Will Ireland Default? Ask Belgium

By Simon Johnson

On the face of it, Ireland seems poised on the brink of default. Its debts are very large relative to the size of its economy, most of this money is owed to foreigners and – unless there is an unexpected growth miracle – the country will struggle to pay its debts in full for many years to come.

Yet all the indications are that, as part of the historic rescue package to be introduced this week by the European Union and the International Monetary Fund, Ireland will not default on or otherwise restructure its most substantial debts. Why not?

To be clear, Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product (G. N. P.); in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent.

That’s a higher number than you see in many news reports, in part because officials are still focused on gross domestic product, a misleading statistic in the Irish case, as Peter Boone and I have been arguing in this space for some time.  (Update: some news reports are currently using a higher number for Ireland’s debt, implying that the country owes 10 times its GDP; this is based on misreading the statistics regarding off-shore financial transactions that are run through Ireland.  This misunderstanding will be cleared up when the Ireland-IMF-EU package is announced.)

At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.

The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P.

After the I.M.F. finishes going through the Irish books, we will all need to redo our projections (remember the data revisions that came to light in Greece under similar circumstances). But for now we stand by our previous assessment regarding the likely trajectory of Irish budget deficits – in the region of 10 to 15 percent of G.N.P. for this year and next.

So why not restructure some of this debt, particularly as much of what the government will owe is actually debt taken on by overgrown and careless Irish banks?

The government has indicated that it will force a restructuring of some subordinated, relatively junior debt – for at least for one prominent bank, Anglo Irish, this may amount to paying 20 cents in the euro. This debt by itself is too small to make a difference, but why not apply the same principle to other categories of borrowings?

The most obvious answer is: Ireland’s European partners do not want this to happen, because it would expose the really bad decisions made by pan-European banks and their regulators over the last decade and create potential fiscal risks in other euro-zone countries.

Jacob Kirkegaard, my colleague at the Peterson Institute for International Economics, points out that the claims of foreign banks (in the 24 countries reporting to the Bank for International Settlements) on Ireland “are at over $500 billion — three times the scale of total claims against Greece.” (The underlying BIS data he uses can be seen here: http://www.bis.org/statistics/provbstats.pdf#page=90; start on p.90.)

German banks in particular lost their composure with regard to lending to Ireland – although British, American, French and Belgian banks were not so far behind. Hypo Real Estatenow taken over by the German government – has what is likely to be the highest exposure to Irish debt.

But look at loans outstanding relative to the size of their domestic economies (using the BIS data on what they call an “ultimate risk basis”).

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. British banks are owed $131 billion, or about 5 percent of Britain’s G.D.P. French banks are owed $43.5 billion, which is approaching 2 percent of French G.D.P. But the eye-catching numbers are for Belgium, which is owed $29 billion – in the relatively small Belgian economy, this accounts for around 5 percent of G.D.P.

Given the prevalence of off-shore banking in Ireland, these numbers may overstate the true liabilities.  But still, Belgium is already on the hook, according to the Bank for International Settlements, for 18.3 percent of G.D.P. as a result of “general government contingent liabilities arising from ‘crisis assistance’ to financial institutions” (again, see Jacob’s note.) The last thing it – or the rest of the euro-zone – needs is a fiscal crisis arising from commitments to support its banks after an Irish default.

Belgium’s overall fiscal picture is not good, its political stability is far from assured and its underlying social fissures would surely not be helped by a further dose of severe austerity. (According to Eurostat’s latest numbers, the Belgian budget deficit was 6 percent of G.D.P. in 2009 and its debt was 96.2 percent of G.D.P. at the end of last year; to be fair, Belgium has an established tradition of being able to survive with high debt levels.)

In addition, Ireland’s European creditors reckon, if they can just hold on for a few years, perhaps there will be a recovery in asset values. But real estate prices rose dramatically in Ireland over the last decade – quadrupling by some measures. And fiscal contraction – either higher taxes or lower government spending or both, as negotiated with the I.M.F. and E.U. – is unlikely to help the residential real estate market (so far most of the damage has been in commercial real estate.)

It is true that Irish mortgages are “recourse” — that is, you can’t just turn in the keys and walk away from a property as you can in many parts of the United States. On the other hand, Irish residents can leave the country – moving to Britain or the United States is a well-established tradition for many families. And how can an Irish lender enforce debts when someone has emigrated?

Eventually, Ireland will need to restructure its debts. How soon and how completely it does this will have major implications for the rest of Europe.

Many countries were exposed to the potato blight of the 1840s – it was a global affliction — but Ireland was unusually dependent on this one crop (a phenomenon known as monoculture). The result was famine and emigration; the population never returned to its pre-1840s level.

Many countries experienced debt-based property booms over the last decade fueled, in part, by reckless cross-border lending. Ireland again proved to have something of a monoculture; this is the origin of its extreme vulnerability and an awful decade to come.

This time, will the global disease continue to spread as banks elsewhere get bailouts that allow them to become even bigger and more dangerous? Will we see immediate ramifications in other euro-zone countries, such as Belgium or others?

And will the same underlying problem continue to grow in such a way that it can ultimately bring down the United States – as Peter Boone and I suggested here in March?

This blog post appeared this morning on the NYT.com’s Economix.  It is used here with permission.  If you wish to reproduce the entire post, please contact the New York Times.

108 thoughts on “Will Ireland Default? Ask Belgium

  1. They say the Irish citizens owe about half a million each as their share of the debt — but surely most of them did not stand to benefit that much has not things gone bust. It’s not as if all that money were plowed into infastructure and services. Instead a few stood to make millions or billions. So how has it come about that the citizens must pay for this? My question: what would happen if a class action lawsuit was brought before the courts by non-speculating citizens, demanding taxpayers’ relief from this situation ? I E demanding their taxes not be used to pay banks’ debts. Is there recourse to this injustice through the courts?

  2. Could it be that Belgian (long-term debt) is in the hands of Belgians (and therefore the servicing of the debt is not too much of a drain on the country) ?

