June 9, 2014

Print and be saved?

Posted in Banks · 86 comments ·
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If you only have to look at one chart this week, let it be the one on this page (chart one).

Chart 1_sbp june

It shows how Europe and Ireland have become cash economies because bank lending has collapsed. This slump in bank lending is why the European Central Bank (ECB) introduced revolutionary measures last Thursday. These new moves by the ECB may have a significant positive impact on our economy in the years ahead, because they will now reward banks that lend and penalise banks that don’t. Significantly, the ECB will not reward banks that lend to property. This is a crucial positive for Ireland.

Since the crash in 2007-2008, bank lending has fallen progressively everywhere. This is what always happens after an asset bubble. The people have too much debt and they don’t want to borrow and the banks have too much bad debt and they don’t want to lend.

In such an environment, even good projects can’t get financed and therefore this type of recession – one where there’s too much legacy debt – goes on for much longer than other recessions. Globally, since 1945 the average recession lasted 10 months, this one feels like it’s been going on for years.

One of the traditional roles a bank must play in an economy is that it must recycle money from savers to borrowers. There will always be people who want to save and there will always be people who want to invest. The bank should match these people together offering savers a place to put their money and offering investors that same money to invest.

But if banks are not lending, the savings, when they are put in the bank, stay in the bank and don’t get recycled out into the rest of the economy.

This bottleneck chokes off recovery and allows deflation to take hold. Deflation is when prices are falling. This process can become ingrained if after a few years of falling prices, people expect prices to fall, not rise in the future. (See chart two.) This is what happened in Japan from 1990-2010.

Chart 2 sbp June

Deflation is precisely what the ECB has now moved to fight. But it won’t be easy, because nobody is sure that the latest initiative will work. If it doesn’t work quickly, the ideological sceptics in Germany will force the ECB to abandon the experiment.

To see why the Germans are not behind ECB president Mario Draghi all you need to do is examine recent history. In fact, the D-Day celebrations this week are a good place to frame this history.

One of the interesting aspects of the defeat of the Nazis was the unbelievable success of the country that emerged from the ashes, namely West Germany. At the core of the Federal Republic was a constitution which protected the citizen’s liberty against the state and a powerful constitutional court in Karlsruhe to police the state on behalf of the citizen. The other institution was one that protected the citizen’s money against the State: the central bank – the Bundesbank in Frankfurt.

From day one, the aim of the Bundesbank was to protect the citizen’s savings from inflation, which had destroyed the German economy in the early 1920s.

When the problem is inflation, the solution is deflation.

Heresy

However, what the Bundesbank never contemplated was what happens if there is deflation. By logical extension, if the problem is deflation, the solution is inflation. But it is heresy for central bankers to embrace inflation – however, that’s what Draghi knows they have to do.

Writing as a former central banker, schooled in the traditional way to be always on the look out for inflation, I know how difficult it is for these guys in Frankfurt to accept that they have to turn policy on its head and generate inflation now.

To execute this new strategy, Draghi has presided over a very un-Germanic coup at the ECB, where the Germans have been out-gunned, out-thought and out-voted. To put it bluntly, last Thursday Draghi wrote the obituary for the Bundesbank. The ECB is deeply Latin now. And it is doing what all Latins do in a crisis: print money.

The ECB has pushed rates down towards zero and says rates will stay there for four years..

It has also unveiled a new LTRO scheme which is, in effect, a giant cash for trash scheme encouraging banks to lend to the real economy, all financed by a money printing central bank. The new scheme will allow banks to exchange dodgy assets on their balance sheets for real cash and the bank can then lend this real cash to companies. Crucially, the new scheme can only be availed of by banks that prove they are lending to the real economy. This is a new and significant development because it means that banks will be rewarded for lending to the private sector firms that need financing.

This plan gives banks time to plan how they want to offer the money to the economy. It puts the ball firmly in their court. Let’s hope they do something this time. This is an intriguing development and it shows that Draghi is prepared to tear up the rulebook scripted by the German Bundesbank and replace it with his own new version to fit the new deflationary reality.

The impact could be most significant on the periphery where the credit crunch is most damaging. Tellingly for Ireland, he has stipulated that bank lending need to rise, but this rise can’t include property lending. This doesn’t mean that Irish bank will not lend against property (which is the risk), but that it will be more profitable for them to lend against other stuff.

If this re-balances Irish bank lending away from property into start-ups and companies which produce things, it could be a huge positive for an economy like ours that has a weakness for destroying itself with its property obsession.

At this stage, it’s a big if. But we have to give it the benefit of the doubt. At least after seven years of fighting deflation pressures with more deflationary pressures, the ECB has admitted that it was wrong all along. The solution to deflation is inflation and, God knows, Europe could do with a bit of that right now.

David McWilliams hosts the Dalkey Book Festival June 19-22nd. dalkeybookfestival.org


  1. NeilW

    “One of the traditional roles a bank must play in an economy is that it must recycle money from savers to borrowers. ”

    While we persist with that myth we’ll get nowhere.

    Banks do no such thing. What they do is recycle borrowing into saving. The borrowing (balance sheet expansion) always comes first.

    When banks balance sheets are contracting (borrowing shrinking) then we get a shrinkage in circulation *and* saving.

    Banks will only lend to creditworthy borrowers prepared to pay the current cost of money. That is always the limiting factor.

    Unless you are prepared to underwrite people who are likely not to pay back the borrowing then there is nowhere else to go.

    You have to give people more income via fiscal policy and stop believing you can fix everything by fiddling with the One Interest Rate to Rule Them All.

    • michaelcoughlan

      “You have to give people more income via fiscal policy and stop believing you can fix everything by fiddling with the One Interest Rate to Rule Them All”

      Agree 100%. Thank god someone has a brain in their head. Tax cuts for the lower and middle income groups would be good fiscal stimulus. Will it happen? Nada.

  2. Meek Inherit the Earth

    Unlike the M25 ( London ) and Le Periferique ( Paris ) where what goes round comes round the M50 ( Ireland ) just does not go round ….it drowns .And when it goes Under …then it stays Under ….and when it stays under …it Never comes up .Because there is Nothing there .

    Some of the earliest mammals that decided to arrive on land and initially had webbed feet .

    It is time for Irish Borrowers to put back on their webbed feet and learn to swim again .

    • Dún Aengus and the M50 are on the same latitude and face the sea ( semi – circles ) .There is a difference Dún Aengus is made by both man and nature and what was taken by nature is now gone and into the sea . The M50 was made by man but Nature was too smart not to sponsor an Irish man again and allowed him to follow his own greed instead.

  3. Reality Check

    David, you should get a permanent gig on the Radio airwaves.

  4. Tull McAdoo

    I suppose if you subscribe to the neo-liberal view of economics then it the ECB becomes a one trick pony,i.e. adjusting base interest rates.

    Of course they do cloak their “interest rate adjustment” pronouncements with all sorts of mumbo jumbo bolloxology best decyphhered by their attentive and deferential Dept.of Finance guru’s/ boffins throughout the EU. yawn yawn yawn

  5. Adelaide

    “This is a new and significant development …” Sorry, David, but you’re over-egging this. You should have included the before/after numbers. Draghi’s announcement on Thursday dropped the lending rate from 0.25% to 0.15% and dropped the deposit rate from 0.0% to a negative -0.1%. A miniscule change. Besides, negative deposit rates have already been tried and tested to no avail in Denmark and Sweden.

