Some thoughts on Maggie

Let me be clear at the outset – I’m not a fan. I’m enjoying all the jokes – the Iron Lady rusting in peace, the possibility of privatising her state funeral, Thatcher the milk snatcher, and especially Judy Garland’s “Ding-Dong the Witch is Dead” storming up the charts, a huge embarrassment to the British government in the week she’s to be buried, but something they can do nothing about – a pure expression of public opinion, more pure even than an election.

But in the end an old lady has died; one who for the last twenty years was out of the public eye, and who I’m sure will me missed by her family, especially her over-privileged coup-sponsoring son Mark, who without her influence would be (and should be) languishing in either a South African or Equatorial Guinean jail.

There was one thing she did get right – she predicted that the single currency would be a disaster for Europe, and that the goal of the EU was federalisation, meaning essentially the end of the sovereign nation state in Europe.

Conservatives will always admire her for the way she broke the unions, privatised many state assets and demonised socialism. Leftists (I refuse to use the word “Liberal” – this is an economics blog and in economics “liberal” has an entirely different meaning to its political usage) will remember the poll tax (actually everyone will remember that), the closing of schools and hospitals, and the depletion of social housing.

And that’s just in Britain. To say that she was not loved in Ireland would be an understatement. For South Africans, she was known as a supporter of the apartheid regime (as was Reagan). Her treatment of and comments about Nelson Mandela won’t be forgotten easily; ironically the latter gentleman will probably be joining her rather too soon in whatever passes for an afterlife for you humans. Chileans will remember her providing sanctuary to Augusto Pinochet, and Argentinians, well let’s not even go there……..

But the single biggest thing which affects us all, in every way and every day, is that the right-wing economic policies implemented and cemented by Margaret Thatcher and her US counterpart Ronald Reagan in the early 1980s have led directly to the sidelining of the productive sector of the economy, in favour of the financial sector. The latter’s rampant and unregulated economic aggression is the overriding cause of the economic crisis we find ourselves in today.

 

 

 

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Austerity is here to stay, regardless.

In the first series of Blackadder, the king sends a messenger away telling him: “I don’t like that news, bring me some other news!” The messenger leaves the room and immediately returns, saying exactly the opposite of what he had just said. At the moment we’re all like Brian Blessed’s wonderful King Richard IV – we don’t want to hear the bad news, and both sides of the current referendum campaign are telling us it could be different.

I’ve been musing over the scenario facing us regarding a possible Eurozone exit, assuming we follow the route that now seems inevitable for Greece. Our crisis was different to that of Greece – there they had a government debt problem that became a banking problem. Here it was the other way around. Either way, we’ve ended up at the same place and we need to keep a close eye on Greece now as they are the canary in the coal mine. I think in a few ways we’re in better shape, the most important of which is that many Irish people do still have money, they just aren’t spending it at present. If we can get them to stop hoarding it in European banks, but rather to invest it directly into the Irish economy, we can fund ourselves, we won’t need bailouts from Europe. This recent pronouncement that we’ll be unable to return to the bond markets is such so much fear-mongering nonsense. The markets have no memory, they will move on.

But what will happen if we leave the Eurozone? There is no question that a new currency will be significantly devalued compared to the Euro. This is because of confidence factors that are inevitable in such a situation. People will want to hold euros during any change, and the initial differential in demand between the two currencies means that the new currency will cost less. This means that anything we import – in particular fuel and medicines, will increase in price, and we all know the knock-on effect of fuel prices. The ubiquitous “sun holiday” will become a luxury few can afford. Our standard of living will drop significantly; in fact we’ll achieve overnight what the Fiscal Treaty aims to achieve in 5 years. So austerity is here to stay, for a while, no matter which choice we make next Thursday.

That’s the bad news, is there any good news? A weaker currency than our major trading partners means a boost in exports. We can also expect to see more local shopping – buying from and selling to each other. A current account surplus (resulting from export trade) along with private savings means we can fund ourselves. We will be able to borrow on the bond markets if we need to, because the markets like a country with low debt. At present, the EU wants to increase our debt burden. We need debt forgiveness; we need relief for our mortgage holders in negative equity, and an organised, clearly communicated default on our sovereign debt to European banks, debt which should never have been made sovereign to begin with.

Why the Euro is bad for Europe

Money is debt. Yes, I know that sounds weird, but the tenner in your wallet may be an asset to you, but it’s a liability to the Central Bank of whatever country you happen to live in. Now it used to be in some countries you could swap your banknotes for a fixed amount of gold. There are reasons, that I’ll tell you about in a minute, why you can’t do that any more. So what makes our money……..money? The simple answer is that it’s money because the government says it is. The whole game is played with mirrors. Remember a few years back the banknotes used to say “Promise to pay the bearer on demand…….” If you take in your tenner they’ll give you another one in exchange. Eventually someone realised it was a bit silly so they don’t say that anymore. Money has value because of 1) its general acceptability and 2) its relative scarcity compared to the demand for it.

