What’s worse? Having to listen to a Portuguese communist telling us that the Euro was a victim of Ireland? Or having to listen to our own guy, when the EU has just nailed his ass to a post, telling us there is “no row” between Ireland and the EU President?
I don’t remember voting this guy to be President of anything, do you?
Now the so-called EU President went on to suggest that that chances were slim of Ireland getting a post dated cheque for paying the bondholders and “taking one for the team”. This statement comes on the same day as the former head of the IMF mission to Ireland tells us we should have burned the bondholders – as this column was arguing all along.
The notion that the Euro was not a major factor in the boom/bust cycle of not just Ireland but Spain, Portugal and Greece, is simply implausible. You may remember in the period from 2000-2007, the flow of funds from the core to the periphery was trumpeted as evidence of the success of the Euro. This argument, proposed by the Euro-enthusiasts, was that capital flowing from Germany to Ireland looking for yield was a sign that the system was working.
In 2005, in the Pope’s Children, I invented a fictitious elderly German saver to represent what was happening to German savings and how they were being recycled out of Germany to fuel booms in places like Ireland, Spain and Greece. This warning about the day that the German might want his savings back was scoffed at by the Euro enthusiasts who refused to countenance the argument that the Euro would cause too much money to flow into the periphery in good times and too little in bad times.
The minute the crisis hit, these positive “flows” of capital suddenly became negative “imbalances” which need to be fixed. The narrative changed from the capitalist free flow of capital from the core to the periphery, to a quasi socialist tract– except it was only socialist for the rich – which contended that the taxpayers of the peripheral countries should pay the debts of the banks.
The argument back then articulated by the likes of Barroso and the IMF was that the State must bail out the banks because this was the only way of saving contagious bank runs all over the continent. This interpretation of the way financial markets operate, resulted directly in the “taking one for the team” story.
But anyone who has worked in financial markets knows that the markets have no memory and events of the past remain in the past. The markets also know that if your problem is too much debt, your situation is made more sustainable by less debt not more debt. The solution therefore is to do debt deals, maybe not paying principal, maybe not paying money now and kicking out the debt for years to come.
In Greece, the EU oversaw a €100billion default of sovereign debt and what happened to the price of Greek debt after that? It rallied massively. In Ireland, the official line was that any changing of the terms of our debts (a default by any other name) would cause the markets to take flight. What actually happened when we didn’t pay back the promissory note on the day we were supposed to? Surely by not abiding by the terms of the contract, the markets would take fright? The opposite actually happened: the day the promissory note was not paid, and it was announced that it wouldn’t be paid for a few decades, Irish bond prices rallied!
So the interesting thing about the Barroso view of the world, is that is has actually being wrong at every juncture. And now, realizing just how wrong the official Brussels position was, the IMF have changed their position on the whole thrust of policy.
According to the IMF this week, we shouldn’t have paid the senior bondholders at all. How does that make you feel?
But the saga is not over yet because the legacy of the massive movement of capital from one bank to another, from one country to another resulted in massive malinvestment. Malinvestment is what happens when there is so much capital about that huge investing mistakes are made but those mistakes are only evident after the event.
The bad investment sits on the balance sheets of the banks for years because the banks’ initial reaction is that the market will come back and if they can just service the interest on the loans, the banks don’t have to write the loans off.
But as the handmaiden of the crash in asset values is a credit crunch and typically a period of deflation, the loan’s chances of being repaid are minimal with a bout of inflation.
As the European economy is in the grips of deflation, not inflation, eventually the banks’ balance sheets get worse and worse and the banks become Zombies. A Zombie bank is nothing more than a government backed safe deposit box for depositors – or at least that’s what the large depositors of Cyprus thought until their deposits were confiscated.
In order to fix the Zombie banks, the ECB came up with a ruse, which extended cash to them in return for their dodgy loans, only if the banks then bought high yielding government bonds. So for the past two years, Eurozone banking policy has been one where the central bank lends to bust banks who lend in turn to bust governments. The higher yield on the bust government bonds flows directly to the banks, so not only do the governments look like a better bet but the banks look profitable too. That’s only as long as the debt isn’t rolled over at the new lower rates, at which time the banks go bust again.
