly be successful in these circumstances)?

  32. Lorcan

    S&P downgraded Portugal today.

    That’s leaves Ireland as the only one of the PIGS maintaining their rating.

    Wonder when that axe is going to fall…

    • Furrylugs

      Old Chris Pryce over at Fitches must be married to one of ours else he’s had a few good sessions in Temple bar. Very understanding man altogether.

      When does this ancient CelticTruism kick in?

      (To our expat guests…..Out of Nothing there comes Nothing)

  33. AndrewGMooney

    Citizens of Ireland worldwide! I speak to you tonight from Beg Ara, whilst I swim with Atlantean dolphins, as is my wont. So hear ye! Listen up, y’all!

    Governments worldwide (except in the ‘sensible’ Eurozone!) will do whatever is necessary to prevent a deflationary vortex opening up and swallowing their productive capacities. They will not hesitate to risk inflation. That’s a devil they know and which they can and will kill with whatever Everest high interest rates it takes.

    Hyperinflation requires a particular level of stupidity not to notice that the ‘medicine’ has worked, the patient is up and about, and no longer needs the ‘inflationary stimulus’ meds. O’bama has put Science back on it’s rightful throne. He will use whatever ‘voodoo’ economics he finds pragmatic to his wider, rational goal of complete cultural and ethical renewal.

    Politicians fear Deflation more than anything else. With good reason, as far as I can tell from my studies.

    Quantitative easing, ‘printing money’, can come in many ways. As move move into that ZIRP ‘looking-glass world’ reverse-reality, prepare yourselves for developments that simply seem CRAZY!!!!!

    Such as taxes on savings deposits, mattress currencies suddenly having expiry dates, and helicopters dropping shopping vouchers onto bemused citizens from the sky.

    Actually, the Taiwanese are already off and running with the ‘free shopping vouchers’ lark. I’m sure this would make FF popular again, at least in Dundrum!


    Ireland is, sadly, powerless to act. It must just await the outcome of Obama’s big gamble. Which I am hopeful will come off. Without hyperinflation. And without defaulting on Sovereign Debt. What’s a bit of inflation between friends, eh? I’m sure the Chinese and the Saudis would rather 70% of something, than 100% of nothing from a inflationary black-hole implosion.

    So long as the Brits don’t ruin it all by being all arrogant and cheeky again by saying “We thought of it first!”. Are ‘they’ crashing their currency to close SuperQuinn stores deliberately? Or is The Market shitting it pants because it doesn’t know what’s happening, doesn’t know what ‘the authorities’ should be doing and can’t cope with the idea of individual countries like Britain and Taiwan saying: “Fc-uk it dude, let’s go bowling”.

    I love this ‘economics’ stuff. It’s better than ‘shrooms.

    Kind regards.

    • AndrewGMooney

      I meant ‘deflationary black-hole implosion’. Not inflationary.

      Also, I should have added that Eric Janszen thinks we’ll have ‘ka-poom’, which is a ‘disinflationary deflation’ called ‘ka’, followed by an ‘inflationary super-nova explosion’ he calls ‘poom’. Quite onomatopaeic or however it is you spell that word.


  34. Lads please would ye give up the bull-shitting. With all due respect, but i think at this stage in the game it would be better – for the sake of fools like me who are possibly going to lose quite a lot to try to stick to facts, and what might realistically happen and not ‘ka-poom’, which is a ‘disinflationary deflation’ called ‘ka’, followed by an ‘inflationary super-nova explosion’ he calls ‘poom.’

    I think commenting on this site gets – to what seems like a bunch of stoned out school boys – away too much from the point.

    Has anyone got anything to say about: US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent.”
    Thank you;-)

    • AndrewGMooney

      Paddy, I’m not bull-shitting. I’m commenting in all seriousness on David’s article. With a little levity because some people on this site think there’ll be no Euros in the ATM’s by the weekend! All will be well. It will be a rough ride, but the sky isn’t falling, despite the US deficit.

      Here’s a one-page summary of ‘Ka-Poom Theory’ which was posted by the dark genius of I-Tulip in 1999!

      Just scan it quickly, ignore and jargon, you’ll get the gist of it. It’s describing EXACTLY the scenario David’s worried about. And, it absolutely answers your query:

      “Has anyone got anything to say about: US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent.”

