May 24, 2012

Fiscal treaty is Kamikaze economics for most of EU

Posted in Euro · 174 comments ·

Frequently, and with some validity, business people lambast economists for knowing nothing about the real world. They claim that economists dwell in ivory towers and just don’t get it. Some economists may well live in ivory towers but those of us who work for ourselves and employ people and try to make a living in the private sector are not as removed as the business people might think. In fact, we are business people. Yet the point is valid, as theoretical models of the economy do sometimes seem removed from reality.

However, the criticism can work the opposite way. Just because you run a business does not mean you understand how the economy works.

And when business people weigh into public debates about the economy, their pronouncements can vary from the vaguely embarrassing to the downright wrong. We are seeing this in the economics of the fiscal treaty debate.

Despite knowing nothing — or at least very little — about how the economy works, why is it that some business people speak with utter confidence on economics yet they get the basics wrong?

A business is not the same as an economy. An economy is myriad businesses and lots of other bits too that are not businesses, but may be customers of businesses.

Let’s just address the most basic proposition of the business people about the fiscal deficit and what the country needs to do to right itself. The favourite line of all business people is that the Government needs to balance its books.

If we can just balance our books, through cutting spending and raising taxes, all would be grand. Let’s just examine whether this is actually true.

The Government also borrows the language of the business person when it says that it is imperative that it balances its books.

There is no problem with both the Government and the private sector balancing their books — as long as they don’t do it at the same time. Doing it at the same time, as we are trying to do, destroys the economy.

Some propositions, which sound absolutely reasonable, when teased out a bit don’t make any sense.

It sounds perfectly reasonable to suggest that free-spending teenagers should learn the value of thrift. If you have teenage children, you might regularly tell them not to spend so much. You may threaten to cut off the supply of your cash to them. You might often tell them to go out and get a job. Or you might suggest that they save more.

So you tell them to reduce spending or increase savings. Do you ever urge them to reduce their income?

I didn’t think so.

Now consider the following. What is good for the individual might not be good for the collective. When you start to save to balance your books, that is good for you. But if everyone stops spending in order to balance everyone’s books at the same time, that is not good for everyone.

The reason is not hard to grasp. It is the paradox of aggregation. It begins with one of the basic rules of economics, which is that the vast majority of employed Irish people are employed in the domestic sector. This means that we buy and sell stuff to one another. This implies a golden rule, which many business people fail to grasp: your spending is my income and my spending is your income.

And then one more rule holds, which is that my income is the font of my savings. If my savings are the barometer of my prudential housekeeping, I need to have income out of which to save. But if I have no income because you are not spending, then I have no savings. And if I have no income and therefore no spending power, then ultimately you have no income and so on.

This is the paradox of aggregation: what is good for the individual is not necessarily good for the collective. This leads to another paradox, the paradox of thrift. The paradox of thrift means if we save at different times and spend at different times, then we can keep the income and spending channel open. But if we all save at the same time, then no one has income and we all suffer.

This distinction between the individual and the collective goes to the heart of macroeconomics and it shows why the business world view, which is looking at one balance sheet, is not that clever when it comes to looking at millions of balance sheets.

Now think of the fiscal treaty. The fiscal treaty says that the governments of all European countries should balance their books simultaneously, which sounds reasonable.

But now look at the fact that, with the exception of Germany, economic activity in every European country is weakening, and yesterday the OECD downgraded growth forecasts for all countries bar Germany. Slowing growth is a reflection of the private sector stopping spending and trying to balance our books.

But if we are saving and the Government is forced by law to save too, who will spend? And if no one spends, what happens to everyone’s income? And if everyone’s income is falling, what happens to austerity targets, which are expressed in terms of debt to income? As debt is expressed as a percentage of income, and income is falling while debt is fixed, it means the ratio is getting bigger rather than smaller.

Now let’s go from the teenage kids to my 10-year-old, who is learning fractions. Once he grasps the idea of a numerator and a denominator, he can maybe tell the business person what happens when the numerator is getting smaller faster than the denominator.

The denominator is the bit of the fraction below the line. The fraction gets bigger. So if the numerator (income) is getting smaller faster than the debt (the denominator), the fraction is getting bigger and you are missing your targets.

A recession is actually too much saving. I know it sounds strange, but that’s what it is.

The fiscal treaty will therefore deepen the European recession, which is the result of too much private sector saving as people are scared about their future employment and income prospects, so they save.

This is why austerity without debt forgiveness can’t work. School kids could figure this out. It also explains why what is good for the individual is not necessarily good for the collective and explains why everyone saving at the same time is good for no one.

This is why the fiscal treaty is Kamikaze economics for most of Europe, it is designed to suit the Germans’ short-term political interests and has nothing to do with macroeconomics as we know it.

As for the business people, they are right about economists sometimes. But other times they should stick to accountancy; economics uses a different part of the brain.

  1. piombo

    Good morning David,
    Effective essay in bridging macroeconomics to financial management. Most people in their heart of hearts would acknowledge, if asked, would agree with your thesis.
    However, Ireland, Italy and others need to regain competitiveness and this can only be achieved through lower government incomes (or costs) as lower government effective income drives prices of labour, services and goods down. This is good as lower costs will render Ireland more competitive versus all.
    As well, lower spending forces the State out of sectors in the economy and everyday life where the private and non-for-profit sectors can deliver at lower prices the same services eg., healthcare, education infrastructure, transport.
    Lower income is the fastest way to achieve lower asset prices which will quicken investment in these same assets as yield rise over the cost of investment.
    Less State income will force the slashing of non-value adding intermediation (€13bn a year in quangos!) within the economy thus spurring competition and ultimately increase wellbeing.
    Freed from the above, I can only dream of a State where government solely legislates and mandates certain rights and obligations (education for all to 18 years), primary healthcare provision priced according to income ie., the poorest don’t pay; ease of hiring and firing all employees (public and private) with known and fair termination terms eg., 1 year of work earns 2 months of redundancy; mandatory defined contribution private pensions for all employees and the total ban of defined benefot pensions for all.
    I could go on and on but suffice to say, there is a wonderful New Ireland on the other side of Austerity and one well worth the effort.

    • Adam Byrne

      Will we ever see it in our lifetimes though piombo? It seems highly unlikely to me.

    • NeilW

      ” This is good as lower costs will render Ireland more competitive versus all.”

      Did you bother to read the bit about incomes?

      This belief doesn’t work. Has never worked and never will work.

      It suffers from the same aggregation issue – you can’t get everybody to cut their costs at the same time – primarily because debt contracts don’t suffer the same depreciation.

      There is a reason currency revaluation works, and internal devaluation doesn’t – as can be seen in spades in Greece and Ireland.

      • piombo

        Hi Adam,
        Will we see what I prospect in our lifetimes?
        Yes, and much sooner than we think.
        The State in it’s present form will be forced out of most or all economic activity simply due to price pressures. The private and non-profit sectors in all instances, without exception, beat the State on prices on a like-for-like basis.
        Hi Neil,
        Yes, I bore Incomes in mind, but only the Public Sector ones as the Private sector self-adjusts and does not contribute to the €15 bn annual deficit.
        Given the State is the single largest employer Public sector income reduction is the most important factor in regaining cost competitiveness.
        Aligning public sector incomes (wages, conditions, pensions etc.,) to the private sector will reduce directly the deficit and indirectly drive down house prices and prices for everyday consumption as the public sector employees will have less disposable income to spend on these items.
        The other indirect benefit will be to keep in check private sector incomes and thus a virteous cycle starts for the State in general.
        The same applies to public pensions where there is a a de facto arbitrage in force versus the private sector.
        Public sector incomes for the unemployed, sick, poor working families would be unaffected but these people would benefit directly from the lower prices as mentioned above.
        Mandating higher school leaving ages and setting equitable termination conditions would have secular impacts on the labour market.
        There would be losers (mid and top management in the public service etc.,) but the State would definitely transform itself into the Singapore of Europe and our children would honour our generation’s sacrifice with admiration.

        • Adam Byrne

          I meant the ‘wonderful New Ireland’ piombo. Thanks for the response. Adam.

        • “Given the State is the single largest employer Public sector income reduction is the most important factor in regaining cost competitiveness.
          Aligning public sector incomes (wages, conditions, pensions etc.,) to the private sector will reduce directly the deficit and indirectly drive down house prices and prices for everyday consumption as the public sector employees will have less disposable income to spend on these items.
          The other indirect benefit will be to keep in check private sector incomes and thus a virteous cycle starts for the State in general.
          The same applies to public pensions where there is a a de facto arbitrage in force versus the private sector.”
          There will be national strikes ny the public sector unions at the very mention of such reforms.
          No government will dare implement them.
          Given the number of people affected one way or another it would be signing their own death warrant.
          Perhaps a dictatorship with a strong and loyal army could impose reform of this nature-of course the IMF could dictate terms- if we had our own currency.!