    The Irish seem to be in a quite different boat.

  3. I’m still waiting for one of these countries to find a pair and drop out of the Eurozone. The alternative to round after round of austerity is to float the currency. This is what solved Argentina’s problem – they dropped the ridiculous dollar peg. Yeah, it’s inflationary, but isn’t that good? Ben?

  4. I know that there are things like 401ks, pensions, and other government based investments involved in all of this, but it’s hard not to see what is happening in Ireland and other countries (including my own – the U.S.) as simply being a transference of risk (or perhaps more correctly – wealth, since without these government bailouts, the money would cease to exist) from the 99% at the bottom to the 1% at the top.

    In short, in order to preserve the wealth of the few, we distribute the losses to the many.

    Granted the fallout of actually letting these banks fail perhaps would be more damaging than what we face now, but it’s hard not to wonder if Mellon was at least partially right:

    “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system.”

    Of course one has to note he curiously left out “banks”. No coincidence there I suppose.

    In any case, being a Keynesian at heart, I certainly wouldn’t go that far, but I’ve got to believe that at least some of these investors could have taken a haircut, but again, “curiously”, they didn’t.

  5. What do you mean, “take down the United States”?
    That’s provocative – I’d like to understand what you mean.

  6. One must wonder if banks have totally escaped the possibility of being regulated by states. I was pondering the current Irish problem as I read Simon Johnson’s Economix article Will Ireland Default? Just ask Belgium. He pointed out that the debt may reach 150% 0f GDP.

    On the face of it, Ireland seems poised on the brink of default. Its debts are very large relative to the size of its economy, most of this money is owed to foreigners and – unless there is an unexpected growth miracle – the country will struggle to pay its debts in full for many years to come….

    To be clear, Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product, or G.N.P.; in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent.

    The amount owed to banks outside of Ireland shows the immense set of dominos that could fall in Europe:

    Jacob Kirkegaard, my colleague at the Peterson Institute for International Economics, points out that the claims of foreign banks (in the 24 countries reporting to the Bank for International Settlements) on Ireland “are at over $500 billion — three times the scale of total claims against Greece.”…

    German banks in particular lost their composure with regard to lending to Ireland – although British, American, French and Belgian banks were not so far behind. Hypo Real Estate – now taken over by the German government – has what is likely to be the highest exposure to Irish debt….

    German banks are owed $139 billion, which is 4.2 percent of German G.D.P. British banks are owed $131 billion, or about 5 percent of Great Britain’s G.D.P. French banks are owed $43.5 billion, which is approaching 2 percent of French G.D.P.

    But the eye-catching numbers are for Belgium, which is owed $29 billion. In the relatively small Belgian economy, this accounts for around 5 percent of G.D.P.

    Which led me to pose a question to myself: How large are the worlds largest banks relative to the home country economies they ostensibly live within? A little searching led me to this post on Zero Hedge by Tyler Durden: Presenting Total Bank Assets As A Percentage Of Host Countries’ GDP

    With the threat of sovereign default and contagion now pervasive within the Eurozone periphery, it is relevant to quantify the relative exposure of various banking centers’ assets as a percentage of host countries’ total GDP. The reason for this is that in Europe for many countries a sovereign default would not have as great an impact, as a risk-flaring contagion impacting these countries’ primary financial entities, whose assets account in some cases for multiples of host GDP. For example in Switzerland, the assets of the top two banks, UBS and Credit Suisse, alone account for nearly 600% of the country’s GDP. And while Switzerland is relatively isolated from the budget and deficit crises in the PIIGS and STUPIDs, other countries such as Italy, Belgium and ultimately France, Germany and the UK, are much more exposed.

    * Belgium – Dexia: 180%of GDP
    * France – BNP Paribas, Credit Agricole, SocGen: 237% of GDP
    * Germany – Deutsche Bank: 84%
    * Italy – Unicredit, Intesa Sanpaolo: 101%
    * Netherlands – Fortis: 155%
    * Spain – Banco Santander: 92%
    * UK – RBS, Barclays, HSBC: 337%

    It seems to me that the regulators of the banks are in some ways more influential than the Ministers of Finance. They potentially have sway over multiples of GDP assets. If bank regulators require banks in e.g. Switzerland to hold 1% more capital against risk, this means that they must tie up 6% of Swiss GDP on their balance sheets. Obviously, this capital cannot be brought into the vaults only domestically without a significant squeeze on the local economy. It must come from abroad, even further exacerbating the risk chain of dominos. But can regulators avoid ‘capture’ by the mentality of the banks and provide regulation, from the viewpoint of the nation-state, that can contain risk?

  7. . . perhaps he means the United States as we know it now — you know, the one that calls the tune all around the world. The one with all those military bases in all those countries. Those very expensive military forces.

  8. Class actions not a feature of Irish legal landscape yet. Irish superior courts quite deferential to matters perceived to be “policy” matters/ matters for legislature/executive under strict separation of powers interpretation even though the theory provides for each organ( Courts/legislature/executive) to act as check or balance on the other. ECB could be a potential defendant based on its role set out in Lisbon Treaty.

  9. Simon, excellent article. In answer to your last question (but not the “PS” regarding the US), it is just so very hard to imagine that the IMF (controlled primarily by the European Central Bank and our government, or any of the “owned” finance ministers in the various countries involved (including our Treasury of course), are going to make tough decisions. They’ve shown such a penchant for can kicking and praying, that I don’t expect to see them let any major banks suffer much, if any, disruption, let alone serious restructuring or failure. Maybe I’m not up on all of the political dynamics at work outside of the US, but if we are any example (which I suspect that we are), the dynamics follow the money (as in plutocratic cooperation), and the money, insofar as most finance ministers are concerned (for their job security no doubt), is definitely not going to allow for major restructuring of debt that could wreak havoc on the largest banks (we’re talking crewcuts or worse).

    I mean, c’mon, if they were going that way, it would already be somewhat apparent, and actually should have happened. But then, global dynamics, in my tea leaves (maybe like yours) are determined to go the last, very expensive mile and over the line to catastrophe. Sadly, this is human nature.