Draghi knows this and in an effort to put some sanity into the Eurozone banking system, he has ordered a stress test.
What do banks do when faced with a stress test?
They stop lending and hoard capital. The less loans they have out, the smaller the risk of bad loans and the less capital they have to raise to leap over the stress test hurdle. This means that the stress test, part of the great lurch forward to a banking union, has actually prolonged the credit crunch!
We see that in Ireland with bank lending falling all the time. The same is the case for the rest of Europe. Ireland for many businesses has become a cash economy, devoid of credit. Figures for the rest of Europe show the same story.
The other thing that banks do when they are trying to build up their capital is that they sell assets abroad and repatriate money. This may be why the Euro has been stronger of late because billions of Euro is flowing back to Europe as banks sell foreign positions.
Therefore, European businesses trying to export get the double negative whammy of banks hoarding capital and an overvalued exchange rate.
As you can see the Euro is at the epicenter of all this. Its travails are the cause, not the consequence of the banking problems and the proposed cure to the banking system’s woes lumbering the bank debt onto the citizens, playing with bond yields and now exacerbating the credit crunch with the stress test, appears like economic lunacy.
As to why the Irish economy is still breathing and beginning to recover, look no further than across the water to the booming UK, our largest single trading partner, which surprise, surprise doesn’t have to put up with the whimpering of Mr Barroso.
David Mc Williams has just launched a new daily newsletter on economics and finance www.globalmacro360.com Sign up today for your free trial.
+1
If we are to accept what we are told at home in that there would be a deal on our Debt and the EU and Prez Barrowboy are now saying no way!
I would encourage a Quid Pro Quo approach and scratch the outstanding promissory note debt that was kicked down the road for my 13 year old son to pay!
Morning. .good article David. many people here strongly advocated the burning of bondholders & were roundly attacked. I understand your point about the U.K economy “booming”….butI suggest if we went to the North of England we may see a slightly different picture….? I believe that the financial crisis will continue as their has not been any incentives to end it. Banks are more powerful than ever. The “elites” continue to get richer…the middle class are almost a thing of the past.Pensions still a timebomb……personal debt has still not been tackled. gainful employment has a wholenew meaning now.comparedto when are parents… Read more »
David, Thank you for your article. It describes perfectly the lunacy, arrogance and pomposity at the heart of Europe. Barroso and Schaeuble are beyond dangerous. The covering of bond holders was, I believe, the greatest financial theft in history. The ECB went political and forced our hand. I sincerely hope that this fraud will be uncovered by whistle blowers at the heart of the Irish Department of Finance who will disclose the true nature of exchanges (phone calls, emails and “the letter”) between all officials of Brian Lenihans department and Trichets office, and expose the dark heart of Euro political… Read more »
Sherry Talk Barroso became lost in translation and not everything he said has been highlighted and this article has been selective in the evidence it did analyse . I do agree with this article on that evidence it did chose . However , the omissions in this article has much to be said on our insular mindset and funnel vision we have of ourselves and the narrow psych we dictate .This begs me to conclude that if significant omissions have been made by our esteemed host God only knows how the ‘flock’ of taxpayers interpret it to be . Barroso… Read more »
Is there a reason that the phrase, “Burn The Bondholders” should be used? To me it seems to give a chance to defend paying back the bondholders, due to its aggressive, “feck them” sounding tone. My knowledge of the intricacies of the financial system is more as self informed interest, rather than any professional interest; but it seems to me that standard financial practice should have been that anyone investing in technically insolvent companies (i.e. whether its banks, governments, or otherwise) loses their investment, or most of it. Am I missing something here? Shouldn’t it be the bondholders on the… Read more »
DMcW keeps looking over his shoulder at the U.K, but in a Guardian interview yesterday, Helmut Schmidt adds: “Britain has a problem which that will make itself felt in the next 15-20 years. In the 19th century it was the most advanced engineering nation in the world. Now it has more or less given up on engineering and replaced it with finance. That means you can be hurt.”
Remember the kid in back to the future part 2 ?
No education
no manufacturing
no new ideas
dumb down education
ramp up entitlement
wall to wall consumerism
debt is good
saving bad
the lure of easy money
sustainability ?
The M.T.V Generation…..?
No empathy. ….