          • bonbon

            Perhaps, hesitatingly, a tentative call for a totalitarian state, then? I see mustaches sprouting!

            Or are you being charmingly, playfully sarcastic?

    • Oisin.Org

      “Ireland, Italy and others need to regain competitiveness and this can only be achieved through lower government incomes (or costs) as lower government effective income drives prices of labour, services and goods down.”

      OR: it can be achieved through a floating currency exchange rate; we have given that up for France and Germany, whose political project – the Euro – caused the credit/property bubble, and which system we are now expected to bailout;

      OR: it can (in Ireland’s case) be achieved by renouncing our socialised promissory notes to bail out the above;

      Or, we could just go along with this simplistic, moralising narrative about good housekeeping that ignores the underlying causes.

    • I like that comment. I ask the question why an Island nation with 230,000 civil servants (am I correct David)is Billions in debt and another Island nation with the same population but with 67,000 civil servants has 38 Billion in the bank. Some severe Government cost cutting is required along, with productive spending.

    • bonbon

      So are you saying the Austerity to save the banks imposed on citizens is legitimate? Just to cut through the jargon, you know. Liberal firing? What about Trade Unions, are they in your cross-hairs too?

      I see this is almost exactly what Monti is doing in Italy.

      The “small government” echo I see here could come from Mit Romney or Ron Paul, with an “austrian School” accent.

      No mention of dealing with the Banks, derivatives, emergency exit from the dying Euro.

      Just to put it in perspective.

      • EMMETTOR

        Thanks for putting it in perspective, bonbon, too much f*cking perspective as the Tap would say. Piombo, you acknowledge DMcW’s attempt to bridge Macroeconomics and Financial Management (although that’s not all he was trying to do I reckon) but most of what you then write seems to indicate that it was a bridge too far for you. Increasing competitiveness, a more efficient Public Service, downward pressure on our cost base, etc, etc, all of these are lovely ideas but NOT RIGHT NOW PLEASE! Our economy has been shot in the head and you are suggesting the cure is to amputate both it’s legs at the knee. Just saying…

  2. gizzy

    I think there is a difference in views between Business views as represented by IBEC and those on the ground with small mid size domestic businesses. But I agree fully when people talk on behalf of business they do see an economy as company p & L and Balance Sheet and that is fundamentally wrong. That is why IBEC have not made a right call any time recently from Benchmarking to now.

    • Bigman1

      Half the country haven’t a clue what this treaty is about and using simple terms like ‘balancing the books’ will appeal to the masses.

  3. Viewsoutside

    The problem to solve is the German politics. Is this likely or even possible?

    • Dorothy Jones

      Good Luck with that one, wouldn’t hold my breath!

      Axel Weber ex-Bundesbank President taught Hans Eichel [prev. Min. of Finance]at Bonn University where Jens Weidmann [Bundesbank President] also studied. Waidmann previously advised Angeka Merkel on Finance. ECB Board of Directors member Joerg Asmussen studied there too; Asmussen negotiated with Christine Lagarde who was mentored by Nicolas Sarkozy. Asmussen also has a close relationship with Ramon Fernandez, Gen. Sec. of the French Treasury and was on the Board of Directors of the ECB where Mario Draghi is now President. Timothy Geithner [US Min. of Finance] and Asmussen are described as ‘Weggefaehrten’, companions.[Might explain why Geithner [bankers take priority over taxpayers] reportedly ‘torpedoed’ the IMF plan to have a haircut on 30€bill of unguaranteed bonds by two-thirds on average as part of Ireland’s bailout.]

  4. Adam Byrne


  5. Deco

    I am begining to think the entire EU is in a longer term Kamikaze drive. Youth unemployment in several countries is reaching critical levels. Especially amongst urban males, who are most liable to wreck things the most.

    The entire policy framework is failing.

    For the sake of comparison, Europe should be looking at how the Asians coped with the 1998 liquidity, asset crash, banking crisis.

    The entire political establishment has contructed a role for itself in protecting those who resource the political system with resources, at the expense of those who resource the state system. The entire system is dysfunctional. We have the Welfare Mamas (to use Max Keiser’s term) of the finance sector looking for more handouts, as shown by the latest “proposals” from the Spanish banking sector. Apparently if we don’t keep bailing out gamblers, we will get sysytem failure. Wake up folks, we already have system failure. Look at the Spanish unemployment rate. That is system failure. And this is bigger than any stiumulus program will ever fix.

    The entire EU intellectual outlook is determined by the thinking that prevailed in a few elite well funded universities in the 1960s. It is completely oblivious to role played by oil with a highly accomodative EROI, in providing for this ever increasing set of demands. It is thinking disconnected from economic reality, coming from a short period in time that was unrealistic in the longer term. We are past cheap oil now. We are dealing with a highly complex system, and the centre of power is incapable of running all that it claims to survey. The system is simply too complex, for the lazy assumptions and the big space occuppied by “ceteris paribas” where they simply refuse. The scale of information flow, makes it impossible to control.

    I reckon that the Yes side will win, and in all probabillity within six months it will have not made any difference. But it enables the Germans to convice themselves that they can turn the EU into a model of probity and economic efficiency, and it enables Brussels to convince itself that national governments are the problem, and not the nonsense factory in Brussels.

    There is nothing that we can do, except run for cover. This situation is a monumental disaster. The EU wanted postive support for the economy, after enlargement so that everybody would have buy-in into the larger Europe, and all it has done is dislodged Club Med in the aftermath of a bubble. It has split Europe. Monumental policy mismanagement. This is what happens when a bureacratic powere structure is aiming for imperial status. They always look to the next acquisition. This is just like business. All sorts of compromises are made. And serious compromises were made with the single currency.

    The word Ephermalization comes to mind. Something keeps growing until it reaches critical mass, and then it has to decline. This is a problem in at EU level, and it is a massive problem at state level, right across Europe. Compare any EU country to Singapore and you realise that Europe is seriously mismatched with what can be achieved.

    Stimulus packages are not going to solve the Spanish unemployment situation, or the Greek state inefficiency problem, or the Irish banking problem, or the Portuguese productivity problem. Stimulus packages will not solve Italy’s demographic problem, or it’s corruption issue. All the stimulus programs will do is convince people that maybe life is not that bad with these problems still existing. It will feel better. But I do not think that they are designed to fix anything.

    Simply but, Europeans are going to have to learn to study better, to work harder, to clean up the corruption, to make the state system efficient, and to be a lot less concerned about lifestyle, and a lot more concerned about longer term sustainability. Europeans are also going to have to learn to be a lot humbler than they have been. And a lot of plentiness in the institutional state of the countries involved is going to have to get removed.

    The problem is that Europe is in denial, and has a political establishment that are living off promises made to entertain this sense of denial. We see this in the level of state borrowing in the EU. This, is occurring at a time of low interest rates, when there should be increased business activity.

    It will get much, much worse before it gets better. all anybody can do is prepare themselves. The French economy is structurally incapable of digesting the loses from the PIGS, therefore there will be no debt writedown like occurred in the Asian tigers in 1998. Stimulus is a way out, based on money printing or borrowing. There are deeper problems that are continually being shoved under the carpet, so that everybody can feel good in their state of intellectual conceit, and so that the level of denial can persist.

    • Adam Byrne

      Excellent article David and excellent article Deco.

      Yours should be published too Deco.

    • Excellent observations Deco


      • Lord Jimbo

        Interesting Article so posting in full.

        Hey, Germany: You Got a Bailout, Too

        In the millions of words written about Europe’s debt crisis, Germany is typically cast as the responsible adult and Greece as the profligate child. Prudent Germany, the narrative goes, is loath to bail out freeloading Greece, which borrowed more than it could afford and now must suffer the consequences.

        Would it surprise you to know that Europe’s taxpayers have provided as much financial support to Germany as they have to Greece? An examination of European money flows and central-bank balance sheets suggests this is so.

        Let’s begin with the observation that irresponsible borrowers can’t exist without irresponsible lenders. Germany’s banks were Greece’s enablers. Thanks partly to lax regulation, German banks built up precarious exposures to Europe’s peripheral countries in the years before the crisis. By December 2009, according to the Bank for International Settlements, German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks’ aggregate capital. In other words, they lent more than they could afford.

        When the European Union and the European Central Bank stepped in to bail out the struggling countries, they made it possible for German banks to bring their money home. As a result, they bailed out Germany’s banks as well as the taxpayers who might otherwise have had to support those banks if the loans weren’t repaid. Unlike much of the aid provided to Greece, the support to Germany’s banks happened automatically, as a function of the currency union’s structure.