      It may sound bonkers and Iike I’m taking the piss, but if you read the link, you’ll see why I’m not. In fact, you don’t even have to read it, just look at the 2 graphs on the page. Says all you need to know about how we got here, and what MAY lie ahead.

      All the best.

      • AndrewGMooney

        might help if I provided you with the link:


        • Furrylugs

          Thanks be to God Andrew.
          I thought you had been Du Waa Waa-ed

          My sympathies. I’d say if most were honest, we’re all in much the same boat to one extent or the other on the basis that wealth is relative to requirements.

        • Furrylugs

          Read that Andrew. So is “Poom” so to speak, the obsequious inevitability to this cycle?

        • AndrewGMooney

          Furrylugs, nothing is ‘inevitable’.

          Everything depends on the actions taken by our leaders, and the ethics underpinning those actions.

          That’s why Obama’s announcements on the Gitmo Trials are such an important ‘economic’ event: We can’t have Enrons. Guantanamos. Or Anglo-Irish RBS Northern Ice Save Rock Banks. It’s all connected and interdependent. From my first comment on this site I said that ‘Culture Trumps Economics Every Time’. Nothing’s changed my opinion since.

          It took us many years to get to this impasse, it will take a few to steer safely away from disaster. But anyone who claims they ‘know’ what will happen, that any particular type of disaster is inevitable, is surely talking shite.

          I’m optimistic about America, Britain, and therefore Ireland’s prospects. Very concerned about the Eurozone’s slowness to react. This ‘crisis’ gives an opportunity to jettison so much poisonous cultural and ‘economic’ baggage that is holding all of these countries back. It will be painful, but worth it. It truly is time to put away childish things.

          I’m slightly surprised that David didn’t use this article as an opportunity to uplift the downtrodden. There’s a lot of fear and panic in some of these comments. It’s time to move on. Happiness is always an option. It’s not just an American Dream: It’s the whole freakin planet.

          I hope that Obama will, in some way, shape or form, bring forth, inspire or ‘will o’the wisp’ into existence an O’bama to appear in Irish political life.

          Someone who simply will not ‘play by the old rules’ but will re-write the rule book. I visualise Phil Lynott playing ‘One Nation Under A Groove’ by Parliament-Funkadelic by the banks of the Liffey then nipping off to the Dáil to pass a few cool new rules.Still miss him, but that’s the drugs for you.

          Obama is The Black Swan. The totally unexpected game-changer. After that tragic eejit Bush: A Black President. He’ll make mistakes, but I sleep better at night knowing he’s in charge rather than Bush/Cheney. I certainly sleep better knowing that McCain/Palin are toast.

          But I do miss Sarah. But at least I can console myself with my favourite ever Sarah Palin moment. Her exorcism in an Alaskan fundamentalist Christian church:


          Isn’t it time Lenihan ordered yez all back to Church to be exorcised of your seditious thinking? He’s like Basil Fawlty, but instead of ‘Don’t mention the War!’. It’s ‘Don’t Mention The Banks’. So we won’t. Will we?

        • Furrylugs

          An uplifting Post and most welcome.
          I tend to vacillate between confidence in the ability of irish people generally to overcome and innovate, swinging to despondency in the ability of indigenous gurriers to harness that energy for selfish needs.

          “I hope that Obama will, in some way, shape or form, bring forth, inspire or ‘will o’the wisp’ into existence an O’bama to appear in Irish political life.”

          Maybe one of Johns lepreachauns? I could actually see John ALLEN and Michael D Higgins having a whale of a time on Primetime. A sound ethical diatribe by both leaving the intellectually challenged political class totally mesmerised.
          As Tommy Cooper said “What was that?….I don’t know, but there it goes again”

    • McGoo

      How about “don’t buy shares in US banks”?

      Actually, a period of deflation (caused by banks, corporations and government around the world desperatrely trying to borrow money and so shrinking the money supply), followed by a period of high inflation (as those same governments decide to just print their way out of debt, so devaluing their currency and improving their country’s competitiveness) sounds entirely plausible and likely to me. If you think it’s B.S., that’s ok, you might be right, but please explain why?

  35. John ALLEN

    ka-poom to me sounds like a knee jerk -it happens fast and the pain is excruciating and if you are too small you become ka poofed and dont recover then we are left with a ka-punt

  36. Sam

    It is all forecast in the interest rate swaps.

  37. Sam

    Well …not fully yet, but the penny is starting to drop.

