May 28, 2012

The Game is Only Beginning

Posted in Sunday Business Post · 69 comments ·
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In football, there is the following expression: he reads the game well. All good players read the game well. The same goes for rugby. Today, you will hear commentators say about Brian O’Driscoll that he reads the game.
This means that Drico can see where the game is going, where the next play is and how to either deal with it or seize the opportunity. In soccer, the player who reads the game knows where the ball is going next. They used to say this of Roy Keane. It is the same for all major sports.

Many years ago, I spent a summer working in Canada, where the national hero at the time was Wayne Gretzky, the brilliant ice hockey player. Gretzky was so good that, when he retired, his number – 99 – was retired from all North American professional hockey teams. His most famous quote followed a simple question from a commentator about why he was so successful.
Gretzky didn’t even think, he just responded as if it were the most simple thing in the world: “I skate to where the puck is going, not where it’s been.”

Our politicians and those who negotiate for us, whoever they are, would do well to listen to the sportsmen. Head to where the ball is going, not where it’s been.

The European financial and economic ball is moving and the fiscal treaty is all about where the ball has been. By focusing on this treaty, we are like footballers worried about where the ball is now, rather than where is it going next.

Where is the eurozone going next? Well, either it’s going to break up or it will head towards further fiscal integration.
Of the two, fiscal integration is a bigger threat to Ireland. Why? Because our low tax rate goes with it. Make no mistake. The price of fiscal integration has to be tax harmonisation. That’s the way it works.

We can kiss goodbye to the one part of this economy that is truly globally competitive.

Forget the workforce and all that stuff. The reason companies are here and not in Belgium or the Netherlands is because we give them a reason to be here – tax. The new French administration is already targeting it. Wait until we sign up now and see where this is leading us.

If I were a foreign investor, I would be much more worried about Ireland being subsumed into a great European tax bracket than anything else. Maybe the investors who have signed up this year are betting that when push comes to shove, the Irish will opt out the day the Europeans insist on tax harmonisation. I agree with them.

But if this is our position, then we should be preparing for it because this is where the ball is going.
However, the ball will not travel smoothly from A to B.

In contrast, the past week has heightened the sense that the euro will break apart. The focus of attention right now is Spain and Bankia, Spain’s Anglo, which is following the same pattern as our banks, but in a much shorter time frame. Every time the bank ‘fesses up, its losses are greater than it had admitted before. We have seen this pattern.

The core of the problem, which is sometimes overlooked, was highlighted in the Financial Times last week by the brilliant writer Gillian Tett. She looked at the huge interbank loans that were the result of the first ten years of the euro. Banks all over Europe loaned to other parts of Europe and other countries.

When the currency was not in doubt, the people who manage risk at banks (I know, don’t take these guys too seriously) were happy to have a liability in Germany and an asset in Italy.

So, if a German bank lent to an Italian bank, the asset was in Italy and the liability in Germany. But now, in what is called asset liability matching, or ALM, banks want to match their asset and liabilities in the same country. So if a bank has loans in Italy , it will want to also have its liabilities in Italy because it is worried about the euro falling apart.

Now no one wants to lend cross-border – the only way that banks can square these positions is by deleveraging in the periphery. This means squeezing the economies more. This leads to less and less credit and more and more unemployment. The IMF estimates that, over the next 18 months, this will happen to the tune of $2.6 trillion. They will take $2.6 trillion out of the European economy.
This is a huge amount of money. Let’s just get a handle on how big it is for us, the citizens, trying to get finance. It is 26 followed by eleven zeros. If you were to spend $1,000,000 a day it would take you 7,123 years to spend $2.6 trillion. That is what this means. At today’s exchange rate of the euro to the dollar of $1.25, it would take 5,698 years. So it’s a lot of bread.
As a good proportion of this money will flow out of the periphery, the rate of unemployment will rise again and again. This is when, eventually, the lender of last resort will be Germany and the periphery of Europe will be one large economic zone that is sinking.

This is when the Germans have to properly consider the notion of “peripheraid”. Peripheraid is where the eurozone is going.
Peripheraid is the ongoing infusion of German cash to the south and the west. It will have to work the same way as the Italian state has operated in the past 50 years where the north subsidises the south of Italy. The German people, at some stage, will say enough.

Last weekend, I was in Munich. I spoke to lots of Germans. Bavaria is the richest part of Germany. Unemployment is below 3 per cent. The people have no idea what is going on in the rest of Europe because their circumstances are so different. However, when asked about the euro and the ongoing crises, they responded that they wouldn’t pay indefinitely for the rest. They understood that they were huge beneficiaries from the euro, but they also understood that they are now Europe’s ATM machine.
This is where the ball is going. Break-up is the most likely solution and some sort of two-speed Europe will emerge. The fiscal treaty is already redundant. No peripheral country will make these targets in the face of the huge deleveraging and, in the end, we will break our own laws.

We are in a game of poker where everyone has their price. The thing about poker is you have two minutes to figure out who the fool at the table is. If you haven’t figured it out in two minutes, the fool is you. Why fold now, when the game is only beginning?

See Punk Economics 4 on You Tube for an alternative view of the fiscal treaty.


  1. Dorothy Jones

    Yep….I am in Bonn this week. That’s how Germany sees it. Udo Lindenberg wants his savings back.

    Jens Weidmann, head of the Bundesbank shot down European Project Bonds that Hollande has been pushing with all his might to fund infrastructure projects as part of his “growth” policies.

    “This debate irritates me a bit,” Weidmann said. “Every month, ingenious ideas to counteract the crisis surge out of nowhere before they disappear a month later. Now it’s project bonds…. It’s not a lack of infrastructure that is slowing down growth in these countries.”

    Caveat Emptor folks when voting.

  2. Just TWO Minutes Only !

    Where are My Pockets ?