        How It Worked
        Here’s how it worked. When German banks pulled money out of Greece, the other national central banks of the euro area collectively offset the outflow with loans to the Greek central bank. These loans appeared on the balance sheet of the Bundesbank, Germany’s central bank, as claims on the rest of the euro area. This mechanism, designed to keep the currency area’s accounts in balance, made it easier for the German banks to exit their positions.
        Now for the tricky part: As opposed to the claims of the private banks, the Bundesbank’s claims were only partly the responsibility of Germany. If Greece reneged on its debt, the losses would be shared among all euro-area countries, according to their shareholding in the ECB. Germany’s stake would be about 28 percent. In short, over the last couple of years, much of the risk sitting on German banks’ balance sheets shifted to the taxpayers of the entire currency union.

        It’s hard to quantify exactly how much Germany has benefited from its European bailout. One indicator would be the amount German banks pulled out of other euro-area countries since the crisis began. According to the BIS, they yanked $353 billion from December 2009 to the end of 2011 (the latest data available). Another would be the increase in the Bundesbank’s claims on other euro-area central banks. That amounts to 466 billion euros ($590 billion) from December 2009 through April 2012, though it would also reflect non-German depositors moving their money into German banks.

        By comparison, Greece has received a total of about 340 billion euros in official loans to recapitalize its banks, replace fleeing capital, restructure its debts and help its government make ends meet. Only about 15 billion euros of that has come directly from Germany. The rest is all from the ECB, the EU and the International Monetary Fund.
        Better Prepared

        Germany’s changing financial exposure has major implications for its role as a leader of Europe’s response to the crisis. Before Germany’s banks pulled back their funds, they stood to lose a ton of money if Greece left the euro. Now any losses will be shared with the taxpayers of the entire euro area — particularly France, whose banks still have a lot of outstanding loans to Greece. Perhaps this is what some German officials mean when they say that the euro area is better prepared for a Greek exit.

        Ultimately, though, the cost of letting Greece go would come home to Germany. If bank runs and market turmoil forced Portugal, Spain, Italy and others out of the euro area as well, the losses could wipe out much of the capital of German banks. Not to mention the longer-term damage the euro breakup would do to the exports that drive Germany’s economy, and the potential demise of a European project designed to prevent a repeat of the horrors of two world wars.

        To prevent such an outcome, with or without Greece, Germany will have to do everything it has so far refused, and more. This would include allowing the ECB to stand behind the debt of sovereigns. The euro area also needs a mechanism that would transfer money to economically troubled countries just as automatically as the region’s payment system bailed out Germany — an element economists have long said is crucial to making the euro area a workable currency union. As we have advocated, a joint unemployment insurance fund could be a first step toward such a fiscal union.

        As German Chancellor Angela Merkel considers the next step in the euro crisis — one that could help the euro area return to growth or, alternatively, risk the survival of the entire currency union — she should keep in mind that her country is indebted to the euro system as much as Greece is.

        Read more opinion online from Bloomberg View. Subscribe to receive a daily e-mail highlighting new View columns, editorials and op-ed articles.

        • It seems we are all in this together.!
          Nevertheless if Germany can impose budgetary discipline on the irresponsible hooligan nations, is that a bad thing.?

          • EMMETTOR

            Germany imposing discipline? As much as we’re all Europeans and all that crap, the Germans are unique in Europe, not just for their efficiency but how they have, in the past, imposed this on others: ruthlessly, murderously, inhumanly, disastrously. Of course, I shouldn’t raise the spectre of totalitarianism, that’s ancient history, right?

    • bonbon

      To put that in perspective, British Intelligence :


      MAY 26, (LPAC)–British intelligence’s Ambrose Evans Pritchard, currently perched as international business editor of the Daily Telegraph, minced no words on Friday, May 25, in denouncing the failed European Union heads of state summit May 23 in Brussels, where the main event was a public rupture between Germany and France, a rupture that was celebrated in the City of London, even as the entire European system comes crashing down. The anticipated dispute between Merkel and Hollande over the new French President’s insistence on Eurobonds was denounced in Germany’s {Bild Zeitung}, which accused Hollande of “arrogance” and noted the end of the Franco-German condominium. “We once had Merkozy. Merkhollande does not exist.” Hollande was accused of blocking with Italy’s Monti and Spain’s Rajoy against Germany, and in the end, the entire meeting degenerated into nothing. Evans-Pritchard offered his own insane solution to the European financial and monetary disintegration, one that he has repeatedly demanded: hyperinflate faster and on a grander scale:

      “The ECB could halt the crisis immediately if it was willing to act as a genuine central bank, taking the risk of sovereign default in Italy and Spain off the table entirely. This would mean massive bond purchases, accepting the risk on itw own balance sheet rather than shuffling it off onto banks and further entwining the lethal nexus of weak lenders and weak states, each propping the other up. That would require a fresh EU treaty to change the ECB’s mandate. No such discussion was held in Brussels this week.”


      Thank You, Deco. Once again you point out the Big Picture and the difficulties involved in redrawing it.

  6. Deco

    The EU is trying to regulate a sense of responsibility into the subjects, while at the same time promising the subjects that Europe will take responsibility, and at the same time making sure that the EU will never be made responsible.

    The word that strikes fear into the EU, from top to bottom -> responsibility. Plenty of response, and no understanding of responsibility. Everybody is convinced that somebody else will accept responsibility. This is adolescent, and it at the heart of the Europe’s intellectual culture of denial. Construct loads of fairytales, with fairytale endings and then believe in it. It feels great until you wake up some day in a disaster. And then you try and bill somebody else.

    • cooldude

      Excellent points Deco. One of the real reasons the Yes side will probably win is because we have two thirds of our population living off or being paid by the state. Even if the bank debt was defaulted on (and of course it should be) we would still have a 10 billion gap between state spending and income. This money has to be borrowed even though borrowing to pay for day to day expenses is simply robbing money from our future generations. This is why all these Croke Park crowd will vote Yes because they would rather rob their perks from future generations than face up to the reality that we simply cannot afford the ‘public service” we have in place and we need to trim it by at least one third. No these people want us to give away our sovereignty and heap debt onto future generations so they can enjoy their perks and their tax free early retirement packages.

      • Reality Check

        Spot on Cooldude, The double standards of the “Vichy” cosseted sector makes me sick.

      • Absolutely sacrifice future sovereignty and suffer the indignity of a permanent imposition of assumed private debt for cheap short term loans for a further temporary reprieve from the reality of obvious arithmetic.

    • bonbon

      Interesting the use of “subjects”, as in British subjects of the Crown. We are citizens of nation states, not subjects. That is the core conflict with the EU, an ancient imperial resurgence v. modern nation-state industrial economics.

      Only one can survive. Compromise is not possible.

  7. mjballina

    Excellent article. Especially in the light of this organised campaign by the government to round up establishment figures from the world of business (and worse still – sports people,musicians and celebrities) under this “Alliance for Ireland” banner urging us to vote for this new treaty – something they cant possibly comprehend.

  8. Reality Check

    +1 Adam re Deco – He should have his own newspaper column.
    Deco’s comments are the first ones I read on this site.

  9. gizzy

    At the heart of this matter is the mistaken belief that balancing budgets equals structural change. It is a real accountants approach and hence is obviously the advise being proffered by the big four.

    However anyone that has ever worked in change management will know you need to carry out your structural changes first and then look to balance your budgets over the mid to long term.

    If Spain were for instance to achieve audit book compliance without any impact on the huge unemployment, it just creates social upheavel and the certainty that the books are only balanced in the short term.

    Our politicians have confusing the fiscal impact for structural change. It is merely putting a financial framework around a seriously flawed European Economy.

    A bit like writing a safety manual for a car missing breakpads and accelerator with a faulty gear box and clutch. The car will probably go nowhere but if it does move it will crash but so what the manufacturer will tell you it is not their fault you had the safety manual.

    • bonbon

      I like that, a safety manual for an inherently faulty auto. Very good! And all ISO certified!

      “Three wheels on my wagon, and still rolling along”, if you have heard the song.

  10. Reality Check

    No offence Gizzy, but “Change management” sounds like one those awful buzzwords spouted by someone infused with (to paraphrase Deco) “The Morally and intellectually bankrupt IRISH concept of management.
    No thanks.

    • gizzy

      No offence taken. The Irish concept of management has no connection with change either at government, regulatory, semi state and very little in the private sector. Just because you can apply the term buzz word to something does not mean it does not have value.

      We need radical change and we need it managed.

      What we get instead of change management is something like Croke Park.

      • bonbon

        “Change Management” comes from the Schumpeter theory of management, Economist magazine core curriculum.