  38. John ALLEN

    sam – whats ur prognosis a euro or a new punt and why ?

  39. McGoo

    y’know, noone seems to be asking the obvious question :

    How can we make money out of this mess?

    My current strategy of renting a house, sitting on a large pile of cash in Rabodirect and watching house prices fall is producing an excellent, tax-free and virtually risk-free return in real terms.

    What are other peoples thoughts? I have a feeling that the word “gold” is going to be mentioned.

    • Furrylugs

      McGoo. Bloody good question.

      Instead of trying to save the country, we should be pooling ideas how to screw it even more than the D4 wide boys.

      Get rich quick???

      “The Government have announced in the Budget for 2009, that start up companies
      which commence trading from January 1st, will be exempted from both Corporation
      tax and Capital Gains Tax for the first three years, up to a total tax liability of € 40,000.

      This translates into a massive €320,000 in tax free company profit at the current rate of
      corporation tax rate of 12.5%, each year for three years.”

      Start carbon trading in the gaeltacht. Grant aided to the hilt. Fly all over the place as cheap as you can to collect as many foreign receipts as possible. Cash them in after 3 years and take whatever repayment will be due.
      Make big statements timed to coincide with some outrageous comment from O’Leary.
      Show no profit but much effort and rakes of letters to assistance Quangos. Appear on the Late Late as someone who had the gumption to start up in the hard times.

      Get too high a profile to fail, then take whatever lump sum they throw at you to survive. Then disappear to a warm clime with no extradition treaty.

      It worked for John DeLorean.

  40. Rob

    i reckon property may ironically become a good bet again but not really as a 2nd property but actually as your pp residence provided of course you have a job, can keep it and want to stay in this country (debateable). The problem as i see it is that so-called blue-chip shares proved dodgy and confidence is shot. Then again would it be reasonable to think that in a year AIB/B of I share may be worth 3/4 euro making it look like a bargain? Was it Soros/Buffet who said that humans were curious as no-one wanted to buy shares/property on their way down, whereas exactly doing will make you money (in most cases), that is unless capitalism is actually dead and the Cubans are arriving in Shannon as we speak and Cowen and Lenihan are stuffing euros into their suitcases to meet up with Lynn in Bulgaria….

  41. jim

    Its what I call the shopping mall model.The Markets have decided that they own the Mall and in the absense of any cohesive argument thats the way it will remain.Bear with me and ill explain.The US is the main anchor tenant,stocking up with produce from China,Japan and elsewhere,even supplemented with its own brand items produced under licence from home producers and elsewhere,with a nice turnover.Britain have a good store[pennys type operation,same suppliers,similar setup] Germans have an Easons type setup,high brow,low risk with the exception of the big magazine rack it bought from the east but it did add to the turnover.Arabs supplying the oil to heat the place,Russians doing the carpark and electricity,paid parking giving them a nice cashflow.Eastern europeans collecting the trollies in all weather,happy to be free to ramble about.Spaniards doing the bikini and sunglasses retailing.Ireland doing the flower shop in the corner and had the idea of doing home delivieries[exports] for all occassions and not just funerals like the 80′s.We have a good footfall globally speaking with what appears a rising turnover.Then comes the stock check with the usual audit and things dont add up,nothing unusual at first glance but then error discovered in audit software.Security called to lock the doors,nobody leaves until all bags are checked.Large bags of sub-prime bootie discovered,fingers start pointing,arrests made.lehmann brothers cuffed,further arrests,confidence blown to pieces.Market demands all tills to be checked and verified.Counterfeit currency to be seized.New manager Obama appointed to anchor store.New bankfloats for all tills,new credit rating for all store owners,some stores treatened with closure,massive sales announced,all store owners grumpy,some stores faced with negative equity but trading out ,footfall gradually returns.Everybody mindfull of the next audit,big questions being asked about who exactly owns the Mall and is it worth buying in the name of DEMOCRACY.

  42. b

    Probably the only American that knows what he is talking about is Peter Schiff. Look him up on Youtube. It isn’t what you want to hear but he says it straight. The Dollar is finished.

    • jim

      Ah Mr.Schiff a great follower of the Austrian School of Economics.I often wondered if he would adapt [if asked] Menger’s theory on marginal utility to suit Sean Fitzpatrick and his attitude towards his developer buddies.For those non economists the theory states “the greater the number of units of a good an individual possesses,the less he will value any given unit” Back to Schiff,Im still not convinced he’s not trying to tap into an anti-Government anti-dollar,sentiment to promote his brokerage buisness and media buisness.He does love his own portfolio,our Mr.Schiff.