  3. The Spanish authorities appear to be hoping that their bank bailout liabilities will be shared by the ECB and not all imposed on the sovereign

    http://www.guardian.co.uk/business/2012/may/27/spain-bankia-bailout-plan-ecb

    Spain has still a far healthier deficit rate than Ireland albeit with higher unemployment and yet it wisely realises that it simply can’t afford to independently fund its deficits and assume all the private bank date resultant from private speculation. As the wider tectonic forces in Europe are moving yes or no in Ireland is unlikely to have any real impact on our future in the EU and the cost of such membership. It would be inaccurate to suggest there could be no cost to a no vote, there could be but What a yes vote will do is democratically legitimize all that private debt imposed on the Irish state when Spain with a lower deficit appears to be saying NO to such an imposition. Enda Kenny posed a question in todays Irish Times on how a no vote could give any advantage to the issue of bank debt, again it would be misleading to suggest a no vote will immediately lead to a deal on bank debt, it won’t but to answer Enda kenny’s questioning the obvious advantage is that in saying no to the legitimacy of its imposition by agreeing to repay it back, its a tremendous advantage rather than saying yes to repaying it back and removing any room for further negotiation.

  4. The fact that the government has such a sinister and snide response to any legitimate grounds for voting no, choosing to attack the advocate rather than their argument on virtually all occasions does not inspire any confidence in the validity of their view. That bank debt can not be legitimately accepted in the interests of the future of this state. Its imposition to the the extent and by the means of its incursion were unjust a resort to basis arithmetic dictates it is equally unsustainable. The markets did that arithmetic a long time ago,and only for the people who imposed it upon us agreed to refinance us we would either have defaulted on it or justice would prevail and a more equitable resolution would be found.

  5. Deco

    Spain is continuing to unravel. The imbalances in the Spanish banking sector, the wholescale misallocation of resources is now being apparent.

    Spain is Ireland’s banking crisis all over again. Cronyism. Bertie Factor politicians who knew how to buy votes. Noonan factor politicians who knew how to over promise and under-derliver. Waste. Quangos. Jobs for insiders. Funny banks. Mad bankers. Compromised regulators. And it all had the full blessing of the Brussels nonsense factory.

    Brussels, and the ECB has been busy. Here is a banking crisis that we made earlier. We made it years ago, with cheap interest rates, and full capital mobility.

    The Brussels Empire has designed it’s own demise.

    • Dorothy Jones

      I cannot understand why the extent of rot in the Spanish banks, which is known, has been left unaddressed for such a long period of time.

      The ESM or any of these constructs are completely out of line with the magnitude of debt.

      Greek sideshow is a taster for what has yet to manifest itself.

      Fortsetzung Folgt…..

      • Deco

        It suggests that there was an agreement from the ECB downwards not to talk about the issue. Including the EU commission, deinitely the previous Spanish government, probably this one as well, regulators, regional governments, banks, the media, etc…

        It is a case of “too big to bail”. Way too big to bail.

        So they try and use Ireland as a test case to prove a theory of EU exceptionalism that they clobbered together. Basically, Ireland will turn a corner, and will prove that the EU’s model is working.

        Similar to what Washington DC are attempting in Iraq, in a way.

        Confounding the sceptics.

        • Dorothy Jones

          Deco: Yes, Spain is way too big to bail. But, the Germans do not play by the rules, including the Foreign Office in Berlin in reation to payment of monies due. I think I should submit a letter to the papers today based on my own experience; the public should at least be aware that they are being asked to vote for a system over which they will have no control. Best Dorothy

        • Ireland has been turning corners for 4 years.

          We are in denial like we have been since 1916. It’s a confidence trick.

    • molly

      Spain is really in a very bad state and you are right be interesting to see how much they can cover up .

      • molly

        Spain won’t be like the Irish government and kennys speech about how we Irish will pay our debts even if it kills us ,the cheek of kenny I don’t sorry can’t pay other people’s debts.
        Wait and see Spain will get a write down and stay in the euro.
        Watch this space.

        • Even if it kills us

          It is already killing us. Literally

        • Watching this space Molly. I am interested in ALL governments and what they are covering up. I feel it is my duty. Our own government especially. We are being flanneled by merchants of Voodoo Politics who are shitting us. I am sure of it. I suspect they are colluding with the Chicago Boys and loving every minute of this experiment on The Irish Patient

          I admire steely resolve as long the goal is crystal clear and Economics and Politics reminds me of Software Development. It is great to be challeneged when you are in no doubt about what needs to be done and most of all why it needs to be done. If you are are working on a project that does not meet this simple criteria then you are either in denial or happy picking up paychecks for churning our sloppy work

          If something is worth doing it is best to do it properly and taking a pride in it. Anyone who who has done a craft trade knows this but the decision makers of today have no pride because their ‘work’ is not really work at all

          Projects fail because people forget the original brief and end up chasing shadows. The project is delivered late and is out of spec. The Euro project is out of spec because it is not doing what it was designed to do. The design was flawed from the beginning and doomed to failure. For Software Developers this is the ultimate risk and why good ones devote around 40% of their time making sure the customer’s requirements are bang on target. It costs less in the long term because you will have a happy customer and not be spending your leisure time backpedalling and chasing ghosts

          Large projects become unmanageable thanks to internal politics and development processes that are too complicated and slow. We say ‘ok, screw this and lets develop a working process that allows us to change track at a moments notice and make changes to keep the requirements on track. Instead of being straight jacketed in old working practices we radically change our thinking to cope with fast change when required. This method is known as Agile Development and is how small professional web developers operate in the current climate. Adapt or die. Just like life actually

          If someone is not willing to adapt then they know where to find the door. In the world of the small entrepreneur this is possible but not in the megalithic departments of the state apparatus

          Countries that are in trouble are akin to large projects that have gone bad. They are like monolithic software systems all trying to talk to each other while the developers are using modern tools and programming practices but have to deal with lots of legacy code written 30 years ago in languages that are arcane and which no-one is skilled in writing. Yet these arcane systems are often vital to the daily business operations of banks and other large operation where real time transactions are happening 24/7. These arcane systems are like the Jackie Healey Raes of our times

          Sometimes it is better to back to the customer (the people) and say to them: tell me all about your ideal system and what it should do. What would it look like and how would it work?

          Even if the tools are not currently available lets just fire on with the exercise and get a clear sight of our hypothetical goal. Once the goal is clear you then assess the tools at your disposal and see if they are up to the job

          If not we say ‘this is unacceptable’ and this thing has to be built even if it kills us. On time (earlier preferrably), on budget (with a decent profit to yourself of course) and in exceeding the original expectations of the customer

          Of course Politicians and Ecomonists are not aware of the organisation and discipline required to be a top techie. Yet they have the balls to call themselves ‘technocrats’. They are nothing more than chancers and wide boys in my opinion

          They could not organise a piss up in a brewery

  6. Deco

    We have a political class, and a media class who never seen where the puck was going.