    The other night I watched the Naomi Klein movie, “The Shock Droctrine.” I already knew much of the story, but it just brings home how much goes on that we just can’t comprehend until it’s written in history books. I would just be that Niall Ferguson is wetting his lips, or maybe pants, waiting to write the tragic postscript on this era’s economic history. A very scary time on the planet to be sure.

  10. This is not really that provocative. You can see below the article regarding percentages of GDP in various countries central or major banks. In the US, we are in a similar condition. Let’s say that lots of our banks assets are from holdings in other countries, which is a fact. Let’s say the the dominoes in the Eurozone begin to fall. So, then what can our banks do? We have to assume that, although our “financial reforms” claim that they would eliminate the bailout thing happening again, what if? And, if this happens (I think better than a 50/50 chance, and, if Congress tries to bailout some of our largest banks again (remember that their contingent liabilities are still sewerage in many cases), I think we might be talking revolution. Of course, we both know that the entire bailout thing should have happened very differently, that Glass-Steagall should have been reinstated, banks broken into bite sized pieces, etc., etc. What member of our ruling elite thinks that another bailout would be acceptable anyway? Most of them have already expressed hatred for TARP, but we know that there sincerity level is highly suspect (hahahahahahaha). So, if the Eurozone crashes or just deteriorates into a steaming pile of feces, then, it’s probably over for several of our major “inter(nationally)connected banking casinos. Then we are talking takedown and death.

  11. THis is a post at the Fox News level. There is no way to know (except the Irish authorities themselves and they are unlikely to be indiscreet under these circumstances) what a reasonable forecast for cleaning up the Irish banking system would be, and even that would depend on the assumptions about future GNP (bravo for that!) levels. Once that is known, the clean up cost should be added to Ireland’s gvt debt (the banks’ deposits are gvt guaranteed, so the gvt will have to carry the losses by recapitalizing the banks. Let’s assume that the cleanup cost is twice the outstanding debt of the Irish gvt itself. Then we also have to assume that a growing Irish economy (exports) in a growing world economy, will have a banking system with real franchise value, i. e. that the market would be prepared to pay for these franchises. So, in a growing economy, the gvt will both recover something from the loans transferred to NAMA plus it will make a profit on its recapitalization. That may leave Ireland still with about twice its pre-crisis national debt, but that would not be too far from the European avarage. The real reason this became a crisis is that everyone expected that the ECB would keep its promise to return to more normal levels of liquidity provision. The de facto nationalized Irish banks would then get into deep trouble. The current events have probably averted that, led to some helpful pressure on the EUR (great for EU growth) while it was about to go up again, and are preparing EU local chauvinists for the real world: much higher levels of integration, or the orphanage for small states with economies re-tuned for operating within the single market. Does anyone seriously believe that, if the EUR would fall apart, resulting in a group of countries pursuing UK like policies, the rump would allow those countries unrestricted access to the internal market?

  12. Simon do you think you could call up your old colleagues in the IMF and ask them to have a bit of decency. They must be aware of the issues you raised here.
    They should force the Senior bondholders and creditors to accept their losses.
    The IMF preaches about corruption and bribes in countries.
    Now it is basically offering a bribe to Senior Bondholders and creditors with the Irish peoples money so that they don’t pull out of other European banks.


    Irish Minister Suffers Humiliating Take-Down on Prime-Time Television Over Handling of Financial Crisis


    Still Worth checking (three related articles & one link for an article from the Irish Times).

    Would the United States do everything the same way if it had a second chance? A good deal of the global pressure appears to be in the interests of more of the same. I question whether the Irish will fall into lock step with the agglomerated amalgamation of Finance chiefdoms.
    There may not seem to be much option from the debt trap, but my bet is that International corporate interests in Ireland are going to have a major showdown with the Lords and Barons of Financial Feifdom. And maybe that’s going to be a good place for the schism to start to shatter the S.M.O. of this working financial service veil of deception.

    It is hard to imagine that Ireland will buckle to a threat of economic collapse and austerity for all. Nearly Everyone in Ireland has experience direct or indirect pain and suffering from the years of civil war and dissent from English domination. America could be a great friend to Ireland at this cross over event, and it may well set a model for true corrections that could not happen in any other location without very complicated political ramifications. Helping Ireland right now would only hurt the scavengers and vultures standing by to carve up their assets. This is the place to stand our ground in the global political and economic arena!

  14. http://www.alternet.org/story/148993/right-wing_think_tank_praised_ireland%27s_%27economic_freedom%27_…_and_then_its_economy_crashed

    Right-Wing Think Tank Praised Ireland’s ‘Economic Freedom’ … and Then Its Economy Crashed

    Any time the Heritage Foundation holds up any country as an economic example, it should set off alarm bells. READ MORE

    By Terrance Heath / Blog for Our Future


  15. Perhaps some losses have been accepted as the credit deritative market dropped $41 trillion in just one week.

  16. I find it rather incredible that the Irish did not insist on – and get – both rate concessions and partial debt forgiveness from foreign banks as a part of the negotiations. They were clearly given the power position in negotiations by the fact that the Euro Union came to them. Since the German fear is collapse of German banks, clearly that should have been the main Irish negotiating point.

  17. We reap what has been sown for us all. The grim reaper is astride the ultimate prize –the USA. This is where the world Depression begins.

  18. Honestly, I think that bankruptcy (right away or more or less orderly as in a renegotiation of the debt) is the only solution, very specially for Ireland, which has almost as much external debt as Spain in spite of being 10 times smaller.

    I believe this is the only way, within the current capitalist frame, to address the problem and transfer it to some extent to the co-causing central EU powers, which are just trying to get away by patching instead of really addressing the problem in its full dimension.

    In any case it is clear that the people must not pay for the failures of the banks. The banksters are the ones who have to pay.

  19. Unlike Argentina, Ireland needs external funding just to balance it’s primary budget (before debt service). Not sure exact amount but most sources put deficit at 10-12%. In other words, massive social unrest if you can’t externally fund. I also think a huge piece of external debt needs to roll around June, so not a lot of time to resolve.