    Likewise Draghi’s new LTRO scheme of e400b of cheap credit for banks to lend to SME’s (again tried and tested to no avail in UK and Netherlands) has also proved ineffective in an environment of saturated indebtedness. Me thinks, Ireland, fits that description.

    Draghi’s announcement won’t mean diddly squat to the PIGS countries but will be a shot in the arm to stronger creditor countries which further highlights the madness of Ireland sharing the same currency with Germany. The madness is becoming surreal when you see Italy now including prostitution and cocaine trade in its GDP figures in order to manipulate its deficit.

    Finally, it didn’t make the RTE news but the company’s own reason behind Waterford’s Bausch and Lomb ’20%/20% take-it-or-leave-it’ ultimatum to its 1100 staff is because the company can’t compete on the back of a strong euro. The Euro is killing its Irish outfit (and killing our economy). David, your article should be entitled, “Exit and Be Saved”.

    • michaelcoughlan

      “The madness is becoming surreal when you see Italy now including prostitution and cocaine trade in its GDP figures in order to manipulate its deficit”

      I have seen it all now.

    • Pat Flannery

      Adelaide, this is a genuine question not a snark: what currency should Ireland switch to? The British Pound, a new Irish currency, the Dollar or what? Where should it “exit” to?

      • Ireland should show some energy and independence and leave the euro and operate its own currency tied to no other.

        Repeal all odious debt, issue money interest free and debt free to replace all existing Irish fiat central bank currencies.

        National debt that remains will be paid by treasury notes, and thus eliminated.

        The resulting government budget surplus would then result in income taxes being radically reduced or even eliminated. This fiscal stimulus will expand the Irish economy toward self sufficiency and wealth production that benefits all and NOT just the ones closest to the current money spigot.

        Money production from Treasury would be frozen when the above is accomplished to avoid the stealth tax of inflation and reintroduce the concept of the benefits of low deflation caused by increases in productivity

    • paddythepig

      Excuses excuses.

      How come German companies (and plenty of other good companies in other euro zone countries ) can successfully trade in the world, within the euro currency area?

  6. cooldude

    Where exactly is this deflation we keep hearing about. Food prices are rising at well over 10% per annum and that is global. Car tax, house insurance, public transport and most other essentials are rising. We even have the much heralded rise in house prices which has the property porn guys getting themselves into a right twist. The only area where there is and has been consistent price deflation is the phone and tech gadget market and prices have been dropping in this segment for over ten years with actual increased demand so price deflation has NOT postponed spending in this segment of the market.

    Draghi is going to introduce QE in Europe and all this deflation monster stuff is just an excuse for this. QE will benefit the speculators and will create speculative booms in the stock market and real estate. It won’t produce any improvement in the real economy and printing money never has.

    • michaelcoughlan

      Excellent post Cooldude, As for McWilliams; “The solution to deflation is inflation and, God knows, Europe could do with a bit of that right now” is laughably idiotic.

      When you say Europe David do you mean the citizens or the establishment? Citizens need inflation like a HOLE in the head! Whatever meager savings wiped out? Daily staples out of reach of millions left to starve? What a pile of shite.

      If Ireland wants inflation they could do the following; The government is claiming that Nama will make a billion for the “taxpayer”. Wrong. If nama makes a billion it will make it for the Government! The ONLY way the taxpayer will get the billion is if the government gives it back to them. Lets just say the government sent 1million families a cheque for €1000 each. THEN the taxpayer would be making the money back and there would be stimulus AND inflation however small.

      Lowering interest rates will lead to inflation in the STOCKMARKETS which are MAKING NEW HIGHS EVEN THOUGH BANK LENDING IS FALLING OFF A CLIFF!

      • Look up “The Presidents working group on financial markets” if you want to know why the stck market is rising. AKA the Plunge Protection Team.
        Government is pumping to provide a “feel good” atmosphere. Just more Manipulation. “There is no such thing as a Free Market” –Chris Powell

    • Fat Tony

      Let them eat iPhones.

  7. Frank H

    From Mises, “Planning for freedom” 1952, talking about the post Malthus-Say debates of the early 1800′s. “Those authors and politicians who made the alleged scarcity of money responsible for all ills and advocated inflation as the panacea were no longer considered economist but “monetary cranks”. The struggle between the champions of sound money and the inflationist went on for many decades. But it was no longer considered a controversy between various schools of economist. It was viewed as a conflict between economist and anti-economist, between reasonable men and ignorant zealots.”
    Welcome to the world of monetary cranks and ignorant zealots Mr Mcwilliams. As for your deflation nonsense, please take a lesson from a real economist:
    http://www.mises.org/daily/6459/Whats-So-Scary-About-Deflation

  8. If Ireland’s cost of living index was on a par with other countries, then maybe you could argue that we need inflation (although I cannot see myself agreeing with this argument)

    But our cost of living index isn’t low, so how is inflation going to help us.

    Excellent point made by whoever mentioned the tech industries and how lowering prices has only helped those industries.

    • Adelaide

      Hi Johnlod. Recent OECD report places Dublin 2nd highest in the living index cost of European capital cities. The outlier London is #1.

  9. Talking of inflation and deflation in relative terms and deficits and suplusses,and these articles, there is the following observation.
    A while back it was not unusual to get 200 comments and even 300 plus from time to time.

    Management considered this a surplus and took auterity measures and cut many contributions. The result has been that over the last months there has been a deficit of comments in numbers as often the contributers were reduced to less than 50. It is questionable that the quality of the content diminished as well.

    Many times the comments have disagreed with the premices of the main article whereon there is a deathly silence from our host. IE. no debate on the stated opinion is proffered.

    Today there are 19 comments to this time. 9 are adverse to the hosts position, non in agreement and the rest neutral or talking of side issues. Definately a deficit from the host in terms of general agreement. Does this mean that the educated person knows what the problems are but our leaders, movers and shakers have not got a clue.

    We are being lead astray.

    • Adelaide

      To be fair Tony I think BonBon used to singlehandedly generate 50% of all comments while another 25% of comments were telling him to get lost. I also noticed that some previous regulars didn’t return after Christmas.

      • True enough about Bonbon but it does not change the validity of the the observation about the agreement/disagreement with our host.

        Perhaps a lot of the regulars found that a slew of the articles lack meat on the bone.

  10. StephenKenny

    It is the key idea of this economic argument ,and I’ve never seen anyone try and dig into it: ‘deflation causes people to wait before buying things because they know the price is going to fall’.

    There are some things it clearly isn’t true for – food, energy, cars, tech kit, clothes, home furnishings, in fact everything. How do I know this? People will pay 30% a year so they can have it this month, rather than next. People will mortgage their homes (stripping the kids of inheritance) so they can have it now. People don’t wait, even if there is good reason to do so (do the math regarding of 20 years of an annual holiday, paid for by credit card, as opposed to saving for one year, and paying interest free for 19 years).

    People who are prepared to do this, in this highly financialised world, might be prepared to do so for a huge price fall, but if you ‘want’ a new car, rather than ‘need’ one, how is the idea of a 2% price fall next year going to stop you buying a car today? The damn thing depreciates by 20% the moment you drive it off the lot anyway.

    People who don’t buy tech kit because they’re waiting for it to fall in price are still waiting to buy their first cassette player.

    It may have been true in years gone by, but it clearly isn’t now. What’s interesting isn’t that it isn’t true, it’s that so many published people keep on saying it is.

  11. nothing the banks or bankers do will repay the outstanding debts owed by so many they can no longer borrow free money and repay it.