    Maybe it was because they were paid to not see where it was going.

    Well, in any case if any of you trusted the mainstream in Ireland, you are now well and truly thumped by the establishment. The bankers and the developers have the money somewhere hidden. It did not just disappear. Multiple accounts. Just look at the crooks in NAMA. So many of them buying back the property that there were not able to fund with loan repayments.

    That line from Leonard Cohen, about the game being rigged comes to mind. That is the way the system works. A strong regulatory framework, designed explicitly so that the rich don’t become bocome poor, and so that the poor don’t become rich. The regulators playing golf with the bankers. Loads of programs to encourage the poor to actively prop up the property market, at price levels that they canot fund sustainably. Bailouts for the rich. Taxes for the shrinking middle class.

    You have to follow the advice of Mr. Gretsky. The mainstream media will provide you with advice that will serve “our advertising sponsors”. “Our advertising sponsors” are in control of the media message.

  7. Philip

    David’s article summarises thus: Ireland with its tax advantages and own currency at a safe distance from Europe OR Ireland as a sub state of Germany under German rules or worse as the worst part of a 2 speed Europe all bowing to German Rules.

    To be honest, there are a lot of things I’d like to become more teutonic around here – from a distance, having the vorsprung durch tecnik approach to life looks great until you realise that Germany has its inefficiencies and incompentcies by the bucketload. Germany is not flexible. Will never be flexible and does not know how to be flexible. You are streamed into a class and way of living more or less from birth.

    I am saddened that Europe has become polarised and that the synergies of nations is falling apart by the day. I am sad too that some of the socialist agendas did not rub off in Ireland becasue in the end, they really turned out so expensive and anti-commercial and in turn … unsustainable. I do wish we had France’s health system but I can see that taking a hit as they try desperately to take us and the rest of the periphery to maintain such a system…this actually is all that is happening to Greece and indeed Spain…the money that Germany needs to sustain its old electorate is being pulled from young before they are allowed to flourish.

    We need to stay to hell back from this as much as possible in whatever way we can. Europe has lost faith in the future. All I see are 50-70 year old gits (I being one) getting in the way of a young workforce and their dreams and aspirations.

    • joe hack

      I LIKE this in the Facebook way, but don’t worry old git this not so old git is not in favour of involuntary euthanasia and maybe its time the aspirations of the younger gits should be less about the self. I do think that some day we will have to comprise a debate on euthanasia and maybe the Chinese got it backwards with their one child policy. Oh! I wonder will my age group be the first to sign up to one old git policy and maybe I will be used for human or animal feed “Soylent Green”

    • Deco

      A recent trend is emerging in the Labour Market in the US.

      People over 50 are finding it easier to get work that young people. It used to be in the US that once you passed age 50, you were for the scrap heap.

      Now adults over 50 are getting jobs, and beating young people.

      Adults over 50 present many advantages to employers. They are much better at punctuality. They don’t have one day flu. The spend very little time on the phone. They tend to have a very good undesratnding of the customer. In some cases, they have better physical fitness. They are less like to “do drugs”. They are better at communication (huh ?). They stay calm under pressure. They tend to have a more positive, more genial nature. They understand team work, and they don’t assume it something on TV. They are appreciate the job, and are not using it to get to something more befitting their status.

      I suppose it will not be long until you see the same thing here ?

      Ageism – it is not what you think…

      • Arnold Clark, a large car dealer in Glasgow gets around 2000 letters each year for their apprencticeship intake

        According to the HR manager 85% of applicants are unemployable

        Employers want people who are reliable and older people are more punctual and reliable than younger people. It’s a fact of life

        You would never see a 25 year old in charge of the Glasgow to London train. It is all guys in their 50s who have been brought up on discipline, punctuality and a sense of responsibility.

    • dwalsh

      I think European socialism was very successful until the neo-liberal ideologues began to systematically undermine its functionality and destroy its financial basis.

      Look at Harney…in my opinion she stayed on in health not to improve the national system, but to prepare it for privatisation; which necessitated making sure it was inefficient and as expensive as possible. That’s how they prepare a public service for privatisation.

  8. joe hack

    Wrong David, better to buy the lock for the stable door when the horse has bolted than to get a new horse and loose that horse too.

    I am assuming you are advocating a no vote but I am not aware if you have made this clear by actually saying that you are voting against this treaty. I know that you are in the broadcast business and taking sides may not be a good career move but this is a referendum not an affiliation to a political party.

    In the past 30 years or so I have always voted no to the EEC/EU and will continue to do so but since we are in this EU dictatorship this treaty makes sense that is if the euro still exists and if the horse comes home it will be safer stable and governments like the ones that are elected here will not find it so easy to buy votes in the future with likes of lower taxes. I will be again voting No but not for any of the reasons you have outlined above because if we remain in the EEC/EU or whatever else it may morph into this treaty would make logical sense but yes, it should have come in with the euro but better to buy a lock now than lose another horse later. I want the Irish pound back I want Ireland to build its own nation society we have never had enough time to try to be successful in our own right so I am hoping that this EU/Ireland incorporated falls we can be a successful nation in our own right instead of selling ourselves and begging for hangouts. When I was a younger people I knew saved and borrowed to buy a home recently they have borrowed to buy an investments how sad a nation of greedy people we have become.
    When the dust settles and we know what the assets in each euro country is worth it is only then that we will know how much each country owes each country that is the process that is at play now.

  9. bonbon

    BANKIA BANKRUPTCY BANKRUPTS SPANISH GOVERNMENT BAILOUT FUND

    May 27 (LPAC)–To ward off formal bankruptcy, recently nationalized Bankia, Spain’s fourth largest bank with 10 million clients and 20,000 workers, was just promised an additional 19 billion euro bailout by the Spanish government, bringing its total bailout (so far) to 23.5 billion. That amount, incidentally, is four times the size of the government’s annual budget for scientific research.

    But there’s a minor glitch: The Spanish government’s bank bailout fund that was established to handle such contingencies, the FROB, doesn’t have the money. After all its earlier bailouts, the FROB now has a grand total of 5.4 billion in its coffers, of which 1 billion is already committed to the Banco de Valencia. So it is short a mere 14.6 billion. Oops.