  20. Argentina needed external funding as well, and the funding was only going to be lent at 17% and in dollars. This was causing massive deflation in Argentina, and their borrowing rates were going up anyway because everyone expected them to default IF they kept their currency pegged at 1 to the dollar. Even if they dropped the peg, the creditors knew that they’d be paid back either in cheaper pesos or in the case of dollar denominated debt, fewer dollars.

    Knowing they were going to take a haircut either way, creditors started asking for higher rates on Argentine debt, and the Argentine government kept letting the country spiral further into a deflationary depression until they finally gave up and devalued the currency. Unfortunately, by this time unemployment was so high that the inflation that resulted further destroyed the Argentine middle and lower class until the economy began to grow rapidly again (along with the rest of the global economy) in 2004.

    Floating the punt again would accomplish three purposes: first, it would make Irish exports cheaper versus their foreign competition (one of the big contributors to Argentina’s situation is that next-door neighbor Brazil’s currency depreciated throughout the 1990s and led to a huge trade deficit.)

    The second is that it allows Ireland to pay back its existing debts in Punts, and therefore have some power in negotiations with their creditors, unlike under the Euro regime where they have none.

    Finally, it also allows the central bank to monetize new debt because it can control its monetary reserves again. Ireland will not have to borrow from abroad. It can issue debt in Punt and have the Irish Central Bank purchase this debt and add it to reserves in the system. Yes, this is inflationary, but only to creditors! It’s going to reduce the amount that existing debtors are going to get paid back in Euro, but they can go ahead and demand Euros all they want, the ICB will say, “the more petulant you become, the less you’re going to get”, because the more Punt debt you’re going to force us to monetize to maintain our spending, and the lower the exchange rate of euro to punt, the fewer euros you’ll get back, so be a dear and lend to us at 5% like the ICB is lending at.”

    Incidentally, our own Fed gets away with this behavior every day.

  21. Steve, your comment does lead to a good question. What if a country like Spain or somebody, just says, “The hell with you. We’re going to borrow as much as we need to at whatever interest rate we have to pay in order to finance our deficit. Even if interest payments equal 50% of our spending, and we’re paying 20% interest on new debt, and our deficit is 20% of GDP or whetever, it’s not going to make us accept an austerity package.”

    My guess is the only alternative for the Eurozone is to kick them out. Otherwise, they’re going to force the ECB to pursue ‘inflationary’ policies and/or countries like Germany that get to borrow on the cheap at Spain’s expense are going to suffer.

    Quit or be fired isn’t any different that my previous post.

  22. Taking this one step further, the disintegration of the Eurozone one way or the other is not going to be inflationary from the U.S. perspective. A stronger dollar means cheaper foreign competition – take a gander at the IPI, PPI and CPI over the past couple years, and think about whether quantitative easing is just another way of generating inflation via talking the dollar down.

  23. And given the performance of the Argentine stock market immediately prior to and post-devaluation, anything other than the Irish banks is probably a really good investment from a local perspective.

  24. I am sure the indentures say we will take either euros, or if you prefer, several garbage trucks full of Punts. Not that we are really talking about legal niceties :)

  25. I would hope that this blog’s author would be on my side on all of this, considering he and the esteemed Mr. Blanchard are supposedly part of the “kinder gentler” IMF and not the one that sent Joseph Stiglitz and many others running screaming from the reservation after one too many failed bailouts and austerity packages. If he’s posted on this topic I’ve missed it.

    So what’s the solution for Ireland (and Portugal, and Greece and Spain, and Italy, and overly-indebted-countries-to-be-added-later) Simon? Austerity package, ignore and borrow more, or bail out (as in bail out of the currency zone altogether)?

    As Krugman has noted, the problem with Ireland’s deficit is not profligate spending but rather a collapse in tax receipts due to the massive recession, much like the U.S. An EU-bailout via emergency loan in exchange for massive spending cuts is not going to increase Ireland’s income tax receipts or reduce their indebtedness anytime soon unless you live in Bizarro world.

  26. Ireland had the best business model of Europe: Low business taxes an an Anglo-Saxon Social model. It made one and only one mistake: Joining the Euro against the will of the Irish people as expressed in the Euro referendum.

    Ireland consequently had to undergo a monetary policy that was totally incompatible with its fast growing economy. Imposing negative real interest rates on a country that was booming at a 10% growth rate was monetary madness. It was like giving a stimulant drug to a child with an ADHD condition.

    Not their socio-economic model, but the monetary insanity of inflationary low interest rates caused their housing bubble.


  27. Mr. Johnson wrote:

    “Belgium’s overall fiscal picture is not good”

    Belgian Debt and Contagion

    NOVEMBER 26, 2010, 12:50 PM ET

    “Belgium’s borrowing costs are rising as high levels of public debt, the continuing political crisis and bailouts for Eurozone peers make investors nervous.

    Belgian public debt will reach 100.2% of its gross domestic product this year, according to the IMF’s October Global Financial Stability Report, the third highest level in the single currency bloc after Greece and Italy.

    Belgium hasn’t had a government since the last election in mid-June. Seven parties are trying to negotiate a coalition government but there is little sign a resolution can be found for the ongoing dispute between French-speaking Walloons and Dutch-speaking Flanders over social security payments between the two regions.

    “We’re in the middle of a financial crisis which is spreading to more and more countries, and if the crisis continues due to unresolved government issues in Belgium this could create a problem,” said Laurent Bilke, global head of inflation strategy at Nomura in London. “The political problem is pretty serious, in the current context you don’t want to show any sign of weakness, and this is a meaningful one.”


  28. I am no sure what the source is of these bank assets/gdp numbers. I am sure though that in Netherlands, Fortis no longer exists..