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/6/9_This_Will_Bring_The_Entire_Global_Ponzi_Scheme_To_Its_Knees.html

    • Reality Check

      Tony, you are a good guy but the controlled opposition/scam artist types like King world news & Alex Jones constantly bleating “BUY GOLD, BUY SILVER; The Market’s gonna crash” are a sick joke at best.

  12. Bamboo

    +1
    We are living in a new era and the dead ordinary consumer’s attitudes and habits have changed dramatically. I see more and more young families trying to avoid buying a house in Ireland. They look at ways of staying in their parent’s house, rent a house or moving abroad. Buying a house is for many just a dream and/or a nightmare. A big change of sentiment from the good times. So I don’t see people spending that money that they have on the items that they used to spend their money on.

  13. Bamboo

    Have governments not inflate the housing bubbles by their own first time buyer’s schemes? Where did these subsidies go? To the young innocent buyer or to the developer? The developer of course – as the developer put that on top of the asking price. So, how can we inflate the economy this time?
    Maybe we should all buy a good photocopier so that we can all simply photocopy our own money. Would save the government printing money.

    • The subsidy went to the purchaser. Without it the purchaser would not be a buyer. Adding a buyer or many buyers to a market which was already too high for said buyer to afford simply added demand in an already tight market and that extra demand raised the prices further than they were. do not blame the developer. Rather blame the legal authorities of all kinds who restrict the possibility of building a home.

      I looked at buying farm land but if it is residential zoned then the price immediately jumps 200,000 Euro. When one enquired how one could apply for building permission on a piece of property one had to be a local resident for 15 years or more or a member of a local family.Sounds like a closed shop to me.
      Free the market and put all the forclosed properties on the market and open oning restrictions and the developer of high priced property would be busted.

      • Bamboo

        The way I see it. The government introduces a scheme to persuade buyers to buy by all types of subsidies. The developer put whatever the buyer gets from the government on top of the price. So who is winning. Of course, I am not blaming the developer. I am blaming the scheme.

        Regarding building restrictions for non-locals:
        I tried to do that more than 20 years ago and I gave up. I think the trick is to get a local to buy land and build on it, then you buy the property of the local when it is finished. But still there are lots of obstacles with this I am sure. In my area there are plenty of “non-locals” in “locals only” land but I have no idea how did get around it.

        • Bamboo

          Farm land that is zoned for residential is not farm land I guess.
          planning permission is an odd one. There are few things you can do that can help you. Get a local architect involved – a real local one. Find out how well connected they are with the planning department and other departments in the county council. Then they definitely get a lot more through the net. They are able to bypass all sort of building restrictions. Maybe not building on a “locals only” land.
          I wanted to get an extension done on my house but my biggest mistake is that I did the plans myself. In the end I was very restricted in what I was allowed to do.
          Regarding brown envelopes etc. I don’t really think so but then again ….

          • thanks for the observations. Farm land is farm land just some has a residence allowed and a lot do not. I think the countryside would fill up with small efficient farming operations if all property were allowed residential status.

            Small towns ans cities would prosper from the activity. The pressure would be re-leaved from the cities.

  14. “Governments would then be the very apparatus through which the bulk of the new money trickles into the economy — which also means a drastic expansion of government’s share in the economy at the expense of individual liberty.”

    Rather the look as last resort should be on the production of central bank money by all and any means possible.
    Within this attachment link will be found a discussion why governments will print and expand the money supply (inflation) at any suggestion of contraction and why it is not in our best interests to have that happen

    http://www.whatamimissinghere.com/archives/36396

    It embellishes the lie that it is necessary to expand the money supply in order to improve or expand the economy.

  15. “This slump in bank lending is why the European Central Bank (ECB) introduced revolutionary measures last Thursday. ”

    Those who did not borrow, but saved, during the central bank induced credit fueled boom are now in posession of cash and taking advantage of falling prices.

    Castigated as hoarders in previous lectures in the pages they are now stepping up and using their frugality for their own benefit.

    Those used to borrowing to live are out of credit and can afford to borrow no more. Therefore the contraction in borrowing is lightly the result of too much debt.

    This does not apply to government as the lending of central banks to financialistitutions and the monetizing of government debt have lead to mountains of credt piled up as reservs in the central banks and nominated as national debt. This national debt results in Auserity measure enforced on the people with the gutting of what economy is left as the result.
    This huge increase in central bank funding is the very definition of inflation.
    Our economes suffer from excessive inflation (all inflation is negative, excessive inflation is catastrophic).

    All economists or rather all those educated by central bankers have it all ass backwards. David is a source of the problem, not a solution

  16. “Globally, since 1945 the average recession lasted 10 months, this one feels like it’s been going on for years.”

    It has and it will continue on all the while the money supply is continually inflated. The economy will be more and more tenuous until it finally fails as market forces overwhelm manipulation and all the malinvestment is purged.

    The longer it takes the worse it will be. We have the mother of all busts approaching and it is closer than it was yesterday. Be prepared and own solid assets.

    Gold and Silver is the only real money. The rest will inflate away to nothing.

  17. “One of the traditional roles a bank must play in an economy is that it must recycle money from savers to borrowers.”

    But they have not done this for hundreds of years. A depsit received whether form a saver or a central bank is used as a reserve in the fractional reserve system. Banks lend out multiples 10 times, 20 times even 50 times the amount of their reserve.
    The money loaned does not exist until the act of borrowing it. Why do you perpetuate the myth that banks facilitate a loan from a saver’s savings?

    This is a dangerous situation for a bank as a saver asking for a return of their savings causes 10, 20, or 50 times that amount of credit to bewithdrawn from the economy. Not easily done and so now the bank must rely on “the lender of last result” to top up the reserves with newly invented money which is in turn inflationary.

    The central banking and the fractional reserve system are a blight and a curse on mankind but perpetuated and agreed with by central bank economists and those who rely on them.

  18. Monthly Payroll Gains Overstated by 200,000-Plus Jobs

    - Contrary to Common Experience, May Payrolls Purportedly Regained Pre-Recession High

    - May Unemployment: 6.3% (U.3), 12.2% (U.6), 23.2% (ShadowStats)

    - Year-to-Year M3 Growth Jumped to 4.6% in May

    - John Williams, Shadowstats.com, June 6, 2014
    —————————————————————-
    Everything is manipulated to make it look advantageous

  19. “Watching Irish treasury yields fall below those of U.S. treasuries yesterday puts a decided exclamation point on the aforementioned global expectation of “QE to Infinity”; as like the BOJ, the ECB nears the end of its arsenal of money printing schemes.”
    Andy Hoffman

    http://blog.milesfranklin.com/whatever-it-takes

  20. “This bottleneck chokes off recovery and allows deflation to take hold. Deflation is when prices are falling”

    No deflation is when the money supply is reduced and the value of the currency rises and so buys more goods.

    Those things that people need, food , energy, even insurance are increasing in price at a fast rate. 10-20 per cent p.a.Money supply is increasd exponentially the last 5 years. Inflation is in the pie and well and truly baked in.

    Those things that people want but cannot afford are dropping in price because of lack of demand. It is not deflation it is depression.
    High inflation causes depression. Get it?

    Every bust is caused by the preceeding boom. Credit based debt accumulating boom will cause a bust everytime. Trying to reinflate will add to the problem not cure it.

  21. “The ECB is deeply Latin now. And it is doing what all Latins do in a crisis: print money”

    defaming the “Latins” is patently rediculous.
    The biggest money printers on the planet are the anglos. US and UK. Now followed by the Japanese, europeans and even the chinese.