    The last thing the Spanish government wants to do at this point is to have the FROB try to borrow more money on the international markets, because they fear a total failure, which would force the entire bailout of the Spanish banks onto EU funds–which means Spain would immediately be subject to the Greek treatment.

    So, instead, the Spanish government has decided to bail out Bankia with 19 billion euros in {government bonds}, which Bankia can then use as capital assets. This is backdoor money printing by another name. And the whole sham will blow up in the government’s face the second Bankia needs to make those bonds liquid… if not earlier.

    It turns out that the Spanish government has been planning for this move for many weeks, but that the issue was called by the Bankia blowout. In fact, the government believes it can get away with issuing {up to 60 billion euros} in such funny money, to recapitalize the entire Spanish banking sector.

    As for Bankia itself, it turns out that the 19 billion gun-to-the-head demand it made on the Spanish government, comes from the fact that the bank discovered that it actually had 13 billion euros more in toxic assets than it had previously realized/admitted, 9.7 billion of which is in the real estate sector. So that now brings the total bad debt on Bankia’s books to 40 billion euros.

    • cooldude

      These 19 billion in government bonds will be used by Bankia to get cash off the ECB. This is the new game in town as the ECB are accepting all sorts of dodgy assets and paying 100% on them. They are turning into a European bad bank which will accept all sorts of junk to keep the ponzi scheme afloat. There will be further LTRO and QE schemes as the only thing that matters is to keep the whole mess from collapsing while they get on with further centalization. As they have the ability to digitally create unlimited amounts of unbacked money there is no such thing as too big to bail. Nobody will be allowed to fail. This will have massive consequences on the purchasing power of the Euro which will lose value. All currencies will be debased simultaneously so this loss will be mainly reflected in hard assets that cannot be debased such as oil, gold and silver.

  10. wills

    This is a cover-up.

    The banking system used the euro to bastardize the fractional reserve banking ratios and cream the CDS instrument innovation in a gargantuan ponzi scam.

    Anything else like what Tett writes on is hiding the simple truth of it.

  11. bonbon

    EUROPEANS DEVELOPING `PLAN B’ FOR CRASH OF EURO

    May 27 (LPAC)–European governments and financial institutions are now openly acknowledging that they are, indeed, putting in place Plan B options for the disintegration of the euro system. In an interview with the Sunday Telegraph, Lloyds of London’s CEO, Richard Ward, said bluntly, “I’m quite worried about Europe. With all the concerns around the eurozone at the moment, we’ve got to be careful doing business in Europe and there are a lot of question marks over writing business in the future in euros. I don’t think that if Greece exited the euro it would lead to the collapse of the eurozone, but what we need to do is prepare for that eventuality.”

    Ward acknowledged that Lloyds was working, along with others in the City, on contingency plans. “We’ve got multi-currency functionality and we would switch to multi-currency settlement if the Greeks abandoned the euro and started using the drachma again.”

    Another large underwriter of European euro-denominated debt, the Franco-German firm Euler Hermes, has indicated that it may abandon writing credit default swap insurance on Greek debt denominated in euros. A spokesman for the company told the Sunday Telegraph,

    “The outcome of the new elections in June remains highly uncertain. Consequently, the situation is further deteriorating. The risk of Greece exiting the eurozone has been revived.”

    Swiss Central Bank chief Thomas Jordan also admitted on Sunday that his government is drawing up an action plan in the event of a collapse of the euro.

    The pileup of crises continued unabated into the weekend (see separate slug on the continuing Spanish crisis). The Sunday Telegraph also reported that former Greek Prime Minister Lucas Papademos wrote a confidential memorandum to Greek President Carolos Papoulias on May 11, confirming that Greece will run out of cash by the end of June, unless the EFSF and IMF loans are delivered on time. The availability of funds in the Greek government will be reduced gradually from around 3.8 billion euro on May 11 to about 700 million euro on June 18, and from June 20 will enter negative territory at the level of around 1 billion euro. Without the bailout funds, Greece will default and leave the euro. The crisis will peak as Greek voters go to the polls and another effort is launched to create a new government.

  12. Adam Byrne

    subscribe.

  13. dwalsh

    Hi coldblow

    re a reply you made to my comment in the previous blog

    Minimising the influence of the media and the significance of whom it serves is to miss a lot…IMO

    My references to the human species in my posts is because I view what is unfolding as a planetary crisis generated by our species.

    • coldblow

      Hi dwalsh

      I think the point I was making was that attributing a dysfunctional media to control by wealthy ‘dark’ elements only gives part of the picture. That’s certainlyk not to dismiss it – Blair was shown the other night making just this point and I think criticism of New Labour consistently missed the point that they were at the mercy of the tabloids. The other part of the picture I was trying to convey was that the press don’t need to be in thrall to sinister dark forces to be useless or destructive – I imagine Karen Coleman’s article would have been no different had her newspaper been operated by a charitable organization run by (transparently selected) benign elves who can only think good thoughts. The thing is that the Commentariat (and half the population) seem to have arrived under their own steam to a broad meeting of minds with Murdoch et al without any evidence of coercion. That I can so easily imagine her writing moralizing opinion pieces of her own about the dangerous sinister forces behind the press seems to support my position. It’s all Good and Evil isn’t it?

  14. dwalsh

    It’s interesting to note that at all times economists and most citizens assume that the current system of governments borrowing money at interest from private banks and other financial institutions on the so-called ‘free-market’ is the natural way to finance the state.

    Remember, the banks are bankrupt…so where does that leave us?

    Consider Draghi’s munificence to the sum of 1 trillion Euros of cheap (1%) credit to the European zombie banks; and ask how is this supposed to help the European national economies.

    This is how it works:
    1. the banks are bankrupt
    2. the central bank loans them money at minimal interest
    (1% in Europe; 0% in the USA)
    3. the banks then loan the money to governments (by buying bonds).

    Where does the money in the central bank come from?
    It is invented….created out of thin air as credit/debt.
    What is the basis of its value…or what is the basis of the power of the ECB to create the credit/debt?

    Answer: the future wealth and taxability of European citizens…us in other words.

    So money is created by the central bank on the basis of our future work and productivity and given at minimal interest to banks who then loan it back to us at higher rates of interest.

    If that is not crazy, I dont know what is.

    • Hi dwalsh,

      It is true that the ECB can create money through making accounting entries in bank accounts.

      The fact that the ECB creating a trillion euro was such an extraordinary event probably made you wonder who creates euros in the normal run of things, if not the ECB.