    What people should take into account is that

    (1) BIS statistics re cross border claims include not only banks headquartered in country X or Y, but also branches of banks headquartered somewhere else. And even claims from a branch of a bank with HQ in country X on its branches in Y and Z. Etc. This is really meaningless stuff.
    (2) Looking at published bank statements, “assets” or “risk assets” may include a lot of derived numbers. Some banks include letters of credit, some include the market value of derivatives, others include neither, etc

    It is basically impossible for an outsider and even difficult for well informed and trained insiders to assess the various levels of contingent liability national governments and indirectly, taxpayers have resulting from banks being either headquartered or operating in their country.

    Since the Irish banks have been busy transferring assets to the NAMA, and they have not published (as far as I know) what their resulting accounts are, it is definitely impossible for anyone, to make statements about the exact structure of Ireland’s exposure to claims from outside Ireland, or claims on the Irish Treasury resulting from its own financial management plus the bank bail out. Maybe at the end of the IMF due diligence things will be published, maybe not.

  29. What legal niceties? There’s no law that says the Irish have to cut out Grandma’s pension and gut their health care system. But that’s what’s gonna happen because their banks lent money during a housing bubble and it crashed the economy and tax revenues went to crap. Tell the EU to piss off! Where’s that Irish pluck?

  30. Appendum: “The New World Order” (Bush #41) and “Bilderberg” – Greenspan/Bernanke bedfellows – Ireland, Belgium, Spain…PIIGS to infinity? “Greenspan: Euro Gains As Reserve Choice (9/17/07)…note the date?” Ref:
    Ref: “Greenspan working to destroy U.S. Economy”
    Ref: “Bilderberg Conference 2007”

    *If all else fails google* PS. Northern Ireland shame!!!

  31. When the house is on fire, getting everybody out is the first thing you do. Once outside, you count heads and if all are safe that’s all that matters.

    The Irish government is still on the phone with the ECB-IMF awaiting instructions while the rest of the family is outside yelling for them to get out.

    You can see the headlines:

    Irish Forgive EU Debt.

    Saves Western Civilization for the Second Time.

    Pope declares Ireland Blessed.

  32. I suspect that what Rien said above is correct:

    “THis is a post at the Fox News level. There is no way to know (except the Irish authorities themselves and they are unlikely to be indiscreet under these circumstances) what a reasonable forecast for cleaning up the Irish banking system would be, and even that would depend on the assumptions about future GNP (bravo for that!) levels.”

    What Rien didn’t say, which is an important clue, is that only a month or so ago, those very Irish authorities who ‘do know’ just how bad things are, announced that there is no chance of a default occurring until next summer.

    But now, as if out of nowhere, the Irish economies condition is front page news. Ironically, this ‘crisis’ comes on the heels of a solidarity move by financial ministers who have made it clear that they have no intention of allowing dollar carry trade activity to drive up their currencies any further.

    When Brazil’s Fin Min, Guido Mantega, said that he is prepared to do “whatever necessary”, the dollar started to rise and has done so ever since. The reason for this is fairly simple, if Brazil prints ex nihilo reals and uses them to buy dollars, especially if other nations also ‘print and purchase’, as some have suggested that they will, this could drive the dollar up above current levels and that would make dollar carry trades into ‘losers’ once traders convert their investments back into dollars. Consequently, for now at least, the emerging nations are protecting their currencies from QE/ZIRP with a bluff, but that is not to suggest that they are not willing to back that up, but instead that they may not be required to.

    It follows therefore, that the Europeans may have came up with a clever bluff of their own. This is not to imply that the GIPS issues are anything less than serious, but instead to say that the timing is just a little too convenient in relation to the ‘currency war’.

    The recent G-20 meetings made it obvious that the US is being made to accept responsibility for the mess it created. But of course that ‘reality’ is not exactly a ‘career builder’ for anyone relying on MSM or corporate acceptence, whether they be writers, professors, pundits, or whoever, and so we pretend to analyze. But what is actually happening right now, is the very historical act of the ROW forcing the US to give up its “exorbitant privilege”(dollar hegemony etc.). And the dollar rising against the euro since this Ireland ‘business’ began is very probably the Europeans taking advantage of the momentum that began to build at the recent IMF meeting in New York. Not with a ‘bluff’, but with carefully chosen timing.

    The thing is, the stale argument that the global economy will suffer if the US economy is not healthy and strong, is no longer viable. The growth during the time since the downturn in many emerging economies, shows that to a degree, but more importantly, the foreign inflows in recent years that were being recycled through t-bill purchases, were mismanaged and invested foolishly. The very foreign inflows for example that added to the excess liquidity which funded the infamous bubbles, were funds that could have, if wisely managed, prevented the current shortfall in global aggregate demand. Therefore, it is highly unlikely with such a telling example of a nation’s shortsighted profligacy, that any such responsibility as what the US demanded to have, will ever again be entrusted to any single nation or even a group of nations.

    The punishment will most probably fit the crime.

  33. They say it took about a billion years for single-cell life in the primordial oceans to work out how to function as complex multi-celled organisms. That’s a looong time. I suspect a big part of what took so long, in spite of the obvious survival advantages of cooperation and specialization, was that it was devilishly hard to work out distribution systems so all cells received oxygen and nutrients and security, even though individual cells were still subject to the laws of survival-of-the-fittest and wanted most of the goodies to stay in their own back yard. If this history is repeating itself on a macro human social scale, our insane me-first financial “distribution system” suggests our current civilization will become one of the dead-end experiments.

    How can we benefit from natural competition without falling into competition’s follies? I think the next generations will have to harness and steer the laws of Darwin just as we have learned to harness the laws of physics. Does this seem too theoretical? Change is needed, very fundamental change. It must start right where we stand.

    There are a lot of very smart people commenting here but it is basically a silo.

  34. How is it that when I read “return to growth”, I’m reminded of Peter Sellers in the movie Being There?

    Should the EU write a new set of trading rules for the rim states and deny them access, who benefits?

    I would think the emerging markets willing to offer product and funding. And in what denomination would that funding take? Rubbles? Yuan? Reals?