        You see we have to destroy an economy before it can grow. Innovation can only spring from “creative destruction”, which needs change management.

        Obvious to most MBA’s and business mmt? No?
        Ask leading questions at business lunches.

        Of course change management in technical engineering company activity is quite another useful process.

        This highlights again DMcW’s point about economics v. business.

  11. joe hack

    Housekeeper economics might work for business and housekeepers and like housekeepers businesses want a full larder before they holiday Angela Markel needs to holiday with next’s month mortgage money otherwise business owners in the west will not be able to buy the hottest BMW and Angela’s larder will empty but austerity is relative thing and if it continues the Chinese will be seeing lots of made in Europe (Germany ) stickers on their goods this may be a subtext of German austerity and like the Chinese now we may not be able to afford our own goods. David! Henry ford was a unique business man – not a house keeper -he set out to pay those that worked for him enough money so that the people that worked at fords could buy their own products. IBEC and most Irish businesses do the opposite and Anglia Markel is the queen of housekeepers she makes Thatcher look like a sugar Daddy, where is Helmut Kohl when we need him they should never have taken down that wall as following leaders Germany don’t to see Europe as Kohl did?

  12. Reality Check

    David said “A recession is actually too much saving. I know it sounds strange, but that’s what it is”.

    I don’t accept that, doesn’t increased savings lead to more Capital formation for business?
    Isn’t savings just delayed spending?

    • Reality Check,

      In normal circumstances yes you are right, but in a liquidity trap – which is what we are experiencing right now – savings get trapped in banking system and not used.



      • michaelcoughlan


        Yes and once again you were ahead of the posse when you offered the solution to Ireland’s liquidity trap when you introduced a local currency into Kilkenny during the Kilkecnomics festival.

        Couldn’t something similar be done on a national scale? I am not sure how it can be done but surely if you did it in Kilkenny it could be done nationally before every last person of talent has been driven out? And where will they go;

        Where have we seen that before?

        It must be obvious to you David we will only save ourselves at this stage. The “insiders” on the Titanic kept back the majority on the ship with locked gates and pistols until the end even though they knew the truth!

        Surely your ten year old deserves a better future than being a debt slave for a bank? I know my kids do!


        See my apologetic response to your reply to my post on the previous article.

  13. joe hack

    The good news is that a precedent has been set in the Lisbon treaty so if a yes vote is carried we can all ways have a second referendum the instability treaty Mark 2

    • Beaver

      I prefer the debt spiral treaty when venting my spleen.

      • EMMETTOR

        Perhaps then I’m the only one who thinks of it as a Fiscal Union, it’s clearly not an “EU Treaty”. We are in an Economic union (The EU) a Monetary union (the Eurozone) and soon we will be in a Fiscal Union (the FU!). Some countries will maintain a level of independence because each union is a sub-set of the previous one, as listed, but those who are members of all three will pretty much cease to exist as States, as far as I can see, with most the power of government residing in a body that is certainly not a state, but a sort of supra-national cabal/cadre/organisation. Is there a word for such a thing?

  14. stevedublin

    I’m fairly sure debt should be the numerator and income the denominator, you have it the other way around.
    To express debt as a % of income it should be (Debt/Income) X 100, not (Income/Debt)!
    Your point is valid though.

    “So if the numerator (income) is getting smaller faster than the debt (the denominator), the fraction is getting bigger and you are missing your targets.”
    1. if the numerator gets smaller faster than denominator, the fraction get smaller, not bigger.
    2. you should have debt as numerator and income as denominator, which would validate your point that reducing income causes the fraction to increase.

  15. donalmc

    The treaty is not a final step. It is part of the process of baby steps to full fiscal union.

  16. Mark B

    Excellent piece David.

    A much more technical look at this issue covered in this paper that makes very solid point. I don’t want to be too cruel but I suspect you were watching the Frontline the other night with some emminent business people.

    “…What Ireland has not signed up to however, is a regime whereby the overall net benefit of a single currency entity flows disproportionately within that entity. Once this sort of “rent-seeking” begins within the EZ, smaller nations like Ireland will always suffer at the hands of economically more powerful countries like Germany or France.”

    It seems to me that their is no union now – it is a game of rentseeking as described above where the Germans have the strongest hand and the concept of a “union” is utterly contrived at this stage!

  17. Cormac Leech

    good article but i think the numerator and denominator in the debt/gdp discussion got mixed up!

  18. NeilW

    “A recession is actually too much saving. I know it sounds strange, but that’s what it is”

    Can we get that in flashing neon lights floating across every parliament in Europe?

  19. Adelaide

    Who was the hysterical woman on Vincent Browne last night? Joan Burton’s sister?

    The calibre of Irish public debate is truly frightening and the clips featuring Enda Kenny were “OMG!”. I still can not fathom why the people voted for him.
    Well, I do. But that is equally frightening.

  20. StephenKenny

    I have difficulties with this line or argument.
    The argument is that it is up to the state, and people, to maintain demand during downturns, but increasing it’s levels of debt.

    This is full of all sorts of implied assumptions. For a start, since it never comes with any form of qualification, it assumes that it will work for all economies, what ever their situation.

    For an economy that has been increasing it’s total debt levels, every year, for decades, it is unlikely that simply increasing them further will have any different effect. This really is an instance of Einstein’s (?) definition of insanity: Doing the same thing over and over again, expecting a different outcome.

    For an economy that has not been increasing it’s total debt for decades, and is simply overheating ( ), then sustaining demand for a couple of years during the resultant downturn may work.

    Japan went into recession in 1990, and has been ‘sustaining demand’ through spectacular borrowing and spending, ever since (22 years). The high speed rail network is now so comprehensive that they have stations in places where the longterm regional plans intend for towns to be built sometime in the next 50 years. All Japan has succeeded in doing is, in effect, to impoverish future generations, for the sake of keeping things OK today.

    Businessmen who make hammers may see everything as nails, but economists tend to see things like modelled constructs, and at least nails are sometimes useful.

  21. Bigman1

    Hello David. What would happen if we vote no to the Treaty and we need funding from the ESM at the end of the year. Do you see the EU panicking and renegotiating our debt in order to facilitate a second vote for yes before the year end? Is this the game of poker you are referring to?

    • bonbon

      The EU is panicking now – see Spain. How it will look “at the end of the year” is not what you imagine.

      If they try a second vote again, how many banks will have imploded between? Dare to guess?

  22. garrettthegood

    Hi David,

    There is possibly a total Irish savings sum of 100-300 billion euro (from what I hear). How can this be mobilised to change the nonsense we’re mired in? GF

    • Winter

      Here’s how –

      A fund which gives savers the opportunity to transfer a portion of their savings into and in return they receive a tax benefit which is financially more rewarding to them than the Interest they would otherwise receive on their savings.
      The positive effect this would have on the economy is enormous and immediate, providing cautious citizens with an increase in their income at no cost to either the state or employers. This increase in national income will boost spending and increase consumer confidence. The Government will use this fund to invest in large scale infrastructural projects providing the necessary stimulus to the economy WITHOUT INCURRING ANY NEW DEBT.
      Check it out (link above) and if you like this idea and want to support it, please follow us on Twitter @TheESF.

  23. paddythepig

    A few years ago, I traded in the auld banger for a new Renault during the scrappage scheme.

    David seems to be saying that it would be good for the economy if I, and others like me, used whatever money I’d saved since then, to trade in the Renault, and get a brand new 2012 plate. If we all were to do it, the savings glut would be freed up, and the economy would take off.

    Thing is, when I bought the Renault, where did the money go? Well apart from the dealers and importers cut, the rest of the money went off to France.

    Discretionary items like this are mostly imported to Ireland.

    And indeed, why would we even want to go back to the throw-it-away mentality of yesteryear? The car is running perfectly fine. There is no need to change it.

    I could throw out all my clothes, and buy a new wardrobe. Where would all that money go? Not to Ireland.

    I could ditch my watch, and buy a new one. Where would that money go? Switzerland? Germany? Japan? The US? Certainly not Ireland.

    I could buy twice as many spuds as usual, and try to eat them, but I’d get indigestion. That money would stay in Ireland. Still what would the farmer who benefited do with the extra cash?

    Maybe he’d buy a new car.

    Back to the drawing board David.

    • joe hack

      You make valid point, the environmentalist in agrees too-we buy manufactured stuff which exports our cash with this cash we import rubbish we are then charged levies for the for dumping the man made rubbish but we are part of a system and in this system we export crap luckily at the moment we export more crap than we import so someone in a crap importing country has to pay for the dumping of our made crap- we do this so money changes hands and the incentive is- look at me I have a shiny new car, I have arrived and I am enlightened because I recycle the crap I did not really need. Noonan is not an environmentalist he told last year to go and by crap it seems a lot of people are buying the crap that is been dished out

    • Paddy,

      I am talking here about the EU eceonomy which is rather closed.