    Every Central Banker prints and it is a central banker edict to do so.
    We are going down the tube with competitive devaluations of currency. A race to the bottom as forcast years ago by some on this very blog!!

    ALL central bankers think this way. They are trained to break the very economies they allededly are supposed to protect.

  22. Nigel Farage is of the opinion that the UK will leave the EU and after it does Ireland will follow to its natural resting place namely an independent Sterling

    • Ireland should show some energy and independence and leave the euro and operate its own currency tied to no other.

      Repeal all odious debt, issue money interest free and debt free to replace all existing Irish fiat central bank currencies.

      National debt that remains will be paid by treasury notes, and thus eliminated.

      The resulting government budget surplus would then result in income taxes being radically reduced or even eliminated. This fiscal stimulus will expand the Irish economy toward self sufficiency and wealth production that benefits all and NOT just the ones closest to the current money spigot.

      Money production from Treasury would be frozen when the above is accomplished to avoid the stealth tax of inflation and reintroduce the concept of the benefits of low deflation caused by increases in productivity

  23. Adelaide

    You only need to compare the weekend’s saturated media coverage of Draghi’s storm-in-a-teacup announcement and the three year media blackout of the escalating Fukishima nuclear disaster to know we are indeed living in a freak show. How any sensible person can comment on present global economics without reference to the deteriorating Fukishima emergency is beyond insult. (ps I refer to all media punditry) Future history books will have a chapter “2010-2020: Fukishima Fallout on the Northern Hemisphere”, while our economic woes will be relegated to a side note, if at all. George Carlin is laughing heartily in his grave. Complete freak show.

  24. Printing money to excess is the preserve of the central bank in supplying reserves and the chartered bank using the reserve in the fractional banking scheme to produce 10-50 times that reserve amount.

    The same scheme s used in all manner of places where the paper promises far out weigh the ability to deliver on that promise.

    In china it was recently reported that physical copper has been sold many times over with paper promises and that hundreds of thousands of tonnes of copper is missing.

    The same is true for gold bullion on the LME where it is acknowledged that there is only one ounce of silver physically available for delivery for every 100 ounces sold by paper promise.

    This legal criminal activity is thriving because it is government policy for the regulatory agencies to turn a blind eye.

    all is manipulated and there is no proper price discovery mechanism working. One day there will be a blow off as all the fraud is adjusted to reality.

    http://investmentresearchdynamics.com/if-its-happening-in-china-it-for-sure-happens-in-london-and-nyc/

  25. cooldude

    Here is a very intelligent view of the ECB’s actions. Makes a lot of sense to me.

    http://www.zerohedge.com/news/2014-06-10/alasdair-macleod-all-you-need-know-about-negative-interest-rates

  26. Deco

    I disagree. I completely disagree.

    The premise that inflation is the solution does not add up. Inflationary policy, via low interest rates under Trichet fed the asset booms in the PIGIS on the periphery, ten years ago. Japan is now printing money, and it is a mess. Zimbabwe tried it. Argentina tried it – about a dozen times.

    How, Mario the muppet wants to do the same again. The current ECB interest rate policy is absolutely bonkers. It prevents liquidations of investments. But, liquidations are the only solution. Japan failed because Japan avoided liquidations.

    Debt is holding the system back. Inflation will not destroy the debt, it will provide the liquidity that facilitates the pretence that the debt cannot be written off. But it needs to be written off. The bank bondholders need to take a bath.

    Forecast – current ECB monetary policy will bankrupt everybody’s banking system. Even Germany’s.

    Low interest rates are a subsidy on speculation. We have now had an EU wide policy of subsidizing speculation since Wim Duisenberg stepped down as ECB president. Wim was the one who anchored the Euro, and the media (and the banks) hated him for it. On the other hand, I can remember the Irish Times (which has been a liar in much of the Irish public discussion) rassuring us about the allegation tarnished Trichet, and his suitability for the task.

    The current policy is simply more of the “extend and pretend” doctrine.

    If Europe keeps it going the EU policymakers will have to invade the Steppe once again to grab resources, to sustain the imperial dream/racket.

    This will all end in an unmitiated DISASTER. It is completly ludicrous. But the rich will be saved. And that is the priority of policy makers in the Western world nowadays. It will end in bloodshed, and dishonesty on a massive scale.

    The solution for Germany, is for Germany to get out of the Euro. The solution for Spain, is to go into financial meltdown, because the current social meltdown is worse. The solution for Greece is to default. The solution for Ireland is a referendum concerning the bondholder debt, followed by default on private sector debt. The EU has cornered Ireland, and served the bondholders. RTE has behaved like an impeccable quisling.

    Once again we are seeing that the centralist policies that predominate in Europe are failing. The attainment of consensus is the attainment of widespread errors.

    Mario is no use to the common man, but he will serve the bankers very well, indeed.

  27. Deco

    If only the Roman Empire tried inflation……

    Maybe if they tried inflation, and invading the east……

    • michaelcoughlan

      Hi Deco,

      I was going to simply link the following but it is so important and the parallels so clear with the US today that I simply cut copied and pasted it. My apologies for how long but necessary re the Roman Empire and inflation.

      “Roman history, particularly the problem of inflation and its impact. The following analysis is based on the premise that monetary policy cannot be studied, or understood, in isolation from the overall policies of the state. MCWILLIAMS TAKE NOTE.
      Monetary, fiscal, military, political, and economic issues are all very much intertwined. And they are all so intertwined because any state normally seeks to monopolize the supply of money within its own territory.

      Monetary policy therefore always serves, even if it serves badly, the perceived needs of the rulers of the state. If it also happens to enhance the prosperity and progress of the masses of the people, that is a secondary benefit; but its first aim is to serve the needs of the rulers, not the ruled. This point is central, I believe, to an understanding of the course of monetary policy in the late Roman Empire.

      We may begin by looking at the mentality of the rulers of the Roman Empire, beginning at the end of the 2nd century AD and looking through to the end of the 3rd century AD. Roman historians refer to this period as the “Crisis of the 3rd Century.” And the reason is that the problems of the Roman society in that period were so profound, so enormous, that Roman society emerged from the 3rd century very different in almost all ways from what it had been in the 1st and 2nd centuries.

      To look at the mentality of the Roman emperors, we can look just at the advice that the Emperor Septimius Severus gave to his two sons, Caracalla and Geta. This is supposed to be his final words to his heirs. He said, “live in harmony; enrich the troops; ignore everyone else.” Now, there is a monetary policy to be marvelled at! US POLICY TODAY WITH ONE EXCEPTION; THE TROOPS GET PAID FUCK ALL MONEY BUT MOSTLY ONLY A COMPLIMENT
      Caracalla did not adhere to the first part of that advice; in fact, one of his first acts was to murder his brother. But as for enriching the troops, he took that so seriously to heart that his mother remonstrated with him and urged him to be more moderate and to restrain his increasing military expenditures and burdensome new taxes. He responded by saying there was no longer any revenue, just or unjust, to be found. But not to worry, “for as long as we have this,” he insisted, pointing to his sword, “we shall not run short of money.” JUST LIKE BARRACK OBARRASEMENT.