    What it would not be in is Euros. Are the ECB’s willing to met China’s demands on ending the dollar status that links the global economy to the banking system. Or US demands on China’s policy protecting their individual national interests. BRIC is no more cohesive than is the G-8 or G-20. Or EU.

    Will the US exploit this proposed division of rim states? Off course they will. Dollars will flow out to find interest and rent.

    The very same reason dollars flowed into American markets used to create the Greenspan bubble. Or the dollars that flowed into China to create the China Miracle.

    It’s banker’s being banker’ with the good assistance of their governments.

    Those crimes have yet to be punished.

    Getting governments to resume control of the banks would be much better.

  35. nottheguywhodidit~

    “Will the US exploit this proposed division of rim states?”

    I doubt that the euro-powers will allow any dissolution over what doesn’t really amount to all that much money once the loose spending is curtailed, which is of course what ‘austerity’ is all about. (Think of parents taking a teenager’s credit card away.)

    But in a world with a very serious shortfall of global AD, I think the “interest and rent” will be too precious to share when that sharing can be avoided. That said, it seems we are headed for a period without a reserve currency… and more regional trading and unilateral trading. A shift toward what may well be the first step toward more localized commerce. Economies of scale computations without considerations of negative externality costs have always been a farce anyway.

    Anyway, I agree that euros have little chance of being accepted as a reserve currency, that concept has shown its flaws and the Chinese don’t want it for the yuan. But with so many emerging economies doing so well, I’m not convinced that there needs to be a world currency of any kind, maybe I don’t understand something, the Chinese do of course think otherwise, but, why not a pure fiat system? It is only keyboard capital after-all and that being more widely accepted is part of what is undermining the reserve currency concept. So, the “exorbitant advantage” could be diluted out as it is divided up among all currencies according to the trade volume of each currency.

    What the current circumstances are saying to me, is that FDI is on its way out due to it being unnecessary and exploitative. It is the poor nations that need every advantage, not the rich nations. And the Fin Mins of the 2nd tier nations have had power fall in their laps as a consequence of history, it is their move and they can control the fate of their respective nations and put the dollar where they see fit. These are very interesting times for the few who can understand what is happening.

    No question that governments must resume control of the banks, and there, is your punishments for bankers, built in. Things just need to get a little worse.

  36. Haircuts for all as vexed Germany takes a firm grip on the clippers

    10:00PM GMT 27 Nov 2010 – excerpts

    “Over the past 48 hours, in a bid to calm the markets, EU officials have insisted that the idea of senior bank creditors losing their shirts – or at least losing some of their money – is “stupid”. Yet this outcome now looks inevitable – not least because it’s what Germany ultimately wants.

    Chancellor Angela Merkel is having a tough enough time keeping her electorate onside as it is. Germany’s hard-working voters don’t take kindly to foolish banks and their even more foolish creditors (generally other banks) escaping scot-free while Europe’s biggest economy shoulders the bulk of the bail-out bill. And who can blame them? Especially when the culprits are more often than not from elsewhere.

    From this position of strength, Germany can now call the shots. It will get its way on senior creditor haircuts – and it must, given the jaw-dropping moral hazard involved in allowing yet another generation of bankers and bank creditors to remain off the hook.

    For now, the Western world’s all-powerful banking lobby and the political leaders in its pay or otherwise under its spell – in other words the majority – cling to the deluded hope that rising asset prices and bucketloads of taxpayer cash will float all boats, allowing UK, European (and US) banks to carry on without having to endure the shame, related losses (and law suits) associated with genuine restructuring. This is the raw politics of it. And it is within the jaws of this almighty battle – Germany’s growing impatience for accountability versus everyone else’s insistence on continued denial – that the tiny Irish economy has lately been caught.

    At the risk of repeating myself, Ireland does not have an inherent fiscal problem. The country’s total government debt is equivalent to 62pc of GDP – below the EU average and less than half that of Greece.

    Most other Western nations, meanwhile, have allowed their banking losses to remain buried, lurking Japanese-style in the “shadow” banking system. The big countries felt threatened by Ireland’s attempt to impose transparency and the market applause that originally greeted this effort. So the Republic’s stab at “fessing up and growing” its way out of the crisis, was effectively crushed by the big Western powers, who sensed an opportunity, at the same time, to have a go at Ireland’s highly-competitive corporate tax regime.”


  37. “Think of parents taking a teenager’s credit card away”

    That’s exactly the wrongest comparison possible, yet a terribly common misunderstanding. Why?

    1. The Republic of Ireland has indebted itself, against public opinion, to save the banksters, including German, British and in general European and Western banksters, at the expense of the citizens, who are now made to pay others’ debt. It’s more like a teenager taking their parents credit card and going wild with it and then the parents, the citizens, being forced to solve the mess somehow.

    Sadly, unlike Iceland, Ireland does not have a honorable president that vetoes this corrupt manipulation of making the people pay for private investors’ errors.

    2. Parents do not depend on their children to buy their goods, they earn their income from other contexts. Corporate oligarchs in general and European business in particular need demand to be able to sell, so it’s more like the butcher cutting your credit… and losing a client. In fact many many clients are being lost with all this pointless budgetary cuts, as demand can only shrink even deeper this way.

    Let’s remember that EU does not have any external trade surplus so when Germany does, for instance, it is because the Irish (or other Europeans) buy. Cutting European internal demand short is simply suicidal for European business, specially if the euro stays overvalued, damaging extra-Eurozone competitiveness.

  38. Maju’

    How is your example of:

    “It’s more like a teenager taking their parents credit card and going wild with it and then the parents, the citizens, being forced to solve the mess somehow.”

    So different from my statement:

    “Think of parents taking a teenager’s credit card away”

    Do parents not either solve the mess or default and thereby transfer the cost to society? Does that not make “worstest” more than just grammatically incorrect?

    And the people always pay, that is how a democracy works. I have no more respect for financiers etc. than the next poor slob but responsibility always ultimately falls on the public and the public has choices ex ante. So with those choices comes responsibility, and the buck must stop somewhere and thinking that it should stop with the lenders and possibly in their nations makes little sense unless we assume that loans were made in bad faith.