Now about the gold standard. It used to worry people that paper currency had value just because somebody said so. What was to stop governments printing and spending money at will, creating runaway inflation? The gold standard required governments to keep a reasonable fraction of their currency liabilities as gold. The central banks could create currency liabilities (ie print money) up to a certain multiple of its gold reserves. Gold coins used to circulate as part of the money stock.

But the gold standard had two huge unintended consequences. Firstly, it removed exchange rate risk across national boundaries (of the countries using the gold standard), facilitating massive lending based on the confidence that the debts would always be repaid because they were backed with gold. Secondly, any variations in the quantity of gold held by the central banks had an exponential effect on the money supply. This was ok when confidence was high and people were happy to hold bank deposits and paper currency. But during the Great Depression people became frightened. and tried to switch their assets into safer forms. Foreign holders of US dollars were particularly anxious to swap them out for gold, especially after Britain suspended the convertability of the pound into gold in 1931. As the gold reserves declined, the monetary system came under strong contractionary pressures, exactly what it didn’t need at that time. The gold standard was abandoned soon thereafter. In the words of British economist DH Robertson: The value of a yellow metal, originally chosen as money because it tickled the fancy of savages, is clearly a chancy and irrelevant thing on which to base the value of our money and the stability of our industrial system.

What I’m taking a long time to get to here is that we find ourselves in an eerily similar situation today. We have a strong creditor nation lending across national boundaries with no exchange rate risk, with the expectation that the loans will be repaid because, even if there was a crisis, the euro would be sacred in the minds of European politicians. The “credibility” of the system has to be maintained at all costs. So as our debts mount, we are lent even more money so we can pay back the earlier loans. At the same time, we are being told to cut back on spending at the very time when we should be doing the opposite.

Let’s be clear on something. These bailouts are not bailouts of the Irish people, or the Greek people. They are bailouts of the French and German banks who lent recklessly to us during the boom. Now you, the people, are being asked to shoulder the burden of the risk that should belong to the banks. At the same time you are being told you have to do this to maintain the credibility of the system, which all the while becomes more and more incredible.

Is the treaty vote really going to matter?

It’s not a rhetorical question. I really am wondering, after listening to the live debate earlier this afternoon on Today FM, why anyone should bother voting. I suspect that indeed, the turn-out will be quite low, and the yes vote will probably carry. I also suspect it’s not going to make the slightest bit of difference in the long run. I can’t help feeling that both sides of this debate have missed the point and maybe there is no point. What we’re hearing is just everyone’s favourite talking points, most of which have nothing to do with the actual treaty.

So I want to list some facts, and what I consider to be the most likely outcomes of them:

  • There are financial crises in several Eurozone countries. These crises have different causes, but have ultimately brought those countries to the same point – the governments are spending more than they are taking in.
  • The EU has stepped in to ensure funding for those countries at lower interest rates than they would get in the financial markets. However, this access to cheap, easy money provides little incentive to channel spending into the right, effective areas. All this bailout money is going towards funding current consumption and paying existing debts, not to grow the economy.
  • The treaty is an attempt to put the brakes on government spending, but it does not differentiate between different types of spending. So governments keep pouring cash into what is effectively a bottomless hole; there’s nothing coming back up or out the other side. And the debts keep mounting.
  • So governments are spending, but not investing. Individuals are saving and not spending. Small business has no access to credit.
  • In an effort to bridge the gap between spending and income, required by the EU, governments raise taxes and cut spending on things such as health, education and infrastructure. But they don’t look to reduce the bloated public sector – money continues to flow into non-productive areas, where it effectively disappears. Unemployment remains high, people emigrate, further reducing the prospects for economic recovery.
  • People get tired of bearing the brunt of other people’s bad economic decision making; unrest breaks out in the more volatile EU nations (don’t think that it can’t happen here).
  • Germany gets tired of writing out cheques to the rest of the Eurozone, even though there’s nothing else they can really do with their enormous surplus. If they were to store it, the euro would appreciate, rendering their exports too expensive for China, their biggest customer.
  • One by one, the fringe Eurozone members default on their debts, not necessarily because they want to, but because they have no choice. Confidence in the Euro drops because no-one knows what it can do any more. Speculators are betting on it failing, and Germany, the only country with the power to ensure it does not fail, is no longer committed to its survival.
  • The Eurozone breaks up. Europe retains it’s common market and political union, but abandons the fantasy of a single currency.
Ireland is the least of Europe’s worries right now. The outcome of this vote is not really going to matter in terms of the bigger picture, which is impending meltdown. If I were over 18 and not a cat, I’d be voting no, because it would at least send the message that the Euro is bad for Ireland right now (and I’ll be laying out an economic case for that in my next post). If the No vote carries, there will be temporary instability, yes. There will be uncertainty, for a while. There will be difficulties; do we float our own currency, stamping our existing Euro notes? Will credit cards still work? (I don’t see why not). Do we peg it to the British pound, at least temporarily? If so, how popular will that be, politically? And is it a Hobson’s choice?
This post was meant to be a review of the live debate on Today FM, but there was nothing said that hasn’t been said already. Oh, there were some amusing bits; Richard Bruton, minister of something or other, said that delaying ratification of the treaty would put us into “Greek territory”. Matt Cooper (hosting the debate) asked him if that meant Germany and France were also in “Greek territory” (whatever that means), as both countries have delayed ratification of the treaty. Yes, Germany could walk away from this too. That’s something nobody has considered. Nigel Farage, leader of the UK Independence Party, had quite a lot to say but I still don’t know why he was there; he put across the point (very eloquently, I might add) that we’ll be voting on a treaty that won’t exist later this year. Um, ok, so why are you here spending British  money on telling Irish people to vote No for something that won’t be there anyway? He was asked that and his answer, as Ceiling Cat is my witness, was that he doesn’t like Herman van Rompuy. Seriously, you humans must try to pull yourselves together.
Except for Mary Lou McDonald. I want to be Mary Lou’s cat, this human of mine just aint cutttin’ the catnip. She remained calm under the barrage of nonsense from Micheal Martin; I loved it when she was asked to name an economist who agreed that a Yes vote would cost €6 billion just in implementation. She did; but Michael Taft wasn’t good enough for Micheal Martin. Apparently to be recognised as an economist in Micheal’s bizarro world, you can’t also be a trade unionist.
I’m tired now, and maybe I’ll be less cynical tomorrow. Maybe.

So much bulls**t flying about

From my vantage point on top of the Sky box I was listening to Vincent Browne’s program last night, and had to stop myself from spitting and yowling at the TV.

Lucinda Creighton, yip-yapping junior Minister of State, seems to think that the ECB wouldn’t dream of printing more money to pump into member states until everyone has promised they’ll behave. Lucinda, honey, they’ve been printing money like crazy the last few months, as has the US Federal Reserve and many other central banks around the world. Why do you think commodity prices (oil, gold) are so high? Why hold an asset that’s being printed every day when you can buy oil, which everyone says is running out? She also accused the Sinn Fein guy (Peadair Toibin) of “terrorising people” – she must have chosen those words carefully given the SF / IRA past – while at the same time saying that if we vote no, money will flow out of the country ending all chance of recovery. More money than is flowing out of it right now? She even kept a straight face, while constantly interrupting the others with nothing more than empty, unsubstantiated rhetoric. Come on Fine Gael, you can surely do better than this.

Mustachioed weasel Willie O’Dea made an interesting point – that the 60% debt:GDP rule is “already law”, and regardless of the referendum outcome we will be held to this in terms of existing EU rules. So, I ask you with tears in my yellow eyes, why is Europe going to such trouble to produce yet another treaty, if its terms are already law? Because up until now there’s been no mechanism to force compliance. From page 2 of our new straightjacket:

NOTING that compliance with the obligation to transpose the “Balanced Budget Rule” into
national legal systems through binding and permanent provisions, preferably constitutional, should be subject to the jurisdiction of the Court of Justice of the European Union, in accordance with Article 273 of the Treaty on the Functioning of the European Union.

Poor Willie, given FF’s loss of support he no longer rules the roost when he’s sharing a stage with other politicians. He had to sit there, no doubt wishing he could facepalm, as Lucinda made a dog’s breakfast of the YES position.

A key moment in the Euro crisis?

The Dutch government has collapsed. It would be an understatement to say I’m not exactly a fan of Geert Wilders, but he seems to be on the right side of this debate. His party is refusing to support further austerity, and has called for a return to the guilder.

And France is looking set to elect a socialist president who has promised to roll back on deficit reducing measures and re-negotiate the EU fiscal treaty. I’m not crazy about socialists any more than I am about racist politicians, but surely it’s beginning to look as though this EU treaty is dead in the water?

The ECB will have to keep printing money, so that bust banks can continue to loan money to bust governments. That’s the only reason Spain hasn’t defaulted yet, but eventually they will. And that will mean the end of the euro.