      It is the commercial banks which create euros by crediting the borrower’s account when they process loans. This is the source of the debt crisis and indeed many of our social problems.

      I’m not sure if you’re aware but banks also delete money as a loan repayment is processed and so reducing our debts reduces the money supply by the same amount. This is why there is less money during a recession. It is pretty crazy alright.

      One solution to the crisis would be to declare all bank-account money as legal tender and this would allow the Central Banks to create debt-free digital money as well as cash for their Governments.

      • dwalsh

        Hi Paul Ferguson

        I dont get what you write about banks deleting money. This sounds unlikely to me. They give out virtual money and take in real money…that is how I understood it.

        Can you say more about this deleting?

        IMO since the ultimate guarantor of the monetary system is the citizens and the nation; the central bank should be under national control – not private control.

        • Hi dwalsh,

          I’ve just come from a meeting with Constantin Gurdiev in which I tried to explain this so it is fresh in my head.

          Probably the best way to demonstrate how money doesn’t exist after a loan repayment is accepted is to follow the loan process through the banks’ balance sheet.

          First of all when banks process loans they have to meet various solvency, liquidity and reserve requirements. Once a loan gets approval the bank creates the money for the loan by typing a higher bank balance for the borrower.

          The balance in your bank account is considered a liability of the bank because technically it’s a promise to repay you cash at some point. When banks make loans they create additional deposits for those that have borrowed and so the banks record the money they create for lending as a liability of the bank.

          The debtor’s promise to repay becomes a new asset of the bank and so the banks’ assets and liabilities stay in line with each other. The money supply and our debts to the banks stay in line with each other also.

          As you repay a loan to a bank your bank balance goes down and so the bank has less liabilities. You owe the bank less also and so their assets go down in line with repayments too. In this way the banks’ balance sheet contracts, the money supply contracts and the money no longer exists.

          If people default on a loan the banks’ lose an asset but the liability is still recorded and this is why banks are in trouble when people default en masse. It’s not that case that there is less money in the economy during a recession because banks don’t get it back because people default. In fact, from the point of view of trying to keep the money supply adequate for trading, defaulting on loans is not a bad thing.

          Constantin was arguing that the banks keep the money they receive as loan repayments but the best way to disprove this is to follow the banks balance sheet again.

          When repay a loan your current account goes down and so to does the banks’ liabilities. The banks lose an asset also since you as debtor owe them less. Constantin was suggesting that banks keep the money and if this was the case the banks would have it as an asset, and yet they’ve lost a liability earlier in the process.

          Furthermore if banks did keep the money ultimately they’d spend it into circulation as debt-free money and we’d have the principal of every loan ever organised from the last 500years in circulation, which we don’t. We couldn’t get to the point whereby every electronic euro, of 97% of our money, has a corresponding debt.

          A couple of quotes from economists and bankers can be found at http://www.sensiblemoney.ie/how-modern-economies-operate/#where-does-money-go-during-a-recession to support my argument.

          Regards,
          Paul Ferguson
          Sensible Money

          • piombo

            Hello Paul,
            You are mixing up apples and oranges. You are applying Economic aggregating to Accountancy, very dangerous. Your mistake is to assume there is only one Balance Sheet when in fact there are three!
            The three are:
            1) Mortgage holder and house owner
            2) Bank
            3) State.
            When mortgages are paid back there the mortgage holder’s balance sheet moves as follows:
            Debit – Liability
            Credit – Cash
            When mortgages are paid back there the banks balance sheet moves as follows:
            Debit – Cash
            Credit – Assets
            When mortgages are paid back there the State’s balance sheet moves as follows:
            Increase – M0/1
            Decrease – M4
            As you can see from the above, there is no destruction of money supply and Constatin is right in that the banks cash balances increase on mortgage repayments.

            Remember that Economics is a branch of social science while accountancy is how the world measures itself

          • Adam Byrne

            Personally I can’t believe that economists, including Constantin whom I admire, can’t even agree on the nature of money itself and how it works in the economy. It’s shocking that there would even be a basis for Constantin to ‘argue’. I mean, what hope is there for solving problems of greater complexity?

            The whole system needs to be dismantled and recreated from scratch.

          • bonbon

            If I may rudely intrude – economics up to now has been most definitely not a science, hence the disaster. Just look at the Nobel prizes to Black-Scholes – just the most glaring admission that an irrationality lies at the core of text-book economics today. Sir Alan is such a genius obfuscator, he let the cat out of the bag in-your-face with his “irrational exuberance” before it blew up. People must begin to see how they are swindled!

          • Adam Byrne

            Rude intrusion excused Mr. bonbon!

            They will never begin to see – they are too thick.

          • Adam Byrne

            And lazy.

          • Hi Piombo,

            As far as I can see your analysis only applies if everyone repaid their loans in cash. However cash forms only 3% of the money supply and so a more accurate description is to follow what happens when you instruct your bank to use money from your current account to repay the loan.

            Borrower repays his loan and his balance sheet would adjust as follows;

            Debit the ‘Money owed to bank (Liability)’ account
            Credit the ‘Deposits at the bank (Asset)’ account

            Bank’s balance sheet does the following;

            Credit the ‘Money owed by debtors (Asset)’ account.
            Debit the ‘Deposits from customers (Liability)’ account.

            The State’s or Economy’s ‘balance sheet’ would do the following;

            Debit the ‘Money owed to banking sector’ (Liability) ”account”
            Credit the ‘Money supply [M1 and consequently M3] (Asset)’ ”account”

            And sure enough the money supply has decreased by the amount of the loan repayment. The money no longer exists.

            This is an important detail and it’s something we’ve spent a lot of time researching so if you feel I’ve missed something feel free to point it out.

            Regards,
            Paul Ferguson
            Sensible Money

          • joe hack

            Paul,I have an understanding of what you are trying to explain here but your term “deleting money” is a confusion since it was not ‘money’ (it was a promise) in the first place (it is a contradiction in terms).
            You are not explaining were the money for interest comes from which the borrower has to pay to the bank.
            You don’t talk about your”deleting Money” in relation to the affects of inflation or deflation or in its relationship to interest payment or where that interest money is produced.
            You don’t explain where the money for a maturing pension schemes comes from.
            Capitalism to continually work needs inflation and if wages does not rise with it then as happened now and in 1929 no one can buy and if nobody buys assets such investment properties (some of which are owned by pension funds) (a home always has a value as is food etc.) have no value this is partly why David is advocating that those with savings spend but in my opinion this just fills up our landfill sites.