Whilst agreeing with the overall sentiment of the article, i’m still curious as to the supposed increased relevance of the UK market. From what I can see (http://www.tradingeconomics.com/ireland/exports) we’re still below, for example, what was being achieved during 2011 and 2012.
Furthermore, aren’t the vast majority of our exports (90%+) accounted for by foreign owned firms so the benefit to the local economy has to be measured accordingly.
Having said all that, I would dearly love to have some democratic say in who acts on my behalf in the EU, but that isn’t part of the agenda, is it.
What’s worse?
For me, by far and away, it is Kenny’s lame response.
Typo? minimal WITHOUT inflation – good luck with that one once Budesbank figure out what ‘whatever it takes Draghi is up to!
German Xmas Market here in Brum – they go bonkers in Brum/Irish pubs as can’t at home. Sabbath shows full of them too – and. Steelhead Paddies!
As the true implications of Euro roadmap to Fed Europa becomes clear – I predict uprising by 2016 -the 1st Irish Republic is a failed state
As Nigel Farage stated in the European Parliament some time back Barrossa and the other clowns in Europe are a complete and utter shower of tossers, and Barrossa’s latest outburst just goes to prove that particular fact!
As I mentioned before ever since the EEC changed to being the EU everything has simply gone ‘tit’s up’ and if it were ever to become the USE then God help us all!!!
I suggest that it is not the official Europe who is in denial, but the people of member countries such as Ireland. You had a chance to burn the bondholders and even exit eurozone, but you didn’t. You got what you deserved (and voted for).
Also, I think Barroso may feel insulted because you called him a socialist: he is a maoist.
I can’t wait for euroskeptics to take majority in the EU parliament and start raising hell.
I am off for a beer ð ¶ “Carpe Diem” can you get that on tap ¿
Great article as far as it goes. One thing leads to another as is said. The tone exhibits frustration and irritation with the sequence of events. The lack of democracy. Even when allowed a vote, in a referendum, the controlling interest will keep asking the question again and again until they get the desired answer. Then that desired answer is never allowed to be refuted. The question has yet to be asked as to why we use the currency we do. I am not talking about the Euro, punt nua or the pound. They are all similar. All are fiat… Read more »
David, you and a sizable percentage of the Irish population advocate that the EU or rather ‘Germany’ was at the route of the Irish problem with the loaning of cheap money. However, if the same cheap money was available to all 17 Euro zone countries, how is it that only the Irish, Greeks, Portugese and Spanish seemed to have made a balls of it?
On 23 December 1913 the Federal Reserve Act was passed after most of congress had gone home. It created the greatest financial tyranny and tapeworm the world has ever known. Remember that without central banks world wars and socialism would be impossible: taxpayers & bond markets would rebel before they got too far.–The Money changer aka Franklin Saunders
Hi,
The article is much ado. States the obvious. What realpolitik suggestions do you have David?
Michael.
End the fed and your central bank as well
http://dollarvigilante.com/blog/2013/12/23/100-years-of-the-federal-reserve.html#
china absorbs 80% of the annual mined gold production.
http://www.ingoldwetrust.ch/sge-physical-delivery-2073-tons-ytd
http://www.peakprosperity.com/podcast/84142/david-collum-broken-markets-state-capitalism-eroding-liberty
https://www.youtube.com/watch?v=kCE515rTTZ8
http://usawatchdog.com/what-happens-when-you-have-to-admit-the-golds-not-there-eric-sprott/
ZeroHedge notes that Goldman-Sachs has launched and is rapidly raising funds for a new proprietary trading fund based on the Volcker Rule — which purports to ban them. One of the Volcker Rule’s biggest of hundreds of exemptions is for banks issuing securities based on real estate loans. The real estate market, after all, is believed to be driving a “recovery” and therefore exempted.
So here we go again, and don’t try parochial bunkum “to explain it”.
The Volcker Rule only exists to block Glass-Steagall.