      His sense of priorities was made more explicit when he remarked, “nobody should have any money but I, so that I may bestow it upon the soldiers.” DUBBYA “nobody should have any money but I, so that I may bestow it upon the armaments factories (his own)” And he was as good as his word. He raised the pay of the soldiers by 50 percent, and to achieve this he doubled the inheritance taxes paid by Roman citizens. When this was not sufficient to meet his needs, he admitted almost every inhabitant of the empire to Roman citizenship. What had formerly been a privilege now became simply a means of expanding the tax base. THIS WAS THE REASON JRESUS WAS BORN IN A STABLE. HIS MORTAL PARENTS WERE ON THEIR WAY TO A CENSUS TO BE ADDED TO THE TALLY SO THE ROMAN EMPIRE COULD GET MORE TAXES. ITS ALSO ONE OF THE REASONS THE INTERNATIONAL FINANCIERS ARE SO OPPOSED TO IRAN AND OTHER ISLAMIC COUNTRIES. IN THEORY WOMEN ARE SUPPOSED TO BE ABSOLVED OF WORKING BECAUSE WOMEN ARE DEEMED TO BE HIGHLY REGARDED WHICH FUCKS OFF BANKERS BECAUSE THEY CAN’T TAX THEM AND CONTROL THEM THROUGH THEIR INTEREST BEARING CURRENCY.

      He then went further by proceeding to debase the coinage. JUST LIKE THE US AND EVERYONE ELSE. The basic coinage of the Roman Empire to this time — we’re speaking now about 211 AD — was the silver denarius introduced by Augustus at about 95 percent silver at the end of the 1st century BC. The denarius continued for the better part of two centuries as the basic medium of exchange in the empire.

      By the time of Trajan in 117 AD, the denarius was only about 85 percent silver, down from Augustus’s 95 percent. By the age of Marcus Aurelius, in 180, it was down to about 75 percent silver. In Septimius’s time it had dropped to 60 percent, and Caracalla evened it off at 50/50.Caracalla was assassinated in 217. There then followed an age that historians refer to as the Age of the Barrack Emperors, because throughout the 3rd century a ll the emperors were soldiers and all of them came to their power by military coups of one sort or another.

      There were about 26 legitimate emperors in this century and only one of them died a natural death. The rest either died in battle or were assassinated, which was totally unprecedented in Roman history — with two exceptions: Nero, a suicide, and Caligula, assassinated earlier.

      Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.

      But the real crisis came after Caracalla, between 258 and 275, in a period of intense civil war and foreign invasions. The emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only 0.5 percent silver in the denarius.

      Prices in this period rose in most parts of the empire by nearly 1,000 percent. WE REALLY REALY NEED INFLATION DONT WE DAVID? The only people who were getting paid in gold were the barbarian troops hired by the emperors. JUST LIKE THE KHMER ROUGE the barbarians were so barbarous that they would only accept gold in payment for their services.

      The situation did not change until the accession of Diocletian in the year 284. Shortly after his accession he raised the weight of the gold coinage, the aureus, to 60 to the pound — this was from a low of 72. But ten years later, he finally abandoned the silvered coinage, which by this time was simply a bronze coin dipped in silver rather quickly. He abandoned that completely and tried to issue a new silver coin, called the argenteus, struck at 96 coins to the pound of silver. The argenteus was fixed as equal to 50 of the denarii (the old coinage). It was designed to respond to the need for higher-tariff coins in the marketplace, to reflect the inflation.
      Diocletian also issued a new bronze coin tariff at ten denarii, called the nummus. But less than a decade later, the nummus had gone from being tariffed at ten denarii to now equaling 20 denarii, and the argenteus had gone from 50 denarii to 100. In other words, despite Diocletian’s efforts, the Empire suffered 100 percent inflation.

      The next emperor who interfered with the coinage in a meaningful way was Constantine, the first Christian emperor of Rome. In the year 312, which is also the year he issued the Edict of Toleration for Christianity, Constantine issued a new gold piece, which he called by a new name, the solidus — solid gold. This was struck at 72 to the pound, so it was in fact debased more than Diocletian’s.

      These were very large issues of coin and historians have puzzled over where Constantine got all the gold; but I think the puzzle is not so difficult once you begin to look at his legislation. First of all, Constantine issued two new taxes. One was on the estates of the senators. This was rather new because senators were usually free of most taxes on their land. He also issued a tax on the capital of merchants; not their earnings, but their capital. This was to be levied every five years and it was to be paid in gold. He also required that the rents from the imperial estates, which were rented out to tenants, were to be paid only in gold.

      Constantine took on the bullion reserves of his former partner Licinius, who had extracted, by force, bullion from the treasuries of the cities of the Eastern Empire. ROSSEVELT FUCKED THE AMERICAN PEOPLE LIKE THIS IN THE 1930’S. In other words, any city that had any gold bullion or silver bullion left in its treasury was simply requisitioned by Licinius. This gold passed on now into the hands of Constantine who had gotten rid of Licinius in a civil war.

      We’re also told that he stripped the pagan temples of their treasuries. VIKINGS DID THIS TO US UNTIL A FELLA FROM THE TOWN I GREW UP IN PUT MANNERS ON THEM AT THE BATTLE OF CLONTARF. SPANISH CONQUISTADORS DID THIS OF COURSE TO THE INCA’s. This he did rather late in his reign. In the early days he was apparently still somewhat afraid of angering the gods of Rome. As his Christianity became more fixed, he felt greater ease at robbing the temples.

      Now, in one sense, Constantine’s reform began the reversal of the process: the gold coinage was sufficiently large that it began to take hold and to circulate more freely. However, the silver coinage failed and, what was worse, at no time in this period did the central government try to control the token coinage. The result was that token coinage was being minted not only by the imperial mints, but also by the mints of cities. In other words, if a city couldn’t pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.

      By the late 3rd century we also begin to have the massive appearance of what numismatists call counterfeits. I would say it would be called credit money today. People need small change, and they simply go and manufacture it. All of this of course meant that the amount of token coinage in circulation was uncontrolled and increasingly massive.

      Now, one of the things that had happened in the course of this 3rd-century inflation was that the government found that when it paid its troops in token coinage, or even in debased silver coins, prices immediately rose. Every time the silver value of the denarius dropped, prices naturally rose.
      The result was that the government, in order to try to protect its civil servants and its soldiers from the effects of inflation, began to demand payment of taxes in kind and in services rather than in coin. LIKE THE CUNTS IN EUROPE ARE FORCING US TO PAY WEALTH TAXES ON PROPERTY FOR THE SAME REASON. They wound up, in effect, repudiating their own issued coins, not accepting them for tax collection purposes.
      With Constantine’s reform, this situation changed somewhat and, slowly but surely, the government began to move away from collecting taxes and paying salaries in kind, and began to substitute collecting taxes and paying salaries in gold. Over the long run, this meant that the gold standard was strengthened and gold remained the real money of the Roman Empire.

      However, the inflation did not end for the masses of the people. In other words, gold was a hedge against inflation for those who had it, and these were principally the troops and the civil servants. The taxpayers had to buy these gold coins in order to pay their taxes. If they were wealthy enough, they could afford to buy these gold coins, which were increasingly expensive in terms of token money. If they were poorer they simply couldn’t pay the taxes; they lost their lands in one form or another or became delinquents. We hear constant references to people abandoning their land, disappearing. THIS MCWILLIAMS WILL NEVER HAPPEN IN IRELAND BECAUSE HISTORICALLY WE KILL ANY FUCKER WHO TRIES TO IMPOVERISH US BY TAKING OUR LAND OFF US.