  43. Sam

    There are stresses in the Euro and there is a real possibility that we may end up with two strands of euro. The premier strand will include the Nordic/German/Franco bloc and then there will be the PIIGS in the “dustbin” Euro strand. These two tiers will have different values (the PIIGS will be devalued) and attract different interest rates. The Germans are paranoid about inflation but the Mediterranean fringe and the Paddies are not.

    It will soon be a time to buy property, lock in the long term swap rates currently available and enjoy the ride as inflation takes us back to the good ol’ days of rising property prices. Because when all is said and done that’s what we are hooked on – along with the rest of the English speaking world. And we feel no confidence unless we have it.

    Also, it is just dumb to pay someone else’s mortgage (by renting for €1,200 to 1,500 per month) when you can buy an an apartment or house at these levels and pay down the mortgage on it at low long term interest rates for much less. If the short planks ever get to figure it out, you can expect to see the Agents start advertising on that basis soon.

    • b

      Sorry Sam? But what are you wobbling on about. Saying its dumb to pay someone elses mortgage with rent is dumb. A mortgage is just a way of being your own landlord and taking risk from the bank. Your home is not your asset. It is the banks asset and is listed on the banks balance sheet as such. It is crazy to pay for a current expense, somewhere to live, with a mortgage. A mortgage a legal contract that the bank can then use against you to sell you more debt. Its as simple as that. An emotional attachment is a real thing but in the cold light of day it is just that an emotion.

      A mortgage in a house you are going to flip is nonsense. Have you ever heard of the Rule of 78 used to calculate interest on a loan? Are you for real? Have you been watching too much Location Location Location again?

      Calling those who choose to rent short planks is insulting. Especially as you have quite clearly demonstrated that you don’t actually get the game. Prices are WAY off in Ireland.

      The Euro will not split. The Dollar and Sterling are going to hit the deck big style. The quantitive easing is yet another inflation of the money supply and this inflation is like putting a fire out with petrol. Put it another way. You don’t sober up by drinking more alcohol. You stop drinking and take the hangover. The suppy of money is going up so the prices may rise but the currency is worth less.

      I don’t think it will be a good time to buy property in Ireland for a long time. If you can both get financing and can see the upturn then good luck to you. I don’t see the upturn coming from the US so that means more pain for us and the money will be in the Middle East and Asia where we have little influence or inward investment.

      So Sam. What I am saying is that the world is bigger than the property market in Ireland and insulting people who for good reason stay the hell away from it gets us nowhere.

      We got flooded with debt. This debt is a massive problem. Debt might not scare you and may be trendy to have but just look around we are heading for the ground and have no controls. I don’t think you or Fianna Failure understand how much and how deep the shit is we are in now.

  44. Tim

    b, only the people who got into big debt are in the shit, now. Those of us, who did not “go mad on property”, are not in the shit; however, it looks as though our government is going to make us pay for those who did.

    I did not “buy big”; \\i did not “borrow big”; I just “lived”, and “supported my family”.

    I should pick up the tab now?

    I saved. I stored-up money for a rainy-day. I behaved “responsibly”.

    Now, I am supposed to let them make that worthless, (by “hyper-inflation”; “de-flation”, or, whatever they are going to call it?


    Not fair on the little-guy!

  45. Sam

    I referred to the Agents as the “short planks” not those who rent. We all have choices – some choose to rent, others to purchase. By making an “ad hominem” attack on me you do nothing to further your argument.

    My point is that it is now cheaper to buy than rent, and that the powers that be have decided that there will be inflation – that will include property inflation. The trees don’t grow to heaven, but neither do they diminish to below their cost of production. And if you want to debate the cost of production of housing, I’m happy to do that with you.

    There is a long held saying in the States, which is “Don’t fight the Fed”. In other words, you will lose your money if you think you can invest in opposition to their policy.

    Their policy is to flood the economy with money. We will feel the benefits and the problems associated with that. I believe that those who see the bottom in the residential market will not be proven wrong. Others have different views:

    “Two men (I never was politically correct) look out through bars;
    One sees mud, the other… stars.”

    Time will tell who was right. Meanwhile, I am happy to let others hold their opinion. I hold mine.