            Capitalism is inherently flawed it cannot work in a sustained even manner boom bust is inevitable. If you want change it, you need to change society’s mindset, it is that needs changing. But since people have a build in wants (greed which there are many level of) we have a long ways to go.

            Science, knowledge and understanding is what we should be buying and selling not infill for landfill sites.

          • Hi Joe Hack,

            I often get told that it’s a promise to pay, as opposed to money. You’re right. However for all intents and purposes your bank balance is money. Indeed in many cases it’s a more liquid form of money that cash even.

            As well as this ‘demand deposits’ are considered part of the money supply and indeed a huge percentage of it but technically you are right. Banks create promises to pay.

            In my post I didn’t go into detail on the fact that banks only create the principal of the loan and expect the principal plus interest back. Indeed in practice it’s impossible for everyone to repay their loans although banks only cancel the principal of the loan out of existence. Any money they receive as interest is recorded as profit and ultimately it finds it’s way back into the economy via banks expenditure as debt-free money. Hence it is just about mathematically possible for every loan to be repaid but in practice, it’s not.

            Regarding capitalism’s requirements for functioning well I would have to make a distinction between capitalism and our current system of money creation.

            I think the cause of many of our problems is the creation of money by banks with a corresponding debt. We could change our system of money creation without changing people’s mindset on Capitalism.

            I believe capitalism could function differently under a system whereby the money supply is issued debt-free at source.

            Paul

    • bonbon

      Actually it is created and then put on an austerity contract – that’s what the ESM damned game is all about. Into the Constitution with it so generations are enslaved!

      How dare they!

  15. gizzy

    We are conditioned from a young age to respect those in authority. It comes as a surprise when you first realise that people in top jobs in both the public and private sector here and elsewhere are not impressive. They are not that bright, they do not have and original thought. all they can do is deal with what they have now. They cannot imagine anything else. Do not credit our politicians with any agendas. Most of us have met them. They are ordinary average people. Only now they are scared shitless. They need a yes vote because for them it is just the least scary option. I see nothing but fear. The rhetoric is just bravado masking massive insecurity.

    They are like David’s player but not only can they not read the game, they do not even want the ball.

  16. molly

    the-game-is-only-beginning.
    Yes it’s all a game,the big boys ant going to lose out either way,they owe to much it will be written off or they will do a runner.
    This country has gone down the tubes we are being hammerd at every turn where are the people who cause this ,gone or here and still enjoying ther liberty,
    You owe the bank money you can’t sleep ,thoes who caused this can sleep like a baby and the bankers can’t sleep.to night on pat kenny look at the suffering of thoes people and another thing that was mention the good old barter system,long live the barter system.

  17. Following the digital money ball can provide a good analysis of why this recession is so unique and where we may be headed.

    Prior to the 1960s a fifth of our money supply existed as cash. The remaining 80% existed as bank-account money. While cash and bank-account money appear to be one and the same, since they are interchangeable, both have remarkably differing properties.

    Cash is created by the state and is spent into circulation by the Government. Bank-account money is created by the banks and loaned into the economy. Hence every bank-account Euro has a matching debt. Bank-account money is also deleted as loan repayments are processed so even though reducing our debts may seem like a reasonable thing to do, the bank-account money no longer exists after you repay a loan.

    Since the 1960s our cash money supply has dwindled to just 3% of the total and the 97% existing as bank-account money, or digital money, comes with a corresponding debt.

    This gradual increase in our use of bank-account money over cash has had many consequences on our economy because a much higher proportion of our money exists in tandem with debt and is only temporary since it’s constantly being deleted through loan repayments.

    Since the 1960s it takes two incomes to run a household, recessions are much more severe and occur more frequently, we have housing bubbles which we didn’t have before the 1970s, The Government invents new taxes since its ability to create cash is insignificant, business is more and more about the bottom line, every economy attempts to become a net exporter, products become less durable, the country is often accused of losing its culture etc.

    All of the above is primarily because we use more digital money over cash and because every digital euro has a corresponding debt.

    This system of money creation is unsustainable and as David has pointed out before ‘When something can’t go on forever it will stop’.

    To keep this system going we need people to organise more bank loans than year than last. The beginning of the digital money system in the 1970s was a self-fulfilling one because entrepreneurs could no longer earn enough from circulation to start up a business. Hence they got banks to create the money through lending. This made it even harder for the next wave of entrepreneurs who got banks to create even more money through lending.

    Equally house buyers could not collect enough from circulation to buy a house outright and so they too got banks to create money, and debt, through mortgages. The next wave of house buyers found it even harder to buy a house outright and banks created higher and higher amounts of money, and debt, and mortgages have taken longer and longer to repay.

    However mortgages have now hit a natural limit. They take two incomes thirty years to repay and cannot increase in duration. For this reason, and the inability of the money supply to dwarf itself periodically like it has done, we appear to be at the end of this system of money creation.

    The digital money ball isn’t going anywhere. The policy makers are staring down at it desperately trying to get it rolling again but for the first time in history Governments, households and businesses appear to have no further borrowing capacity.

    One solution is to bring a second ball onto the pitch, one which provides debt-free digital money as well as cash. This is ultimately where we’re headed but it appears we’re a very long way off since the money creation/deletion system seems to be so misunderstood by politicians and, dare I say it, some economists.

  18. dwalsh

    20 years ago we believed the financial sector and the IFSC was to be a great boon to our national economy. Now we know it was a Trojan horse.

    The enemy is within the walls. The vandals and wreckers of civilisation are ransacking our nation. The neo-liberal barbarians are doing to Ireland and to Europe what they did to the third world in previous decades.

    • 33square

      couldn’t agree more. i have to laugh when i hear about our “highly skilled workforce”. the ifsc exists for tax reasons and it will likely cease to exist for the same. the question is, should we give a crap? how do we want to make our money? by graft and by pull? or by hard work?