      “If a city couldn’t pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.” BARRACK OBARRASEMENT HAS JUST DONE THIS IN THE US BY INCRERASING THE MIN WAGE FOR CIVIL SERVANTS AND PAYING IT WITH FRESHLY PRINTED MONEY.

      As a matter of fact in the 3rd century this was a constant problem in Rome: all sorts of people were trying to escape the increased taxes that the military needed. The army itself had grown from the time of Augustus, when they had about a 250,000 troops, to the time of Diocletian, when they had somewhat over 600,000. So the army itself had doubled in size in the course of this inflationary spiral, and obviously that contributed greatly to the inflation.

      In addition, the administration of the state had grown enormously. Under Augustus, essentially, you had the imperial administration at Rome, the secondary level of administration in the governors of different provinces, and then the primary governmental units in the Roman Empire in this time were the cities.

      By the time of Diocletian this pattern had broken apart. You had not one emperor, but four emperors, which meant four imperial courts, four Praetorian Guards, four palaces, four staffs, etc.

      Under them were four Praetorian prefectures, regional administrative units with their staffs and their budgets. Under these four prefectures, there were then 12 dioceses, each diocese having its administrative staff and so on.
      Under the diocesan rulers, the vicars of the dioceses, we have the provinces. In Augustus’s time there were approximately 20 provinces. Three hundred years later, with no substantial increase in territory, there were over a hundred provinces. The Romans had simply divided and subdivided provinces for the purposes of maintaining internal military control of the regions. In other words, the cost of policing and administrating the Roman state became increasingly enormous.
      All these costs, then, are some of the reasons why the inflation took place; I’ll get to others in a moment. To give you some idea of the situation after Constantine’s reform of the gold, let me just briefly give you the figures for what it cost in terms of the denarius, the silver coinage, or token coinage now, to buy a pound of gold.

      In Diocletian’s time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, 23 years after it was 50,000, it was now 300,000. In 337, the year of Constantine’s death, a pound of gold brought 20,000,000 denarii.

      And by the way, just as we are all familiar with the German currency of the 1920s with the bigger stamp on it, the Roman coinage also has stamps over stamps on the metal, indicating multiples of value.

      At one point, one of the Roman emperors had a marvellous idea: instead of issuing coins he devised a method to handle the inflation. He took brass slugs, put them in a leather pouch, and called it a follis; and people began passing these pouches back and forth as value. I guess it was the Roman equivalent to those baskets of paper we see in the pictures of Germany in the 1920s.

      Interestingly enough, within ten years or so after that began, the word follis — which had meant this bag of coins — had now drifted to mean just one of those brass slugs. One of those slugs was now the follis. They couldn’t even keep the bags stable, they too were inflated.

      Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.

      What were the causes of this inflation? First of all, war. The soldiers’ pay rose from 225 denarii during the time of Augustus to 300 denarii in the time of Domitian, about a hundred years later. A century after Domitian, in the time of Septimius, it had gone from 300 to 500 denarii; and in the time of Caracalla, about 10 years later, it had gone to 750 denarii. In other words, the cost of the army was also rising in terms of the coinage; so, as the coinage became more worthless, the cost of the army had to be increased.

      The advance in the soldiers’ pay in the rest of the 3rd century and into the 4th century is not known; we don’t have figures. One reason is that the soldiers were increasingly paid in terms of requisitions of supplies and goods in kind. They were literally given food, clothing, shelter, and other commodities in lieu of pay. This applied also to the civil service.
      When one Roman emperor refused to pay a donative on his accession — this was a bonus given to the soldiers on the accession of the emperor — he was simply murdered by his troops. The Romans had had this kind of problem even in the days of the Republic: if the soldiers don’t get paid they rather resent it.

      What we find is that the donatives had been given on the accession of a new emperor from the time of Augustus on. In the 3rd century, they began to be given every five years. By the time of Diocletian, donatives were given every year, so that the soldiers’ donatives had in fact become part of their basic salary.

      The size of the army, I indicated already, had also increased. It had doubled from the time of Augustus to that of Diocletian. And the size of the civil service also increased. Now, all these events strained the fiscal resources of the state beyond its ability to sustain itself; and the ship of state was kept going, frequently by debasing, then by taxing, and then often simply by accusing people of treason and confiscating their estates.

      One of the Christian fathers, Saint Gregory Nazianzus, commented that war is the mother of taxes. I think that’s a wonderful thing to keep in mind: war is the mother of taxes. And it’s also, of course, the mother of inflation.
      Now, what were the consequences of inflation? One of the odd things about inflation is, in the Roman Empire, which while the state survived — the Roman state was not destroyed by inflation — what was destroyed by inflation was the freedom of the Roman people. Particularly, the first victim was their economic freedom.

      Rome had basically a laissez-faire concept of state/economy relations. Except in emergencies, which were usually related to war, the Roman government generally followed a policy of free trade and minimal restriction on the economic activities of its population. But now under the pressure of this need to pay the troops and under the pressure of inflation, the liberty of the people began to be seriously eroded — and very rapidly.
      We could start with the class known as the decurions. This was your prosperous, small- and middle-landowning class who were the dominant elements of the cities of the Roman Empire. They were the class from whom the municipal counsels, magistrates, and officials were chosen.

      Traditionally, they had viewed service in the governments of their towns as an honour and they had donated, not merely their time, but also their wealth to the betterment of the urban environment. Building stadiums and bathhouses, and repairing the streets and providing for pure water were considered benefactions. It was a kind of philanthropic act and their reward was, of course, public recognition and esteem.
      This class, in the mid-3rd century, was assigned the task of collecting the taxes in the municipality. The central government could no longer collect its taxes effectively, so they made the decurion class collectively responsible for getting revenues and passing them on to the imperial government.
      The decurions, of course, had as much difficulty as anyone else in doing this, and the returns were, again, frequently inadequate. So the government solved that problem by simply passing a law that any taxes that decurions could not collect from others, they would have to pay out of their own pockets. That’s known as the incentive method for the tax collector.
      As you can well imagine, as the crises became greater and the economy was disrupted by civil conflicts and invasions and the effects of inflation, the decurions, strangely enough, no longer wanted to be decurions. They began to abandon their lands, abandon their cities, and escape to wherever they could find refuge in other larger cities or other provinces. But they were not to be allowed to do that with impunity, and a law was then passed that any decurion discovered somewhere else was to be arrested, bound like a slave, and carted back to his hometown where he would be restored to his dignity as a decurion.

      The 3rd century is also the period of the persecution of the church. We find that at least some of the emperors must have had a sense of humour because they passed a regulation that if a Christian was arrested and found guilty of a capital crime, namely believing in Christ, he was not to be executed but offered the option of becoming a decurion.
      Now, the merchants and the artisans were traditionally organized into guilds and chambers of commerce and that sort of thing. They now, too, came under government pressure because the government could not obtain enough material for the war machine through regular channels — people didn’t want all that token coinage. So merchants and artisans were now compelled to make deliveries of goods.

      So that if you had a factory for making garments, you now had to deliver so many garments to the government requisitions. If you had ships, you had to carry government goods in your ships. In other words, what we have here is a kind of nationalization of private enterprises, and this nationalization means that the people who use their money and their talent are now compelled to serve the state whether they like it or not.
      When people tried to get out of this they were then, by law, compelled to remain in the occupation that they were in. In other words, you couldn’t change your job or your business.
      This was not sufficient because, after all, death is a relief from taxes. So the occupations were now made hereditary. When you died, your son had to take up your profession. If your father was a shoemaker, you had to be a shoemaker. These laws started by being restricted to the defence-oriented industries but, of course, gradually it was realized that everything is defence-oriented.