    • Colin


      You say “My point is that it is now cheaper to buy than rent,”.

      But if you wait 2 years, it’ll be even cheaper to buy. So, it is now cheaper to rent than buy, then 2 years down the road stop renting and buy. Or, continue renting and invest your money in shares (where DMcW showed before that they usually outperform property). Plus, I predict it will be in vogue to say you rent in a few years, just like it is to be an environmentalist today.

    • PM


      I seem to remember DMcW writing an article several years ago explaining the real value of property. The price of a property should be somewhere in the range of 15-19 times annual rent (where annual rent is 11 months rent – 1 months rent goes on maintenance). You can go onto daft.ie right now and find apartments and houses in the same complexes and estates both for sale and rent and compare these ratios. (in some cases you can find the exact same apartment both for rent and for sale). Anyway the ratios are actually in the range of 27-40 times annual rent so property is still massively overpriced.

      Now I know that a lot of people look at rents of 1200-1500p.m. and think they should take out a mortgage – but a mortgage for what? and where? If you work in Dublin do you want to pay 1200pm for a mortgage on an apartment two counties away with a 2hour commute each way to work? In an estate that is going to resemble something from “Escape from New York” in a year or two?
      Right now for the location and standard of accomodation I want it is by far the right decision to rent rather than buy.

      The second point I want to make is that the difference in these ratios is key to what is happening in the economy right now. The ratios need to be brought back into line before people will be willing to buy property again – but sellers will not be willing to drop their prices to do this. Instead they will sit on them until they can get out of the property for at least the same price that they bought it for. How will this happen? ..inflation. They will wait 5-10 years (or how ever long it takes) for inflation to devalue the currency – nominal rents will then increase (although in real terms they will actually be cheaper) eventually the rent vs. property price ratio will reach the 15-19:1 range and buyers will reappear.
      Sellers are psychologically willing to sell for the nominal amount that they bought in at – even though in real terms they are accepting a fraction of what they paid.

      Therefore the higher and quicker the governments can get inflation going the quicker the economy recovers. The downside of this is that people’s savings are devalued. That’s why many people are converting savings to gold bullion – since gold will retain it’s intrinsic value and appreciate compared to the various currencies.

  46. Sam

    1) I have known of the Rule of 78 for a considerable time – also the rule of 69, 70 and 72!

    2) I never mentioned “flipping”.

    3) People own the equity in their house, assuming they have invest some and that the values are rising (price and value is not the same thing, by the way). If values are falling then there is a loss to be taken if the price is crystalised at less than that paid for it.

    4) Ireland has guaranteed its whole banking system, which is five times GDP in a currency over which it doesn’t even have sovereignty. The euro has problems. The eurozone is not a homogenous economic bloc. There are weak economies and strong ones, and there is stress in the system. It is questionable whether the euro can survive in its current form over the long term. It will be severely tested in the next two years. In my opinion, there may need to be a two tier euro. Euro A for the stable economies and Euro B for the weaker ones.

    Unthinkable? ….. so was the collapse of the banking system.

    Speaking of which, the European banking system is much more leveraged than it is in the USA. European banks have one third less equity capital than US banks and they will not be able to cope with the massive corporate defaults and loan write-offs that still lie ahead. And that being the case with European banks, it goes for the Irish banks in spades!

    5) You criticised credit. The economy’s lifeblood isn’t consumer demand, but rather credit, both for the financing of business investment and the purchase of consumer durables like cars. No amount of fiscal stimulus will make much difference if credit is constricted. If credit is available, jobs and higher incomes will follow. That’s a well proven economic fact and the very reason why every capitalist country is now trying to free up credit.

    6)The TED spread is an indicator of perceived credit risk in the general economy. When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans is increasing. When the risk of bank defaults is considered to be decreasing, the TED spread decreases.

    The long term average of the TED has been 30 basis points with a maximum of 50 bps.

    In October 2008, the TED spread reached new high of 465 basis points. Over the past few months, it has gradually reduced to 100 basis points. This is indicative of returning confidence in inter-bank lending. Which in turn will eventually feed through to freeing up credit to consumers…. soon but not yet. But it signaling that the markets (including the housing market) will soon hit bottom.