  39. Simon Johnson you came from the IMF. I think you’re part of the problem. I would love to see you on the Max Keiser show. It would be a great interview, I’m sure.

  40. “Gott Segnen Sie, Angela Merkel”! Ireland literally was railroaded by the Bilderberg Group? The honorable[?] Dermot Gleeson (IRL)…former “Chairman of Allied Irish Banks (AIB)” steps down Jan/2010 and is handed the post of overseeing “$3bn Travelport Floatation”? Ref:
    http://info-wars.org/2010/01/22/bilderberger-dermot-gleeson-to-oversee-3bn-travelport-flotation/ The honorable[?] Paul Gallagher A.G.(IRL), and confidant…the honorable[?] Peter D. Sutherland (IRL) Ref:
    (UCD Micheal Smurfit Graduate Business School:Peter D. Sutherland SC) http://www.smurfitschool.ie/aboutsmurfit/advisoryboards/ireland/peterdsutherlandsc/
    Noteworthy: Peter D. Sutherland (IRL) *Chairman “Goldman Sachs International” – **President of British Petroleum {(BP)2009}__Ref: Goldman Sachs sold $250 million of BP stock / Goldman Sachs sold 44% of its BP stock before the Spill
    PS. If all else fails Google…so much malfeasance its like a “Twilight Zone Episode” or “Epitaph”? Oh…and if you’ve got the time, check out the precursor in motion for Spain (Someone say “Knights of Malta”),…?

  41. Because my paying parents, the citizens, are your child: Ireland (and Europeans in general). My children: the banks, and not just the Irish banks, and the financial sector’s dominance (wildly speculative and wasteful by nature) over the real productive economy in general as well, are the ones still using the credit card.

    Anyhow, I understand your confusion, as I may have needed to think or explain better my counter-example. Anyhow, the credit card is still there, in the wrong hands: the bankers, who act as a drug-addict youngster who manages, by the moment, to blackmail and mislead his parents to work more, enjoy less and pay him his destructive vice. Nobody has taken it from the kid, as the banksters still manage the situation, it seems to me.

    “Do parents not either solve the mess or default and thereby transfer the cost to society?”

    Society is not always just the public arcs. These are society’s management fund but are no eternal reserve, nor the citizens can be exploited, squeezed forever. They don’t have unlimited forces nor unlimited budgets… nor unlimited patience. They are getting tired of the junky kid’s demands and may just disown him (revolution of some sort in real life).

    “And the people always pay, that is how a democracy works”.

    No! Democracy is precisely oriented to make the rich pay something of what they take by their oligopolistic hold of the management of production: the state redistributes some of that surplus back into society, not gets society to pay for the ongoing luxurious parties of the mega-rich. Not via taxes at least.

    Democracy means one person one vote, and most people are rather poor to very poor, so they want to feel the state does something for them, not just taxes them for nothing (giving to the rich).

    Anyone who has read even the story of Robin Hood but more properly about why the bourgeois revolutions and also the distinct working class ones, understands that the issue is who pays for social needs: the hyper-rich who most benefit from the system or nobody. If nobody and social needs are extreme, then the people gets angry, desperate, loses faith in the system and the situation goes awry unavoidably.

    It is a situation of mismanagement and managers need to be replaced. Democratically, yes, the banksters may be repossessed from their overall unpaid social debt, as they are becoming the only ones who get any benefit at all from the current mega-mess, a mega-mess that can only be blamed in their mismanagement of the economy and their own accounts and quality-controls.

    So let’s the banksters pay for this and get other management. People are the last who should pay for this. They can’t anyhow: with no economy, nobody can pay anything. No sales, no credit, no anything. It cannot exist in fact, it’s just a limit in the curve, an economical black hole, but that’s the path we are walking and that we will eventually have to change.

  42. This family stuff is a bit much but, my ‘parents’ were intended to represent the ECB/IMF and the international forces. My irresponsible ‘children’ then are the citizens because, as I said, the citizens had choices. And without the citizenry feeling the pain who will take out their anger on the bankers? Democracies are complicated. But one thing is fairly simple, if the citizenry allows the plutocracy to cheat them, mismanage the money, and all of the rest, that is what happens, over and over.

  43. You would do yourself a painful favor and dispel the notion of the Victimized Irish public. The debt fueled binge, made for a really good party because everyone was in on the stimulants and merryment….notice property prices quadrupled, wages grew, unemployment shrank, and many Irish traveled the world enjoying their vapor riches…

    so it is correct to note that snake oil salesmen in NY, London, Frankfurt, Zurich and Paris are the architects of the mess…the Irish themselves drank deeply of this very pure Kool-Aid….it was the really good stuff!

  44. Great analysis Simon, and rather poor comments section again, if most commentors are reading your posts, the absorption rate is low, one thing is for sure, the attraction of simple answers is a very compelling psychological driver.

    If I was a policy maker, I would be heartened by your blog, as even well developed critical analysis is poorly understood by the fraction of a percent of the public interested in reading it. Academics arguing with other academics is no disinfectant relative to reality defined by TLC.

  45. nyongesa,

    Your “absorption rate” must have been “low” during that period in your life when someone so smug should have learned the importance of the subjunctive mood.

    It is almost impossible to pretend to know more than what you do without that particular all important bit of knowledge. Embarrassing stuff.

  46. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system.”

    Of course one has to note he curiously left out “banks”. No coincidence there I suppose.

    Repeat after me, “Mellon was INSANE.”

  47. “If this history is repeating itself on a macro human social scale, our insane me-first financial “distribution system” suggests our current civilization will become one of the dead-end experiments.”

    Who is this “our” you speak of when you say “our current civilization”?

    The devouring of civilization is all that this is – a “cheap” war for Israel, expensive for everyone else…

    It takes INSANITY to ignore the Korean peninsula, for instance…

  48. Citizens are not being giving choices. All the power is, obviously, in the hand of the banksters, who have corrupted the democratic institutions to near-destruction. The EU countries, the USA too, today are little more than sophisticated banana republics, ruled by a bunch of selfish oligarchs, who brainwash the people with their control of the media and the powers that should act as mediators.