      The peasantry, known as the coloni, were leaseholders on both imperial and private estates. They too were formerly a free class. Now under the same kinds of pressures that all smallholders were in this situation, they began to drift away, trying to find better opportunities, better leases, or better occupations. So under Diocletian the coloni were now bound to the soil.

      Anyone who had a lease on a particular piece of land could not give that lease up. More than that, they had to stay on the land and work it. In effect, this is the beginning of what in the Middle Ages is called serfdom, but it actually has its origins here in late Roman society.
      “War is the mother of taxes.”

      We know for example from studies of Palestine, particularly in the Rabbinical writings, that in the course of the 3rd and early 4th century the structure of landholding in Palestine changed very dramatically. Palestine in the 2nd century was mostly composed of peasant landholders with very small acreage, perhaps an average of two and a half acres.
      By the 4th century those smallholders had virtually disappeared and been replaced by vast estates controlled by a few large landowners. The peasants working the estates were the same people, but in the meantime they had lost their land to the larger landowners. In other words, landholding became a kind of massive agribusiness.

      In the course of this, the population of Palestine, still principally Jewish, also changed in that the ownership of land passed from Jews to Gentiles. The reason for that undoubtedly was that the only people with large amounts of cash who could buy out these smallholders who were in distress were, of course, the government officials. And we hear of them being called potentates, powerful ones. In effect there is a shift in the distribution of wealth in Palestine; and obviously, from other evidence, similar things were happening in other places.
      With regard to taxes, they naturally increased across the board, but Diocletian decided that it was a very inefficient system that he had inherited. Every province more or less had its own system of taxation going back to pre-Roman times. And so he, with his military mind, demanded standardization.
      And what he did was to have all wealth, which was of course landed wealth, assessed by a standard unit of productivity, the iugum. In other words, every person who had land was either singly, if he was a large landowner, or collectively, for those who were smaller landowners, put into an iugum.
      This meant that the emperor for the first time had the basis of a national budget, something the Romans never had before. Therefore, he knew at any given time how many taxable units of wealth there were in any province. He could simply levy an assessment and expect to get a fixed amount of money.
      Unfortunately, this took no account of the fact that in agriculture productivity varies considerably from season to season, and that if an army has passed through your district it may take years to recover. The result is that we hear of massive petitions from whole regions asking the emperor to forgive them their taxes, to remit five years of past dues, or to reduce the number of units of productivity to reflect the loss of population or materials.

      As a matter of fact, when people began to say “it used to be I had five people paying this unit of taxation, but two of them have fled and it’s only half the land in production,” the response of the government was, “that doesn’t matter, you still have to pay for the land that is now out of production.” So, I mean, there was no relationship between taxes and actual productivity. SAME AS PROPERT TAX. YOU’RE LIABLE EVEN IF YOU MAKE A LOSS.

      How did people protect themselves from this? Well, first of all, long-term mortgages virtually ceased to be given. Long-term loans of any kind disappeared. No one would lend unless they were guaranteed payment in gold or silver bullion.
      In fact the government itself, under Diocletian and Constantine, refused to accept gold coins in payment of taxes, but insisted instead on gold bullion. So that the coins that you bought in the marketplace had to then be melted down and presented in the form of bullion. The reason was that the government was never sure how adulterated its own gold coinage really was.

      Pledges and securities for crops and for loans were always in gold, silver, or indeed in crops themselves. In Egypt we have a document in which it seems that the banks had been refusing to accept coins with the divine image of the emperor; in other words, state issues. The government’s reaction to that, of course, was to force the banks to accept the coinage. This led to wholesale corruption in Roman society, as people refused to exchange coinage at the officially fixed tariffs but instead used the black market to exchange coinage on a market principle.
      There was, obviously, flight from the land, massive evasion of taxes, people left their jobs, they left their homes, and they left their social status. Now, Diocletian’s final contribution to this continuing disaster was to issue his famous Edict on Maximum Prices, in 301 AD. This is a very famous instance of a massive effort by the government to limit inflation by price controls.

      You have to realize that there was a little problem: the Roman Empire was a vast region running from Britain in the West to Iraq in the East; from the Rhine and the Danube to the Sahara.
      It included areas of very sophisticated and very primitive economies, and thus the cost of living varied considerably from province to province: Egypt seems to have had the lowest cost of living; Palestine had a cost of living twice that of Egypt, and Roman Italy had a cost of living twice that of Palestine.
      “The Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy.”

      Diocletian ignored that; he just issued a single standard price for the entire empire. The result was that in Egypt, the Edict probably had no effect, because the maximum price fixed in the Edict was very rarely reached in Egypt. It was the people in Rome, of course, who found the maximum price lower than the market price.

      The result of that, of course, were riots in the street, and the disappearance of goods. The penalty for violating this law was death, a very common penalty in Rome for almost anything.
      The mentality of Diocletian, and the cause of the maximum price edict, comes out in the preface to the law. I’ll just quote briefly some of it. When you hear these first words I’d like you to pay attention, because you may have a different interpretation of them than what Diocletian meant.
      He says, “if the excesses perpetrated by persons of unlimited and frenzied avarice could be checked if the general welfare could endure without harm this riotous license, if these uncontrolled madmen, the unscrupulous, the immoderate, the avaricious, could be persuaded to desist from plundering the wealth of all, then all would be well.” Now who are these people? They are the merchants; they are the avaricious greedy types who cause inflation as we all know.
      Then he speaks about himself and his three partners. “[We, the protectors of the] human race” — sounds familiar, doesn’t it? “We are agreed that decisive legislation is necessary, so that the long-hoped-for solutions, which mankind itself could not provide” — you know, it’s the same stuff; we can’t do anything ourselves, we need the legislator.

      “By the remedies provided by our foresight, these things may be remedied for the general betterment of all.”

      In fact, as you read through the rest of the thing it becomes clear that the reason the Edict on Prices was issued was that the soldiers were the principal victims of the inflation. Diocletian was afraid he was losing control of his army. And so the people who are to be protected are the soldiers and the other servants of the state.

      Now Diocletian’s monetary reforms were tentative steps in the right direction; except for the Edict on Prices, which, by the way, simply didn’t work and was gradually dropped. But his steps were not radical enough.

      Because of his inability to create a sufficient supply of gold and silver coinage, combined with his continued reliance on payments in kind for taxes and salaries, and his continued issuance of fiat bronze coinage in endless amounts, he failed to make a significant dent in the problem.
      Constantine’s reforms were also partial, but of sufficient vigor and radical character to make a difference. Through his willingness to extract by compulsion the gold reserves of the taxpayers, forcing them to disgorge their bullion, he placed an ever-increasing supply of gold in the hands of government officials.

      This was increasingly used to pay military bonuses, salaries for bureaucrats, and even payments for certain public works. Increasingly, then, a two-tier monetary system emerged in which the government, the soldiers, and the bureaucrats enjoyed the benefits of a gold standard while the nongovernmental portion of the economy continued to struggle with a rapidly inflating fiat currency.

      The new gold solidus — circulated widely by its possessors, the government-salaried employees — sold at various market rates to customers who desperately needed it to pay their taxes. Thus the state had found a way to protect itself and its servants from the unwholesome effects of its own earlier inflationary cycle, while slowly withdrawing from the cumbersome and wasteful system of accepting taxes and paying salaries in kind. Meanwhile, the masses suffered from a massive injection of fiat money, which they had to accept in payment for government requisitions of gold, silver, or other commodities.
      Now, we may wish to find some lessons in this tale of the monetary policies of the late Roman Empire. The first lesson, I think, must be that if war is the health of the state, as Randolph Bourne said, it is poison to a stable and sound money. The Roman monetary crisis therefore was closely connected with the Roman military problem.