      • David,
        The mess that is the EMU and the Euro is obviously beyond dispute, however as Irish Citizens we have little impact on how that all may transpire. While there are many legitimate reasons to vote no, there are obviously some legitimate reasons to vote yes, and surely in suggesting we vote no, you ought to at least acknowledge the price of that, which could be significant.

        For example, if Greece leaves the Euro prospective foreign investment in Ireland will certainly prefer a yes vote (although the stability thereto could be easily undermined by wider EU events) and as a relatively tiny economy, enough foreign investment in Ireland alone could put us a considerable way towards a stable economic footing in a way that is not possible for the larger PIIGS.
        A No vote makes a lot of sense and is arguably a far more dignified position in the long run considering the unsustainable imposition of private debt on our state, and the fact our elected government have never properly asserted the position of the Irish people on that to the powers in Europe, yet it surely has to be acknowledged that it may not be without its cost.

        • bonbon

          Germany delayed its ESM ratification because of the Irish vote and of course Greece. Also Holland’s insistence on Eurobonds has ruptured the condominium.

          So we do have impact in the current accelerating plunge of the transatlantic region. Dublin should use this.

          Anyway events in Spain will overtake all this calculating. And again Ireland will have even more impact.
          Vote NO. Clinging to a ship in the maelstrom is suicide as any Viking knew.

          • EMMETTOR

            Seems a pretty good analogy: if you thing the EU/EZ is all gonna turn out ok in the short-to medium term, vote YES, if you think the whole thing is off to hell in a hand-cart, vote NO. By the way, anyone thinking of voting yes, have a close look at Spain before you do so.

      • paddythepig

        Hi David,

        So if everyone with savings in Europe went and spend it all on getting a newer version of stuff they already have, how is that good for anyone?

        It would be better for Europe and the world, if those savings were kept in situ, until they could be invested in new products and services for which there is a genuine demand, that either genuinely need to be replaced, or do not currently exist.


        • Paddy,

          I agree with you in general, in normal times, but this liquidity trap we are in changes the prognosis.



        • joe hack

          Paddy, I like the way you appear to thinking maybe because I think similarly but I have not found an answer to how and why it is we make things to make money. Manufacturing things that are built to live only short lives is not healthy, when IKEA opened here people queued for miles to buy that bedside lamp that they really needed but they have most likely gone and dumped it and bought a new one since, how did we manage before IKEA and flat pack. There are great advantages learned in manufacturing rubbish one of the more important is transfer of knowledge to manufactures in health and research and most likely the company making a stent or syringe is making parts for IKEA or Intel for example.

          Do you think a managed tax on savings makes sense —-money is worthless unless it moves?

          • Hi Joe/Paddy,

            I think the answer to why products are becoming less durable can be traced to our growing use of digital money.

            As recently at the 60s over a fifth of the money supply in much of Europe existed as cash. The rest existed as bank-account money which could only function as money through the use of a chequebook.

            Cash is created debt-free by the state and spend into circulation whereas bank-account money is created by banks whenever they process a loan. In general every euro in a bank account has a corresponding debt somewhere in the economy.

            Since the 60s the amount of cash in the economy has dwindled to just 3% and with the invention of computers all 97% of the remainder is no longer restricted to the limitation of the chequebook but can be transferred in many ways.

            The economy currently runs with basically every unit of currency having a matching debt and it never used to.

            There are many consequences of the digital money phenomenon. For example, since the 60s business has become more and more about the bottom line, households require two incomes to function well, every economy tries to be a net exporter, houses take longer and longer to buy, The Dept of Finance invents new taxes because the ability to print money is negligible in the face of so much digital money etc.

            And finally products become less durable since any money that industries have to produce stuff comes with an equal debt. And any money that households have to purchase stuff also comes with an equal debt. Hence the push towards producing cheap products and the apparent desirability of the free market to welcome these flimsy products.

            In solving the debt crisis we’ll most likely give Central Banks the ability to create digital money for their Governments to replace the ability to print cash which no longer provides enough debt-free money for the economy to function well.

            And more of us would be able to afford great thick mahogany tables. Better still, the economy wouldn’t depend on it to maintain stability.

          • paddythepig

            I wouldn’t tax savings any more than it already is taxed. Spending for the sake of it is not the answer. Far better to release savings when there is something of value to invest them in.

  24. StephenKenny

    There are of course situations in which borrow and spend would work: For example, if we copied the post war German or Japanese model of directed development.

    Another would be to copy the ideas behind the results of the US ‘Sputnik scare’ ( – the funding of science and engineering students and courses. As a direct result, by the early-mid 1960s the US was full of recently graduates in bewildering array of state-of-the-art science and engineering disciplines.

    Both of these used carrot and stick approaches. In modern terms this would include taxing property speculation to death, making emigration for recent graduates more expensive (US subsidies were partially repayable if you didn’t work in the US), and so on.

  25. jonathan

    Thank you David +1, Deco +1, and Lord Jimbo +1 for light on the subject of income, spending and macroeconomics.

    There are several elements that need resolution.

    1 – Government Spending to be not greater than Government Income.
    2 – The Irish Currency to have the ability to regulate itself

    1 – Spending less than you earn, it seems right on a microeconomic level. It helps me at the end of my month. But I am sure I understand the consequences of taking such a guideline to the Government finances? If the Minister for Finance set out a Budget (and stuck to it) to reach a situation of less spending than income, what impacts would it have in the country>

    2 – The New Punt. Another addition, would local currencies like the Swiss WIR be useful? 2 billion annually of the WIR is used

  26. Winter

    It is possible to achieve the correct levels of saving and spending in an economy at the same time. It is possible to stimulate the economy without creating any new debt. It is possible to shrink the deficit and balance the books without austerity. It is possible to have a sustainable economic model which ends the cycle of booms and busts, of stimulus and then austerity. What is required is creative thinking, not creative accounting.
    Here’s how –

    Follow us on Twitter @TheESF

  27. While the fact is clear that cutting government spending is further damaging our economy, the fact is not clear that doing so is worse than increasing borrowing to increase government spending. We have a very inefficient use of public money in this country and it is not sustainable, any effort to cut our cloth to fit our table is necessary and welcome so long as the most vulnerable are the most protected from such an exercise. The negative aggregate effect of course cannot be denied so would it be best to cut current spending to balance the books asap but use the borrowed money (that would have been spent on current expenditure in excess of income) to invest in labour intensive stimulus and rather than cut current expenditure gradually each year as is proposed by the Irish government, just invest what would be each years excess expenditure in labour intensive projects. This way you bring the fiscal stability necessary for government spending but preserve aggregate demand in the economy overall by balancing the rapid spending cut with an equal amount of stimulus investment. Also anyone of the thousands currently overpaid directly or indirectly by the state have to deal with their own fiscal reality and learn that the only entitlement to a large salary is that you can legitimately create something of equal value in return.

  28. Alot of “business” people in Ireland realise that their business does not have much of a chance without government payola and although preaching fiscal rectitude are really motivate by the immediate benefit of government fiscal excess. Prices in many markets in which the state is a large customer are artificially suspended as a result of government excess, the sustainable business’s are those who are not dependent directly or indirectly on government excess, to be fair Michael O’leary is operating one and yet he appears to advocate a yes vote.

  29. So what is the source of all the income and spending? How does Ireland or the EU create money, this video made me think about it.

    - A small portion by the Treasury (3%)
    - By far the majority by Commercial Banks (97%)

    • Indeed Jonathan,

      Banks create the vast majority of the money supply in the economy. They do this when they process a loan and so all money created this way, or 97% of the money supply, has a corresponding debt.

      To me, this is obviously the root cause of the debt crisis and no matter what you do to encourage spending or encourage politicians to come up with treaties there’s no getting away from that fact that almost every euro has a corresponding debt.

  30. Nouveau Pauvre

    Here is a video explaining some small print in the ESM that none of the YES crowd are mentioning. On #VINB last night Ganley tried to explain to the YES people that there will not be enough money in the ESM to save all the Banks in Europe ( the fund starts at €700b of which we have to fork out €11b based on our population and then the ESM will have the LEGAL POWER to force all the governments in Europe to TOP UP (No Limit) the fund ANYTIME the fund managers(immune from prosecution)decide and we have the luxury of having 7 DAYS to pay up!