Struggling to take David seriously these days. Watching Barroso it seems he was making a bit of sense. Even if he wasn’t, what do people actually expect the man to say…… eh yeah we bullied you guys…… eh sorry! But lets get back to the reality of the situation… Are we saying that our banks didn’t wreck the economy? Are we say that we didn’t have a sheep running the financial services regulatory authority who shouldn’t have been appointed in the first place and secondly if it was a proper regulator it should have had the teeth to regulate to… Read more »
Often discussed here is the urgent issue of credit for the real economy. The best way to clear up the confusion that monetarists of all stripes sow to block at any cost the urgent reconstruction now needed : “FDR’s Credit Principle” investigates the needed transformation of the relations between direct lending institutions and government power, and debt and budgeting. Part I, “FDR Reviews the Crisis and Reforms of 1933,” discusses Roosevelt’s own review of the crisis of 1933 and the essential reforms from his own preface to the 1938 Papers of Franklin Roosevelt, and the Hamilton precedent for appropriate government… Read more »
Irish singer-songwriter in New York pens poignant Christmas song (VIDEO)
http://www.irishcentral.com/ent/Irish-singer-songwriter-in-New-York-pens-poignant-Christmas-song-VIDEO-237161251.html
Merry Xmas Everyone.
Besides the destructive mumbo-jumbo of Keynes here is an movie expose of
Austrian Economics: The Idiology of Serfdom.
Monetarism of such varieties is the deadliest enemy of recovery and reconstruction.
Sophistry at its very worst, the FT takes out a full page attack on the Pontiff’s denunciation of the “market-economy” and inequality. The Fabian touch omits entirely that the Pontiff exposed globalization as a killer economy.
There is one thing worse than Barroso or Inda, and that is the attempt to stifle any recovery, and progress, to satisfy an insane ideal of monetarism. Sooner or later these nutcases will have to admit, as Hayek, Friedman, Lerner (a leading Keynesian) did, their admiration for fascist economics ala Schacht, Moussolini, Pinochet, Franco to name only a few. watching opportunistic politicians dodging the obvious would be amusing if it were not so destructive.
All I will say is that I agree 100% with Barroso and disagree 100% with David and the Irish media spinmeister machine. The Irish should man up to what they did and stop blaming their Euro partners. That lie is damaging Ireland. Lies never work. Merry Christmas.
The disgusting scrooges at the Indo who refer to this little bit of government generosity as “running up a bill” –
President Michael D Higgins‘s office has honored 423 older Irish citizens, awarding them a €2,540 gift and a personal letter from Mr Higgins, for reaching the age of 100. This includes citizens from the entire Island even if now abroad.
Happy Christmas everyone.
Michael.
http://www.safehaven.com/article/3426/detractors-of-adam-smiths-real-bills-doctrine Antal Fekete outlines why the period 1814-1914 was one of the most prosperous in human history. The real Bills doctrine (RBD)moved goods rapidly from production to consumption and acted as self liquidating credit. Gold was only used to settle the financial differences between the parties. The RBD was abandoned as the nations prepared for war and international trade came to a complete halt. As it was not re-implemented after hostilities ceased it was the major reason of the collapse of the gold standard and the depression of the 1930’s. Re-introduction of the RRBD together with a return to a… Read more »
The ominous foreboding of 2014 and 1914. The Transatlantic regime is dead and lurching towards war.
THE STRATEGY FOR THE NEW YEAR
Official Europe in denial? Look at this stark warning from Der Spiegel FT columnist Muenchau :
http://www.spiegel.de/wirtschaft/wolfgang-muenchau-die-gefahren-des-jahres-2014-a-940763.html
Has he read that Strategy Report?
Not sure if DMcW mentioned this :
http://www.irishtimes.com/business/economy/german-ministers-used-irish-shell-firms-to-balance-budget-1.1613637
Irish shell companies in financial alchemy with German pension funds. Not fictitious at all, and only hit the press in Dec 2013.
-30.8% in 2010 for Ireland ! And 3% is our target !
http://www.bbc.co.uk/news/business-13366011
And have a quick look at Greece(on the annual deficit graph) in 2009 @ -15.6 …In 2010 then Greece, with an aggressive upward adjustment to -10.7% [ Greece itself buying most of it’s own sovereign bonds(debt mounted on further debt)]
The graph also shows the MASSIVE adjustment then -30.8% in 2010 to -13.4% in 2011 for Ireland …for me,that steeep graph tells a clear story of the strangulation and suffocation of people,to keep the evil, rigged broken ,system afloat
Monopoly at least in the game sometimes the greedy go to jail ¿ but still no GS don’t want to spoil the fun;that’s just a game isn’t it – not reality – no one gets hurt¿
Paul Craig Roberts
Allegedly, the US has free capital markets, and globalism is bringing free capital markets to the world. In actual fact, US capital markets are so manipulated–and now by the authorities themselves–that manipulation cannot stop without a crash.