    • It’s all blatantly obvious

      These neoliberal barbarians are being kept in check only because most European nations are social democracies that can’t easily be pushed around. Europe is the final frontier and jewel in the crown for the asset strippers and privatisers. There is enormous wealth waiting to be plundered

      They would privatise it all lock, stock and barrel if they could and make obsecene fotunes in the process. Democracy is a pain in the butt to them however

      Democracy is their enemy. Time will tell and we will see less democracy in Europe in the coming decade as long as corporations and their agents (IMF, EU, World Bank) have the power to put elected governments to the sword. This is a Chicago Boy’s wet dream and a slow coup de etat in process. They can’t do a Pinochet so they do it over a long period of time. It’s all a huge head fuck but they know they will eventually succeed one way or another. Europe is the new experiment and it’s a long game

      You are right to say that the enemy is within. They are hiding under the beds and they don’t even attempt to hide their shameful greed and disregard for anyone but number one. Where is the great Bono when you need him and his likes to speak up. Tossers. Probably thinking of better ways to hide the cash no doubt. Whores par exellence

      If Ireland does have a fire sale it will be international capital that turns up at the auction and no doubt many Irish will be picking over the bones while drunk on their conquests. We are at the hands of brigands and traitors and in the coming years more fire sales will be held to conjure up the billions needed to finance the insane austerity planned by right with governments such as Fine Gael / Labour

      As long we have idiots like Gilmore and that head fuck Lucinda Crichton on the media all day long then the Irish people are fucked if this is where they look to for guidance and leadership. Look at these two muppets and ask one question …. do you believe a word any one of them says?

      Thought not

      • Adam Byrne

        I agree with every word Pauldiv. Bono my arse.

        • I’m glad someone appreciated the rant. I’m living in a contented bubble personally. It’s like being back in the that magic place where you have nowhere to go. Oh that magic feeling – nowhere to go. Abbey Road. I can’t believe how asleep people are and sometimes I envy those who are blissfully ignorant. It’s like it is 1967 again and everyone is living under psychedelic skies except that in the world’s great footballing stadiums is no longer ‘The Year of the Scots’

          Wish I had a time machine. I’d rewind time and sit in the wembley stand and as watch Baxter and Law humiliate the huns

          There are exceptions which remind me of the importance of hanging onto friends and staying rooted to the land. We have been here for five thousand years and we will be here in another five thousand long after this nonsense has passed. We are eternal. Politics is temporary

          Maybe I am in the advanced stages of Shock Therapy. It’s like the 70s are a figment of my imagination and never happened. It’s like Paul Divers is a concept I no longer recognise. Where did it all go wrong? Still it’s been a grand life Bhoyo

          I just want to tell people like Bono and Pat (Please can I ask a question Pat, slurp) Kenny that I see exactly what they are and what they stand for. The sight of these people makes me sick

          I don’t like swearing (my parents never allowed it in the house) but when it comes to elites and false gods I can’t help it

          They are despicable. It’s same in every country

          They feed the people insulting trash but the people are seeing through it and looking to other sources. And long may the working class man have access to information and self education that will help him self imporove and gain a better understanding of the world

          Ps. I loaned The Ragged Trousered Philanthropists to a couple of people and they said it was a life changing book

          It’s looking dog eared and stained like a well passsed around book should do. Good night and god bless

  19. dwalsh

    Since the ultimate guarantor of the monetary system is the citizens and the nation; the central bank should be under national control – not private control; and should issue national credit at minimal interest. Credit for productive activity; not financial speculation.

    Banks have a vital social function. But financial speculation is completely toxic and must be outlawed. It is nothing more than gambling; with the assets and livelihoods and even the lives of the citizens of the world.

    What we have today is a global financial coup; and if it is not opposed and stopped we are heading into global disaster; and very probably a population collapse. It is only a matter of time before the real economy will begin to break under the pressure of the predations of the financial sector.

    They may even intend to break the real economy; and to cause a global population collapse. And when the dust settles they will own whatever and whomever is left.

  20. Deco

    Another debacle unfolding in the Dublin Finance Sector. One of the owners of the ISEQ is under intense scrutiny.

    http://www.independent.ie/business/irish/top-watchdog-probes-all-stockbroking-firms-3122921.html

    I have a question.

    If certain behaviour was happening in this blueblood D4 trading house, since 2007, why is it that five years later the Central Bank decides that there is something amiss ?

    Another question, what were the auditors doing in all this time ?

    • gizzy

      I have made the point in many blogs that the roles of professional advisors were key to the destruction of the economy. They particularly the big legal and accountancy firms together with the esate agents advised on all the large property deals. The Banks did not move without their various reports. In a lot of cases the developers were mere pawns in the game and the vehicle for larger and larger transactions and the only ones who wore any risk. The main men in all the advisory firms to me were key players in the boom and bust but their roles are played down and they all live now to advise against and sue the very developers they once represented. The estate agents are now valuers for Nama.

      You now have Deloittes being investigated for its role in Bloxhams. Bet nothing comes of it and they continue to get government work.

    • You are asking questions to which you and everyone’s granny knows the answer. You are not serious and are just being thick for comical effect in my opinon because you are not normally so lazy when it comes to parochial stuff and I know that is where you love to wax it and come into your own,
      from time to time. Small town stuff and coded language that only an inbred fly paddy would catch the gist of and even then you’d need Philadelphia Lawyer to decode the language!

      If you don’t know the answers to your own questions then maybe you need shooting

      They do not give a damn pal. It is all false respectability and window dressing. People in pin striped professions never go to jail. Full stop

      We all know this is the case and it would be more insightful to begin asking why this is so and why people tolerate it. In fact I put it to you that if they had any self respect the Irish would be out on the streets rioting for change. Oh but we Irish don’t do rioting. I remember moons ago you called the Greek people muppets because they were on the streets protesting. It is ye who are the real muppets.

      But them some topics are too strong even for David The Libertator. Snap out of the pretence gentlemen and admit that you are back to stiching the arse in your trousers. FFS.

  21. piombo

    The game is a POLITICAL one with Finance and Economics being the backroom staff.
    Fiscal integration is the first half followed by political integration in the second half.
    The match will come down to who aligns to Germany and who does not.
    Those who won’t align will leave the Eurozone.
    The match will end before the general elections in Germany and Italy in Spring 2013.
    The match started in November 1989 with the fall of the wall.