      Another lesson is that problems become solvable when a ruler decides that something can be done and must be done. Diocletian and Constantine clearly were willing to act to protect their own ruling-class interests, the military and the civil service.
      Monetary reforms were necessary to win the support of the troops and the bureaucrats, who composed the only real constituency of the Roman state, and the two-tier system was designed to this end. It brought about a stable monetary standard for the ruling group, who did not hesitate to secure it at the expense of the mass of the population.
      The Roman state survived. The liberty of the Roman people did not. When freedom became possible in the West in the 5th century, with the barbarian invasions, people took advantage of the possibility of change. The peasantry had become totally alienated from the Roman state because they were no longer free. The business community likewise was no longer free. And the middle class of the cities was no longer free.
      The economy of the West was perhaps more fatally weakened than that of the East. The early 5th century Christian priest Salvian of Marseille wrote an account of why the Roman state was collapsing in the West — he was writing from France (Gaul). Salvian says that the Roman state is collapsing because it deserves collapse; because it had denied the first premise of good government, which is justice to the people.
      By justice he meant a just system of taxation. Salvian tells us, and I don’t think he’s exaggerating, that one of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy.
      In other words, the Roman state was the enemy; the barbarians were the liberators. And this undoubtedly was due to the inflation of the 3rd century. While the state had solved the monetary problem for its own constituents, it had failed to solve it for the masses. Rome continued to use an oppressive system of taxation in order to fill the coffers of the ruling bureaucrats and soldiers.

      • Deco

        Michael – I watched a documenatry concerning the decline of the Western Roman Empire last year. It was light on the weight of the martial society, and the militarism that was bankrupting the society. Howeve, it did indicate that there were continual civil wars, and that these produced a continual deterioration of society. The soldiers acheived too much power. The state achieved too much abaility to suck resources from the rest of society.

        The relationship between the subjects and the state went to the point that symbiosis was exceeded, and the parasite got too large for the host.

        A lot of the points that you have made are indeed correct.

        The Franks, and the Goths that overwhelmed the Roman legions had some major advantages – no bureacracy. Everything happened faster. And they could adapt quickly to the scenario that unfolded.

        The Empire rotted from within. People lived in an acute state of denial for decades, about the sustainability of what they were doing. Mostly they were consuming less than they were rpoducing, and taxing production as a means to pay for consumption.

        The state system actually weakened the entire society. Apathy was predominant. There was little dissent, and little debate about what was going on. Instead the mantras kept getting repeated.

        If the EU becomes a martial entity then it will follow down the same track. The problem is – Europe is being led down this track, towards disaster.

      • Michael, you get the prize for the longest ever entry on the blog

  28. Deco

    [
    If this re-balances Irish bank lending away from property into start-ups and companies which produce things, it could be a huge positive for an economy like ours that has a weakness for destroying itself with its property obsession.
    ]

    David – the same idiots are still in charge. Just look at the “Irish” banks. Or the big players in Dublin business. 98% of the people in the regulatory authorities are still in the job.

    Intellectually, there has been no progress. The same morons are in charge. They got burned. But it would be too much to expect that they got any sense.

  29. Pat Flannery

    Tony, I don’t know if it was your intention but you described perfectly what a crazy pipe dream leaving the Euro would be. It is pure fantasy as you explained so well above and I am surprised at Adelaide sharing such a view without explaining where Ireland would go currency-wise.

    Of course David McWilliams can be pardoned for openly advocating exiting the Euro because he is essentially a Unionist and believes we should rejoin the British Pound and eventually the United Kingdom. He keeps reminding us that the UK is our biggest trading partner, but like Adelaide without explaining why we remain so shackled to the UK.

    Being nominally independent but remaining essentially part of the UK is our biggest economic problem – it has prevented us from developing an indigenous Irish industrial sector.

    All equipment used in Ireland is based on UK standards requiring all purchases and spare parts to be routed through the UK – at higher prices than apply in the UK.

    That is why David Cameron wants Kenny installed as the next President of the European Commission and why Merkel opposes him in favor of Luxembourg’s Juncker. Kenny is banking on being seen as a compromise candidate. But is he?

    Cameron wants him because London has leverage over Dublin unlike anything it has over any other European capital. Merkel wants Juncker because he was one of the prime architects of the Euro and of an integrated Europe, which she and Germany favor. Cameron’s backing of Kenny is a clear sign that Ireland is still ruled from London and Europeans know it.

    They know that our own David McWilliams is right and that the UK is indeed Ireland’s “biggest trading partner” and that the Brits, not the Europeans, own and operate Dublin’s International Financial Services Center, the IFSC. They know only too well that Dublin’s IFSC is London’s primary offshore tax haven and is controlled not from the banks of Liffey but from the banks of the Thames.

    Meanwhile our main nationalist political party, Sinn Fein is fully coopted into the UK by acting as Ministers of the Crown in Northern Ireland. Perhaps it’s just a coincidence that Sinn Fein is very opposed to the Euro and European integration. Irish parents watch London’s soap opera “West End” every evening on RTE, Ireland’s “national” television! And our youth follow British soccer as their primary sport interest.

    Joining the Euro remains our only fig leaf act of independence. Maybe that’s why McWilliams and others want us to exit it – without explaining to where or to what – as if we do not know.

    • Hi Pat.

      I enjoyed your comments above.
      However I am perfectly serious.
      You wish to retain the Euro but without going through the pros and cons.
      I am convinced that a nation who gives up its currency to another is subservient to that other.
      In order to be an independent sovereign entity Ireland must have its own currency.

      As we are aware that the Euro is controlled by European bureaucrats, that are in turn controlled by international banksters, there is no alternative to be contemplated.
      The alternative is to be an economic serf and eventually a slave as described in Michael’s account of the decline of the Roman Empire.

  30. Pat Flannery

    Tony, my main reason for supporting Ireland in the Euro is based on my understanding of what happen to the Asian Tiger economies during the 1997 Asian Financial Crisis.

    http://en.wikipedia.org/wiki/1997_Asian_financial_crisis.

    If those independent Asian countries had a common currency like the Euro they would not have been ruined by what amounted to a bank run by hot international investment money. To me the lesson is: if George Soros can “short” the Bank of England (which he did and made his first billion) he can manipulate any currency for a quick profit. So can others. Soros has admitted to having shorted several of the Asian countries during (perhaps even causing) the 1997 crisis.

    So there you have it, my position in a nutshell. Ireland cannot afford to go it alone in the present financial world. It would be eaten alive by financial sharks like George Soros (a personal friend of Sir Anthony O’Reilly by the way).

    • Thanks for that Pat

      The attached article basically points out that the acian tigers attracted a lot of foreign capital, has an extended boom on credit. Had that foreign investment reverse and voila a bust.

      Pat, this fits the model of “a credit based boom results in an equal sizes bust.
      Then Ireland as part of the EU and EMU has a similar boom induced by credit borrowing and voila a bust.

      What this has to do with a sovereign country havinf its own currency i still do not see.

      So I stick to my position that what every sovereign county needs is to not give its financial controls to a foreigner.

      Ireland needs its own currency to have a hope of survival.

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