    On a Lighter Note I loved this video but WARNING some Colourful language involved

  31. “Let’s just address the most basic proposition of the business people about the fiscal deficit and what the country needs to do to right itself. The favourite line of all business people is that the Government needs to balance its books”

    Confusing and lacking punch sir. Took three readings to get the point. You are maybe tired but your senitments are honourable. I would put it like this …

    Let’s home in on the wisdom of ‘business people’ offering ‘budgetary advice’ to the Irish government in the aftermath of the upcoming Stability (Austerity) Treaty referendum. Running a country involves far more than simply ‘balancng the books’. It’s not that simple and business people should mind their own business and stop pretending that they care about democracy and the interests of the suffering majority. We are in the final stage of shock therapy because we are brainwashed into thinking that business people and the markets are god. They are anything but. Fuck them and their docile fantasies. They are not intelligent by any means and are pretty effing stupid when you think about it. It takes more that a sharp tie, starched collar and bit of leg or make up to make someone worth listening to. It is the art of seduction and tv will only make you more stupid

    Their interests are completely at odds with those of anyone who works for a living wage. No brainer. They should be watching their cash flow, tracking their ledgers and creating jobs rather that swaggering into tv studios to smugly preach to the rest of humanity. Their track record is appalling and no-one with any self respect would want to walk into their den for a job interview and be reduced to begging. They can kiss my pale and freckly Scottish arse. Just my personal opinion for what it’s worth but I was born with a questioning and contrary nature. It’s Celtic genes they tell me. Damn those Celts

    If something smells rotten then it is rotten and there are plenty of rotten business people in Ireland and anyone who describes themselves as a business person is dodgy by definition. Alarm bells should be going off somewhere. The Frontline is like the Jerry Springer of current affairs and the Monday show was pathetic. Kenny is a crude wide boy joker who should have been put out to stud years ago along with the Byrne fella. Why people swallow this crap is a good question

    If they were all so smart they would have solved the unemployment problem. Let’s question whether these celebrity business ‘gurus’ have any substance or are just the next wave of chancers blowing hot air up our caves. You know the old crack … ‘now is a great time to buy’. Nothing has changed. Yeah yeah

  32. Tony

    The one thing that bothers me about this whole fiscal treaty is this. Spending other peoples money is what politicians do. It’s all they know… well, that and teaching kids. Redistributing our money is how they survive in their careers. And now they’re asking us to limit their spending. It’s all very strange.

  33. Original-Ed

    “If we can just balance our books, through cutting spending and raising taxes, all would be grand. Let’s just examine whether this is actually true.”

    I don’t know what business circle you’re associated with, but most business people that I know are fully aware that balancing the books is not an answer to our problems.

    All are fully aware of the concept of anti-cyclical investment or stimulus as it’s commonly called. The problem is that there is already a stimulus in play, in the form of borrowings for excessive public sector pay, but most of it is finding its way into bank saving accounts and is simply being used to bolster their hopeless position while doing nothing for the general economy.

    Business people believe that the stimulus should be injected into the private sector and not lavished on the risk adverse.

    • Original Ed,

      Maybe I was being a bit sloppy. I am like you a business person so I know what you mean. The main point of my article was that we are in a liquidity trap and while this is the case, more saving will cause the economy to collapse.

      All the best


  34. [...] a budget deficit is not necessarily a bad thing and, as David McWilliams points out in this piece: if everyone and everything is balancing their budget at the same time, that’s a recipe for [...]

  35. Jimmy R

    Couldn’t leave this article without posting.

    The idea that business thinking doesn’t go with macroeconomic thinking is something I have been saying (in my own head) for the last few years. In recessions, businesses cut wages, cut jobs, cut costs, all in the name of getting back on good terms. For a single business, that is fine in that it works for them to keep the business afloat.

    What the business people seem to ignore is that, this action of “austerity” on the business, while it greatly improves efficiency, leaves former workers looking for jobs elsewhere and a lower total wage bill.

    Scale that up to a country, and all austerity means, is that while the books may be balanced after a while, in the meantime, there is huge unemployment, and as David has said, huge cuts in people’s incomes.

    The business benefits because they aren’t on the hook for social welfare payments until the sacked workers find new jobs, and they do not directly feel the effects of unemployment. By this I mean that, in a society/country, higher unemployment leads to higher inequality, higher crime rates, lower standard of living, worse mental health, worse public services etc etc etc. A business is not responsible for this when they let people go, governments are!

    So to have business people telling us that as a country we need to cut to balance the books, it is much more detrimental to us to go down this path. We have seen in Greece, France and even here in Ireland, the increase in popularity of “extreme” right and left wing groups. It doesn’t take a genius to find a point in history books when these kinds of groups got in power and the effects that followed.

    So when politicians tell us of the “unknowables” if we vote no, and asking where we’ll get the money to pay the bills etc, I would ask them about the “unknowables” of policies that if continued will tear the fabric of society and leave scars that may never heal.

    At the end of the day, we’re not a business! We’re a society, start treating us like one!

    • StephenKenny

      The question of deciding *what* jobs, is the problem.

      We’ve had 15-20 years of evidence of what happens when you make money easy, and cheap.

      For any person, business, region, country, or union, the problem of external trade produce the forces that drive economies up or down. Just as a person needs to have things to trade so as to be able to obtain they things they want and need (money for food, for example), so does a business/region/country/union.

      The only reason that it seems to be different for large geographical areas is that they generally have the ability to tax the richer and spend on the poorer. Borrowing, for a country or union, is merely delayed taxation.

      The argument is now that the PIIGS will simply need continuous transfer payments from Germany. Essentially, the Germans will create, innovate, and produce, while the PIGS will sell each other property and mortgages, and use the so-called ‘profits’ to buy German products.

      We are reaching a point where there seems to be general agreement that designing and building the next generation of electric engines, is of no more value to our civilisation than running an estate agency.

      To see what happens when a business fails to innovate and create, just look at Kodak.

      The problem with the PIGS is not that their commercial sectors need to be ‘sustained’ through these hard times, but that they need to be completely replaced by businesses that actually add lasting value, and add lasting value that other people want.

      This means dumping the debt, radical tax changes to favour useful business over the legions of zero-sum middlemen, and us all realising that we have to actually do something, and not just sit around waiting for someone to press a magic button, and pull a magic lever.

      • StephenKenny

        and if you honestly think that the German’s are going to go for this – irrespective of what they say this week, or this month, or this year – then I’ve got this really nice bridge that would look just great in your back garden………..

  36. “my income is the font of my savings”

    As in beer font. Or are we talking Times New Roman or Arial bold

    I prefer the thought of a beer font filling my jerry can until the tap runs well dry pal

    I’m going back to Houston …

    • But if we are talking about a font with a barometer attached then we are talking serious physics. I reckon someone has visited a brewery recently. Does anyone know the best type of glue for repairing shoes?

  37. Joe Higgins TD Socialist Party/United Left Alliance said:

    “Its a threat a day now by the Government and proponents of the ‘Yes’ Campaign for the Austerity Treaty.

    The Minister for Finance using an opinion of the NTMA about not being able to borrow in the money markets and by business organisation IBEC threatening higher electricity and gas bills are the two latest threats. It is reprehensible that the right of the Irish people to vote freely is traduced in such a crude manner.

    As I said in the Dail this morning on the Order of Business, just about the only threat not yet made is exile to Siberia!

    Press reports today say that German Parlementarians are refusing to vote through the Austerity Treaty tomorrow, insisting on putting it back to the Autumn until they see any concrete proposals emerge for growth, investment and job creation.

    By voting ‘No’ the Irish people can intensify the growing opposition across Europe to the devastation caused by austerity and help build a movement for a fundamental change in policy”

    • bonbon

      Looks like Merkel’s crowd are watching Dublin, and very nervously.

      So vote NO, and changes that Enda and the gang who are too dim to see, will occur.

  38. molly

    How much money is wasted in this country.
    How much money are we over charged every day .
    How many are over payed,now add all this to who ruined this country FF,LAB FG these three should unite into one party.
    I left out the greens because they are the only ones to be got rid of so far.
    When I read the above I feel sick ,if this was the uk how many. Would be in prison by now..we might be in recession but rip of Ireland is alive and well.

  39. bonbon

    European situation spinning out of control: Why we need “Plan B” now. Money will disappear so we need a Credit System. Monetarism will actually vanish. The “Austrians” are really agitated.

    Of course DMcW is right, but when does anyone try Kamikazi? When certain defeat is inevitable as the historic reference clearly shows. Remember the films of pilots taking a last Saki, never to be seen again? Sepuku is a better motif – rip ones self apart to prove loyalty to the Samurai. Roman “falling on the sword pales by comparison.

    I think Ireland does not have this tradition – some may have imported it. But the “system” is definitely finished, totally. Sepuku is the least problem, Obama wants thermonuclear annihilation, Blair’s campaign management, sorry, crisis management.