    Now what if Ireland chooses to align to Germany?
    1) Ireland will be assured a place within the EZ and the EU as Germans have a beign view of Ireland and it’s history.
    The German Political establishment allowed us the tax arbitrage economy as a pro tempore arrangement to allow the Irish economy to grow from it’s historic dependance on the United Kingdom.
    2) They view us as having squandered fifteen years of competitive tax advantage and are decided to bring our establishment into line with theirs.
    3) They argue that we cannot continue to have the best paid and staffed civil service in Europe whilst running the deficits we are running. From their prime minister down to the local water inspector, German civil service wages are lower than those of the Irish. They also have to work more years and their pensions are almost all defined contributory ones rather than the sinecure-like defined benefit ones enjoyed by most the Irish civil service.
    4) Practically from an Irish viewpoint, our State will have to slim down considerably through a vast program of privatisations of everything except for Public Policy, Public Order, Justice and basic healthcare and education. Every activity not directly concerned with these areas needs to be privatised with a guaranteed lock-up for the employees concerned of 3-5 years.
    5) The excess of 250,000 civil servants and 400,000 unemployed people will need to be guaranteed a basic income to allow a dignified existence for their families through compulsory participation in the initatives listed in 6) below.
    6) The State needs to identify every form of import-substitution (eg wave and wind energy vs Oil) opportunity, every form of support service that a reasonably well-educated population like ours can provide competitively to the world economies (eg become the world leader in english language support for remote customer services, english language training to the hundreds of millions of children around the globe whose parents invest in their english lanaguage skills). Once identified, the State needs to get out and grow these opportunities leveraging the 650,000 people availible.
    7) Our educational system needs to ensure all children up to 18 are given the right and are obligated to pass the senior certificate.
    8) No public servant nor poltical position should earn more than five times the average industrial wage.
    These last two points will guarantee equity and disincentivise a priveliged public service mentality.

    If we as a nation set about the above, we would not only earn our place at the top table within the EZ/EU, we would also become the Singapore of Europe within three years.
    More importantly, though, our children would thank our generation with the same admiration that the British still remember the generation who defended them in WW2

    • Adam Byrne

      And pigs might fly piombo. Until the culture in this country changes, NONE of the above will be achieved.

      • piombo

        Adam,
        Maybe so, but coming from direct experience, I can assure you that a person’s culture adopts to personal circumctances and not vice versa.

        With Fiscal and Political integration deficit spending is over for our lifetime at least in Europe, and with it the mentality/culture that someone else owes us a living.

        The other mentality that will disappear is that of the rentier culture (as so well analysed by JJ Lee).

        Once people understand the lie of the land another mentality/culture supplants the previous one. This culture is characterised on a personal level by endeavour, enterprise and hard work. It also engenders a political climate paradoxically of unity rather than division as no-one will sense being left behind and that all have an equally important contribution to make to their own lives as well as that of the country.

        • Adam Byrne

          We’ll see piombo. I’m well-used to adjusting to other cultures myself and tend to thrive, as you seem to have yourself in Italy and good luck to you.

          I have little faith though in the masses (in any country) to change their ignorant, selfish, greedy, short-sighted and parochial habits.

    • bonbon

      Your are a little out of touch, promoting green – we threw them out, remember!

      Now for serious economics, not some Monti or Blairobama stuff.

      http://laroucheirishbrigade.wordpress.com/ireland-an-economic-revival/

      We have a historic precedent, not labor camps. High tech energy, major shipping upgrade to take the Arctic development surge.

      BUT first Glass-Steagall.
      THEN Hamiltonian Banking, which Irish Economists, the Carey’s significantly developed, abroad of course because of the Brit Empire.

      Now Monti, and many in the Vatican will not fathom this- well that’s fine. The Church has failed repeatedly on economics, a weakness I can elaborate on.

      • piombo

        Bonbon,
        I am impressed by the contents of the Larouche report. Looks like there some great opportunities to make some serious money. I will come back to you on this in a few days.

        Now regarding Monti and the Vatican given you bring them into the argument.
        Monti is at least giving it straight to the Italians, raising taxes and grounding expectations in harsh realties. He also is the only one capable of taking on Merkel and winning.
        The Vatican. Which one? The seat of Peter and therefore Our Lord’s chosen place to situate His Church through which we receive eternal salvation or the west Roman powerhouse populated by both Saints and Sinners in which Grace and greed co-exist in competing measures as they do in all of us.
        Scegla lei!

  22. [...] David McWiulliams: The Game Is Only Beginning (DavidMcWilliams.ie) [...]

  23. DaveDouglas

    I like this article, I like the way it presents the progress of how things may happen in the future and does not focus purely on economics-talk. But I must ask, as David very adroitly avoids this issue within this article, and to continue the poker analogy, even if the Fiscal Treaty is redundant, is voting yes or voting no revealing our hand in the game too early?

  24. Deco

    http://www.telegraph.co.uk/finance/debt-crisis-live/9296529/Debt-crisis-live.html

    {
    “Spain has engaged in a policy of delay and pray,” Echavarren told Bloomberg in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

    The Economy Ministry says that Spanish banks have €184bn of developers’ loans and assets that are “problematic”, while the remaining €123bn are performing.
    }

    This is the essence of what has been happening in Spain and it’s banking system.

    “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

    Nobody wanted to hear the truth. Denial – an essential element in the approach of the EU, and many of it’s governments to the current debacle.

    • StephenKenny

      The biggest problem that Europe really faces is the breathtaking scale of the problems in the financial services sector in the UK.

      It may have been CitiBank that was recently left holding the baby for the losses, but the trading that created those losses could only have taken place in the UK, given it’s effectively non-existant regulations on larger companies.

      Similarly, the AIG catastrophe that resulted in almost $200bn in bailouts from the US government in 2008, occurred at AIG in London, and could not have heppeend anywhere else. The insurance policies it was writing were not much short of insane, if you ignore the £billions paid in bonuses in London.

      The UK must be frantic for the blame for all the crazy gambling in London to be put everywhere, and anywhere, else.

      One of the things that we have learned over the past 20 years is that if the newspapers, the TV, and the radio are pointing over here, then the place to look is in the opposite direction, over there.

  25. DaveDouglas

    “If I were a foreign investor, I would be much more worried about Ireland being subsumed into a great European tax bracket than anything else. Maybe the investors who have signed up this year are betting that when push comes to shove, the Irish will opt out the day the Europeans insist on tax harmonisation. I agree with them.”

    Are you saying that you agree with the investors betting that we will opt out on that day, or do you agree that we will opt out on the day?

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