What American “democratic capitalism” has brought to the world is manipulated financial markets and the absence of democracy. How long this game can play depends on the outside world.
Read the full article. US real economy is declining. All stats that show otherwise are manipulations.
http://www.paulcraigroberts.org/2013/12/20/manipulations-rule-markets-paul-craig-roberts/
Germans were hoarding the D-Mark. 12 years after the introduction of the Euro, 13 billion D-Mark is in circulation in Germany. In Hamburg alone in 2013, 3.86m€ were exchanged.
http://www.mobil.abendblatt.de/hamburg/article123296178/Hamburger-tauschen-2013-3-86-Millionen-DM-in-Euro-um.html
My flight delayed to Dublin, what’s with the record-breaking bad weather there, a code RED-RED? I hate airports!
Anyhow, I’d be interested to hear your predictions for 2014. Predictions are so yumptious. They’re irresistible.
Britain is Booming?
http://www.trebuchet-magazine.com/britainisbooming/
Here is what “official europe” is in denial of :
LaRouche: It’s the End of the Old Imperial System
Have a look at the map of the new Russian Customs Union. “This is going to cause a real ruckus in Europe,” LaRouche said. Ukraine is considering which documents it can sign.
Ireland has no need to be in denial, and this phase change has huge implications.
Britain Isn’t Eating
http://tinyurl.com/pd4969z
Just read that article Paul. Shocking. I’ll take it Mr. Saatchi didn’t approve the banner. The TV channels spit out non stop celebrity chefs (one of whom Mr. Saatchi may not approve of either) and people are reduced to this level of subsistance? These are our neighbours and we have our own soup kitchens. The EU isn’t working, certainly not for these people.
Japan’s economic outlook looking favourable,reports tell us. hmmm i wonder? Japan’s current debt load is considered unsustainable and although exports are maybe at ~5%,but imports have also grown in tandem to ~3%,so the once giant manufacturing nation ( No nuclear now and it did contribute 30%) is not roaring,but holding steady,seemingly. “Abenomics” is to revive their economy (i.e.BOJ’s new monetary reforms ,aka “3 arrows”, – aggressive reforms of further QE, fiscal stimulus and (supply side)structural reform …[i’d just love to know the ratios between the three arrows??] old article …lays it out well Japan’s plan to extradite themselves http://www.bbc.co.uk/news/business-23339712 http://qz.com/70866/its-hard-to-explain-what-abenomics-is-so-we-drew-you-a-picture/… Read more »
QE is useless without reduction of fiscal drag(e.g.poor consumer spending,high energy costs and servicing costs of Gov’t loans’debt)and all the while,the private sector is Deleveraging? it doesn’t compute how it possibly can work? …(unless there’s MEGA growth of course,but that hasn’t materialised,not even close) These gamblers seem to casually ignore the posteriori reasoning and empirical FACTS, in favour of their ideological delusional blueprint of “free markets” ,that don’t exist and maybe never have,not in a REAL way. P.S.Thomas Edison back in 1921 had an idea of energy backed Gov’t created debt free fiat money….appears it wasn’t just electrons that occupied… Read more »
50 BUCKS a month for the Macro 360??????
A fiver a week would be too much.
I will be very interested to see where this goes.
It is an “insider and outsider” choice for sure.
50 bucks a month!!
Im an outsider on most things, and this is one of those.
But hey GLWS’s of the subscriptions. And as always sometimes it is good to draw a line in the sand and exclude the discontented lazy rabble.
Quite a contrast in
We can talk all we like about this money or that kind of money but nothing will, can change in the economy until the existing money system is gotten rid of. The current economics are designed to fail. As they fail they allow wealth to be transferred to the handful of money manager families. The ones who set up the current system for their own benefit. Using the term fiat money seems to be confused. Fiat= let it be done. OR money declare by an authority to be money. Usually a state declaring a currency to be the only legal… Read more »