  40. cooldude

    David your article is classical Keynesian thinking but I am afraid it is too late in this cycle of excessive debt to apply any more stimulus. When debt levels are low stimulus does have a strong effect on an economy but with the current levels of unsustainable debt, not just in Europe, but throughout the world such stimulus will have little if any effect. We are gone well past the stage of a “liquidity trap” and are now at the stage of an “insolvency trap” which no amount of new liquidity is going to solve. The main European banks are all technically insolvent with average leverage levels of 25-1 on assets that are losing value such as PIIGS bonds. Most European countries have such high levels of debt they would be declared insolvent if they were private companies.They are propping each other up like two drunks trying to stumble home after a rough night. I’m afraid we have come to the end game in this great experiment in Keynesian economics because the new stimulus is no longer creating any growth as debt saturation has sapped both countries and their citizens. The patient is actually dying yet we still prescribe the same medicine of more liquidity and near zero interest rates. It is my view that this is the inevitable outcome of forty years of unbaked paper money combined with the asset bubbles that this system of economics inevitably creates with it’s constant deliberate debasement of money which is very cleverly done so most people actually think it is a good idea. Keynes himself was a very clever man and he knew well that his system would eventually blow up and the ponzi scheme of modern monetary policy would be revealed. Here is a quote from him from Economic Consequences of the Peace (p 239-240) which he wrote in 1920 where he clearly acknowledges the worthlessness of his system of unbacked paper money.
    “A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover at least a part of it’s former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money must have stood for, has been dissipated once and for all.
    If however, a government refrains from regulations and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the FRAUD upon the public can be concealed no longer”

    This is the stage we are now at with basic commodities such as oil and food shooting up in price and bank runs beginning across Europe. We are now heading into the next stage of the crisis which will be a currency crisis as people begin to realize that their money has been completely debased. The only protection as individuals is to exchange a portion of your savings for hard assets that cannot be debased such as silver and gold.

    • Tony Brogan

      Cooldude, you are correct. Each dollar of stimulas added to the US economy now has a negative effect. That is the economy weakens rather than strenghtens.

      The banks won’t save us, the politicians won’t save us so it is time to be self reliant and save oneself.

      James Turk thinks as you do.

    • bonbon

      Keynes’s General Theory was first published in Germany under the Hitler regime – no one else would touch it. Keynes’s preface, in German, easily googled, is extremely important to read- only a “total state” would be capable of implementing his program. The is the Keynes who tried to introduce the “Bancor” world currency, blocked by FDR and Dexter White.

      Ok, well and good.

      Now for the so-called “alternative” Hayek’s monetarism. Totally deregulated markets, money as personal property, all state intervention forbidden?
      Well Hayek himself declared at the London School of Economics, easily tracked down, that his entire inspiration is from Bernard Mandeville’s treatise “Fable of the Bees, the Grumbling Hive” better known by its original title “Public Virtue from Privete Vice”. Why is this?
      Well public good can only appear from instinct of free players dominated by lusts etc…. Dare any state to take their toys away. Out of this, in an unknowable way (because it is so complex, you see) SPONTANEOUS economic good will emerge!

      So the entire argument is base on a totally instinctual belief.

      I am quoting Austrian school luminaries – we can argue about thiis.

      Now it gets interesting. This is Dionyssian, a belief in pure irationalty, a denial of creative reason, that which makes us human. But this is exactly Nietzsche!

      So we discover 2 “alternative” economic-financial camps, looking for support, and both lead to totalitarianism, the removal of elected government, and everyone for himself! We had this before!

  41. tony_murphy

    “A recession is actually too much saving. I know it sounds strange, but that’s what it is.”

    well a boom is too much debt! enslavement by the globalist banksters.

    The world economy is being destroyed by design by the elites.

    VOTE NO as I believe David is also advocating (thanks!), but not for the same reason

    Too many people are dependent on “money” magic-ed into existence out of thin air by the globalist bankers. They are Satanic, and voting Yes is making a pact with the devil. It’s time for people to stand on their own 2 feet and wean themselves of the bankers.

    Go an buy an ounce of physical silver and hit the bankers where it hurts most

    Watch this youtube video which discusses the ESM treaty and what’s hidden in plain view – most people would rather be told lies by RTE and the mainstream media

    Here is the treaty for proof!

    Get it out to everyone

  42. joe hack

    Buying metal or stones is buying things and the money spent to buy stuff goes where. For the average person gold is not useful practical try go to a local shop to buy a pint of milk with a ounce gold in your leather satchel (man bag) but yes I think that if money is used for transactions then that money should exist and even when borrowing money to pay for a HOME that money should exist and should be seen and physical handed to the vendor, speculation can then not exist.
    The money we owe never existed and nor did the money we borrowed it was based on what something might be worth in the future but when the future came c2007 the predictors as always were wrong hence the run on the bank at northern rock. Therefore the problem is one of trust (liquidity- balance) we need confidence in all countries worldwide so that those who have savings spend, money the paper stuff is a promise, a note for work done, we manufacture, make stuff, build stuff to pass money .. The greedier people who have the paper money need confidence so that they will spend it. They need to believe they can again bet on the future and make more money liquid money, move money ………………..

    • cooldude

      Hi Joe, you are correct when you say an ounce of gold in your man bag is not a very convenient medium of exchange. It never was and was never used for this purpose because it is so rare and expensive. However a debit card based system transferring fractions of a gram of gold from one person’s account to another is not only practical it is already in existence and used by In reality however it is the store of value advantage that gold and silver have over constantly debased paper money which is their real advantage. They hold their purchasing power while no unbacked paper money system has ever managed to do this. This is all deliberate as we now have inflation targets and ridiculously low interest rates which are designed to prohibit savings and force people into risky assets such as the stock market and real estate. They know that by saving in modern currencies their purchasing power is being constantly eroded so they engage in risky speculations and more asset bubbles are created. This is how this whole Keynesian system works. It creates asset bubbles through excess liquidity and negative real interest rates.
      So in summary spend your paper money wisely and keep the economy chugging along. As David says this is essential and we have to support our local retailers and businesses. However if you want to preserve the purchasing power of your savings the only way to do this is to switch your long term savings out of the insolvent banking system and into the forms of money which have fulfilled this requirement over thousands of years and are doing it even more so today. In my view, going on historical price ratios, silver is better value than gold right now although exposure to both is optimum.

  43. A recession is too much saving as David puts it.

    This is true. It can feel like there’s less money during a recession because people save rather than spend.

    However, as well as this there actually is less money during a recession.

    The reason for this is once you repay a loan to a bank the money doesn’t exist anymore. It may sound strange but as you repay your mortgage, your current account balance goes down, and no-one else’s goes up. In this way banks delete money through loan repayments. Hence reducing debts to the banks may sound like a reasonable thing to do during a debt crisis but it reduces the money supply by the same amount.

    To resolve the debt crisis we could declare all bank-account money as legal tender. One implication of this would be that banks could no longer destroy it and so at least the existing money supply is protected.

    • StephenKenny

      Let’s just look at this: For the sake of simplicity, let’s say there are no outstanding mortgages at all. Then Mr A borrows €500k to buy a house. This means that the previous owner, Mr B, receives €500k.
      Let us say that it’s a 10 year mortgage, and since it’s the Charity Bank inc., there is no interest at all.
      Nothing else happens during the 10 years except for Mr A’s repayments.
      At the end of 10 years Mr A owns a house and has no debt, and Mr B still has €500k.

      This makes perfect sense, as Mr A now has a €500k asset in place of the €500k that he has paid, over the 10 years.

      Of course, in real life, Mr A would be homeless, so he in fact goes out and buys a house. He could buy it for cash, but as we all know that’s not too smart, so he takes out a Charity Bank mortgage to buy a new place for €500k, from Mr C.
      As any multilevel marketing expert will tell you, quite soon about one third of the global population will have a €500k mortgage, €500k in cash, and a nice house.

      The thing about mortgages that people fail to see properly, is that their biggest mode of wealth growth is that of an enforced savings scheme: Most people would aim ‘never miss a payment’, but would very happily spend all of last years savings on a new car.

      So back to the house: A builder, maybe 10 or 100 years ago, made a turn on building it, an estate agent makes a turn on selling it, and other than that, there’s no marginal macroeconomic benefit of buying over renting. So the repayments are just ‘savings’. Of course, they are savings that gives the bank a little turn every month (mortgage interest). So, all these mortgages produce no more than the paradox of thrift, with just the bank making a turn.

      Welcome to the Celtic Tiger.

      If people *really* meant all this stuff about ‘spending not saving’ they’d be making owing a property burdensome.

      • StephenKenny

        Just to finish it off, what this tells us is what we all know: ‘Property’, except for development, isn’t a wealth generator at all.

        Increasing prices merely takes wealth away from tomorrows buyers, forcing upon them and their time, a hugely increased “paradox of thrift”.