    • jim

      Jaysus “b” the Austrians will never forgive you if you dont defend this position.If its all right with you and Sam ill sit back and watch this row unfold.Having said that after a few drinks and a covering of blue woad[are ye with me john allen] us Celts could easily rejoin the frey.First one to de-base their currency loses.My rules.;-]

      • b

        @Jim. Something had to give. I didn’t know I was of the Austrian school until recently. I thought I was just odd. I didn’t get it. I really didn’t get how so many people seemed to have won the lotto all at the same time.

        We had quantitive easing here since 1997-98 when the safety catches were taken off lending. Look what it has done. It made a false boom, made some people very very rich and saddled the working poor with cardboard houses and monumental debts.

        Too much money is worse than too little.

        I honestly think the general public have not grasped fully what is happening or what happened.

    • Furrylugs

      Have you a link to those rules please Sam?

    • the mediator


      Two things drove property in this country credit and…wait for it…Jobs! The credit is gone and I agree that if it came back
      the Irish people are stupid enough to go right back again bidding for houses on the basis of what they can borrow – not what they
      can pay back. However this time the jobs are not going to underpin our stupidity.

      House prices in this country are way out of whack and are only going in one direction. You also said it is cheaper to buy than rent?
      Thats a whole lot of downside risk anybody in their right mind would be crazy to take on (unless they are a risk seeker).

      Final point – Irish asking prices have not fallen in line with whats happening in this economy – people still “believe” – to rob a phrase from the x-files
      and they won’t stop to “believe” in the property angel until they get a whole lot of reality. Denial is a very bad thing and only postpones and magnifies the pain.

    • b

      @Sam OK. The Irish economy was built up on exporting. The UK and the US currencies are falling like stones and their economies are contracting at an unprecidented rate. How can we sustain house prices when this is happening and when credit has all but disappeared.

      If our exporting markets take less imports and we can’t borrow at the same rates how can we say that house prices will stay up? And if we have mass unemployent and the 10% of the popluation that immigrated leaves along with our best and brightest supply of houses goes up and prices fall. If you buy a house and your job goes and the house price falls how do you sell it. And if a new job appears in a different part of the country what are you going to do? Commute from Galway to Cork or vice versa?

      I rent. I have always rented through the boom. I will continue to rent because I know I can get a far better place than buying without the expense and hassle of living miles from work and being tied to it. Its my choice and it is not that unusual in the rest of Europe.

      @Tim. If you didn’t participate in the madness you should not have to pay. Nationalising Anglo is a disgrace and we should not have to pay for the gambling that went on in that place.

      Obama will flood the US with money and the dollar will collapse. The Irish property market is a side show that has always managed to ignore reality and any kind of common sense.

  47. Josey

    Burning the midnight oil again trawling through the comments, which have awoken me from my slumber to reality.

    People we must all stay united, if we divide they will win….but united WE surely will WIN. Again community will become our survival, borrowing and barter, the “meithal”

    Plant food in your gardens, read up on planting vegetables.

    Clear your debts as soon as possible, cut up your CCs and become independent of the system.

    If hyper inflation does come we need to prepare.

    Invest in the smallest denomination of Gold and Silver coins despite the increasing premiums. Gold used track oil but has deleaveraged in recent times, see the below charts on the right hand side to see how it has increased in value, or is it gold is the constant compared to inflation?



  48. Sam

    No…..a few houses though! :0)

  49. Forgive me Andrew G Mooney,
    I didn’t mean specifically you though I picked a few words from your comment that seemed apt to illustrate. No offence meant.
    I’m trying to learn and understand what’s going on at the moment, and I find it is better in any field (no matter how much you know on a subject it is better to keep it short, simple, and to the point. Not everybody is so well-up.

    I’ll check out ‘Ka-Poom Theory’ thanks.
    You’re a gentleman.

    • AndrewGMooney

      Hey Paddy! No problemo. No offence intended by me or taken.

      Eric Janszen of I-Tulip is a funny man as well as a brainbox theorist. Like DMcW he can reduce very complex scenarios to concise snack bar size.

      Here’s a video of his that sets out David’s article above in a simple and funny way.The final 10 seconds is the disaster that ‘may’ befall America as David’s article fears. And it gives a fun answer to your question:

      ‘Has anyone got anything to say about: US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent.’



  50. The Dude

    Sam is your real name Sean Dunne. or are you in any way involved in the property scam, sorry i mean business (prob an estate agent)

    if you are none of the above you should stay away from the crack pipe

    An other good article by David by i still think the biggest problem the U.S will face is energy i.e oil

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