      • StephenKenny

        that should be “owning a property burdensome”.

      • Hi Stephen,

        Just to confirm my original point, if Mr. A borrows 500k from charity bank inc. it’s not a loan of pre-existent money. The bank creates the money for the loan. This is where money comes from in modern times and it’s the reason why every euro has a corresponding debt.

        The economy now has 500k more than it had. Over the years Mr. A will collect 500k from circulation and give it to the banks to clear his debt. His bank account will reduce with each payment, no-one else’s will increase and the money won’t exist anymore.

        Banks delete all but the interest they receive for loan repayments. This is why there’s less money during a recession. As well as this people save existing money during a recession so it can feel like there’s far less in circulation as David rightly pointed out.

        I don’t think the answer is to spend for the sake of it but instead we should declare digital money as legal tender and this would stop banks from deleting it.

        • bonbon

          Are you referring to M1, M2, or M3? And there is absolutely no mention of derivatives, not money, untill monetized, and on a separate book. JPM is sitting on $70 trillion of nominal iou’s. These will be declared void with Glass-Steagall, deleted.

          Looking at the LTCM crash, caused by digital leveraging. If that was not “legal” why did Sir Alan have to get the FED to bailout over 1 emergency weekend?

          We must not honor these losses. Direct intervention must take place. Universal banking model is over.

          • cooldude

            For once Bonbon I actually agree with you. JPM’s derivative exposure is $70 trillion PLUS and their losses on this reckless, off balance sheet gambling will be horrendous. I would reckon at least 5% given their huge exposure to european bonds and interest rate variations. This is complete and utter reckless gambling with no downside to the gamblers because they think they are too big to be allowed to fail. This is not a zero sum game , which they like to describe it as. If their counterparty goes broke, and lets face it most of them are fairly close to it, they have no one to claim off. Just to emphasize how ridiculously large this position is global GDP comes in around $46 trillion. Total bank exposure to these financial weapons of mass destruction is over $700 trillion. Don’t think this is some grey area which has no relevance to the real world. Bank of America recently put their derivative counterparts ahead of their depositors if anything went wrong. The one thing about this whole central bank, commercial bank cartel is that none of the inner circle ever go broke no matter how much they lose. They simply get bailed out by the tax payers , like you and me, all around the world and they continue to spread their poisonous financial engineering on more and more countries. The bird who ran JPM’s failed book, Ina Drew I think was her mane, collected $15 million in bonuses the previous year. When they win they win big , when they lose suckers like us bail them out. It happened here and is happening all over the world. I wouldn’t trust these wankers with a lot of money.

          • bonbon

            I got a quote from the banker cartel below. They are worried!

          • Adam Byrne

            The bird! Haha nice one, now I know why they call you cooldude, cooldude!

          • Hi Bonbon,

            All three measurements increase after a bank processes a loan. And all three decrease when banks accept a loan repayment. They effectively delete loan repayments.

            Apart from the money supply there are several assets in the economy, the value of which fluctuate. These assets include derivatives and a company may have derivative contracts worth several trillion as assets. However if the entire money supply is only a fraction of these total contracts then they can never be exchanged for money in their entirety. This could be become a problem for whoever owns these assets alright.

            If we got a sound source of money issued debt-free at source and maintained adequate for trading we’d help solve the excessive derivatives issue since the economy would have a much smaller business cycle, if any.

  44. Alan42

    I don’t think that the fiscal treaty matters much in the grand scale of the European crisis . How much longer can the Euro hold together ?

    When Greece goes or is kicked out the markets attention will turn to Spain , Italy , Portugal and Ireland . France is not looking to hot either .

    They say Spain to both too big to fail and too big to save .
    There is a scarey piece in that CNN article about How Spain was second only to the US in Securitizating debt ? Who owns that debt now ?

    More on Spain and Spanish and Greek bank runs . You won’t hear any of this in the Irish media to contain the ol’ contagion . Media silence and Fata Cheese etc

    You would need your head examined to have money in either a Greek or a Spanish bank . People are not taking their money out because they are afraid of the bank going pop it is because they are afraid that they will wake upthe next day with a new devalued currency .

    Can’t say that I would sleep soundly at night with my cash in a Irish bank ( easy for me to say as I don’t live in Europe , but still .)

    The Greek crisis is not just a Greek problem or even a European problem . It is a global problem . How much exposure do US banks or other banks around the world to europe ? How much of Jp Morgans ‘ 2 billion ‘ loss is related to Europe ?

    Are we on the brink of GFC 2 ?

  45. Oisin.Org

    “Just because you run a business does not mean you understand how the economy works.”

    Or you may understand how the political economy works, all too well. Business at the top of the pyramid, is very different from business at street level.

    I heard the head of the Dublin Chamber of Commerce debate the head of the Irish Commercial Tenants Association recently. John Corcoran of ICTA is a shop keeper on the ground floor of the real economy of wealth production, and delivery of services. The other fellow was a director of Greencore.

    Greencore: formerly the Irish Sugar Company, which unlike in France, was handed the politically allocated and created sugar quotas on a plate, and which liquidated said quotas and the industry with it. There were big ideas about big property developments on the sites that used to be sugar depots in developed areas.

    All of that was part-and-parcel of the ECB created Finance, Insurance and Real Estate bubble in Ireland, and all those people are still part and parcel of the public-private sector managerial conveyor belt; no one loyal to the system will go unrewarded.

  46. bonbon

    Perhaps Enda and the boys have an inkling of this and have gone “kamikaze” spare. A “treaty” will not stop this, like all the bailouts so far.

    The Euro Is Crumbling; British Empire Prepares War-Style Measures

    May 24, 2012 (LPAC)–While the G-8 meeting on May 18 19 and the Eurozone heads-of-state summit on May 23 were piously promising to prevent Greece from exiting the euro-zone, quiet war-style preparations were already underway by the British to deal with the exact opposite situation: the financial tidal wave that will be unleashed across Europe when Greece is either forced, or chooses, to quit the euro. On Monday, May 21, a teleconference meeting of the European Working Group (EWG), the so-called experts who work for euro zone finance ministers, instructed member nations to begin making plans for a Greek exit from the Euro, and to calculate costs that each country would have to absorb on its own.

    The open planning for a Greek exit, or “Grexit,” as the idiots in the financial world have taken to calling it, combined with runs on both Greek and Spanish banks, led to flight out of the euro currency itself yesterday. Today’s {Financial Times} reports that “asset managers and pension funds were yesterday cutting their euro exposure and moving into dollars,” according to a Citibank report. “It looks like real panic, but it could get worse,” a manager for the AXA insurance giant told the {Financial Times}, “unless policy makers act decisively and massively”– meaning immense new bank bailouts that would unleash uncontrolled hyperinflation. Julian Jessop, chief global economist at London-based Capital Economics, is quoted in the {FT} piece adding: “Whatever the reasons it has held up so far, the euro does now finally seem to be crumbling.”

    If Greece does exit the euro, there would be a 46-hour window of opportunity to stop the entire bankrupt world system from melting down, according to British “war-gaming” exercises reported by Bloomberg today. Although couched in terms of what Greece would have to do, the exercise clearly is talking about the whole global system. Among the experts cited is Italy’s Lorenzo Bini Smaghi, until recently a member of the ECB’s executive board, and a top British asset.

    “Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro,” the Bloomberg piece begins. “That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed from the end of trading in New York on a Friday, to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro exit scenarios from 21 economists, analysts and academics. Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government…”

  47. bonbon

    Landbank CEO: “The Euro Was a Big Mistake From The Start”

    May 24, 2012 (EIRNS)–In an interview with the Sueddeutsche Zeitung today, Ludwig Poullain (92), eminence grise of traditional banking in Germany and former CEO of Westdeutsche Landesbank, said the question is not even whether the collapse of the euro can no longer be prevented: “Rather, was the introduction of the euro a not big mistake? After all, it was designed as a factor of integration. And now, it has had the exact opposite effect. Is there a European identity any longer?”

    Poullain adds that he not only thinks the euro was unnecessary, “it also was detrimental,” and he also thinks that “the feelings of the Greeks toward us Germans would be less aggravated, had they been denied the first bailout in May 2010, and the country would have quit the euro then.”

    Poullain also implied that Germany would benefit from a collapse of the euro: Granted, the return to the d mark would lead to a drastic revaluation of the German currency, but German industry would be able to absorb it as it has done before, with the revaluations in the old Bretton Woods system, “before the float,” in August 1971. Even then, the “stability apostles” who argued against revaluations, were proven wrong, Poullain says.

  48. crazy cat

    Here is the latest article from Frédéric Lordon who belongs to a group in France know as the ‘ aghast economists’,:

    It’s in French and again Google translation is hopeless.

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