    But citizens are being demanded to pay, blackmailed into paying by those irresponsible parasites.

    And that’s not fair.

    And regardless of fairness it won’t also work. It is not anymore sustainable even in the short run, as we can all see.

    The paradigm by which banksters rule and exploit and citizens pay and shut up has to be changed radically and the most obvious solution is to suppress banks altogether (or corporate capitalism or just capitalism). Of course they will try to resist for as long as they can, as any parasite would, even getting violent, but eventually they will be removed because there is no other choice that can work.

    The end of this chapter of human history. I have really no doubts about this happening in the upcoming decade. The situation is already too dire and unbearable to go further by the path set by the banksters and their loyal political dogs. And an educated people with at least some class consciousness as is the European people, will simply not tolerate this forever.

    It is already exploding, even if consciousness is still weak (it can only grow through this most harsh path of impossible one-sided austerity without exit that has been set by the unimaginative oligarchs).

  49. You have a good point, but it gets complicated:
    1. EUR weakness vs USD: export advantage >desirable but fickle
    2. ditto: potential for more inflation: EU’s main imports are raw materials (incl oil) all priced in USd and going up. Inflation is the main avenue for budget recovesy since most EU countries have progressive taxes> really desirable but the EU is so autarchic that it will not make a big difference
    3. EUR/GBP weakness: specifically good for Ireland (a little mentioned problem for Ireland is that the UK has adopted beggar thy neighbour monetary policy a in the early days of the GFC which is basically only a problem for Ireland (and a reason why Ireland should not have joined without the UK)> helpful and good for the GBP EUR relationship in the future

    4. The ECB’s declared move away from excessively (and unproductively) loose policy once the support package for the peripheral problem cases is working was probably the main trigger, because the ECB had become the main funder of Irish banks. The ECB could have reversed policy (around the G20 meeting) but I guess that the market would have interpreted as a sign of EU trying to deflate the QE2 balloon by signalling equally loose policy.

    All in all this is not a very easy position for traders to be in. A short squeeze is likely when (as is probable) the short term effect is more demand for Irish bonds (keep in mind that there is not much of the stuff around and that the Irish debt managers are professionals). The problem is/was not oversupply of Irish gvt paper in the primary markets (there should be very little supply until deep into 2011), but funding for Irish banks against the uncertainty over the bank bailout and its consequences for the government. More than likely the IMF package will include a rescheduling of bank liabilities not covered by the gvt guarantee (ia the Anglo Irish stuff), and in that respect the rating agency guidance looks correct. The rest is probably OK and maybe a good investment.

    It makes you wonder what the traders were thinking six weeks ago. Could no one have foreseen this Ireland thing (I mean the deliberate roasting of the Irish government that had imperiled the EUR by guaranteeing bank deposits and already lost face domestically, but still useful to the opposition to do some dirty work)?

    Incidentally, lots of so called experts seem to believe that countries like Ireland and Greece should devalue (leave the EUR and float downwards) Apparently these people also believe that these countries then also want to default (or do Brady bonds, whatever). But these countries have (contrary to the Argentina analogy paraded on some blogs) never defaulted before and are very unlikely to have public support for something like that.

    Given that the benefits of devaluation are very limited with very high levels of foreign debt (upon leaving the EUR, all of the country’s debt would be in foreign currency, just think about the complications) that still have to be serviced, the pain inflicted on the local workers, SME and pensioners (the most likely victims of adjustment without FX sovereignty) may be more bearable if it would coincide with some form of generosity from, say Germany. Lending more in order to protect your own banks and to a debtor whose default probability you control is not exactly generosity. Someone should explain that to those moronic German voters. Who gave them the franchise anyhow? Bismarck I believe, but he made sure that gvt policy would not be at their mercy.

  50. Rayllove

    I had thought a reserve currency was a given. I need to take a closer look at the possibility of not having one.

    Looking down stream at the comment on defaulting in currency other than one’s own by Rien and Rickk’s German’s calling the shots comment, the worse is beating a path to Ireland’s door.

    Given the ECB’s exposure to the low-mid end of the rim, we have yet to include the old Warsaw pact in the computations, it makes me wonder if intervention by the 2ed tier is a wise choice at the moment.

    A good bit of fear mongering and the dollar will go up as the US markets go down. And every one on the planet knows the FED is buying US debt and getting no where.

    Will we get a lower euro, a higher dollar, and austerity all round?

    Time will tell.

  51. It follows therefore, that the Europeans may have came up with a clever bluff of their own. This is not to imply that the GIPS issues are anything less than serious, but instead to say that the timing is just a little too convenient in relation to the ‘currency war’.

    I wrote about precisely this theory two weeks ago in EuroJenga Blocks for Christmas. I never bought into the idea that Angela Merkel did not know her words would spook the bond markets.

  52. The financial managers in banks and government are responsible to manage that aspect of society. If doctors and health experts told people heroin is a good cure for the common cold (while enriching themselves selling heroin) there would indeed be “good times” among the common folks for a while — but they would still be “victims.” Your use of the v word shows what you are. Can you even define the word INJUSTICE or has it no place in your vocabulary?

  53. Maju,

    I agree with most of what you have said although this one thing is simply not true:

    “Citizens are not being giving choices. All the power is, obviously, in the hand of the banksters, who have corrupted the democratic institutions to near-destruction.”

    I have written many times that the US is in a state of ‘democratic tyranny’. I did in fact devise that term so as to fit how I see the problem that democracies are having as corporations usurp power through gaining converts via shareholding. I also have used the term ‘corporatocracy’ but it suggests that corporations are to blame. But, corporations are made-up of people, and these are the very people who gain from the status quo and so I try to make it clear that they, shareholders as voters, are what is consolidating the power of the plutocracy. The burgeoning size of the investment-class in other words is gaining influence when the plutocracy was already too influential.

    The point is, the power is in the hands of not just the bankers as you say, but in a class of citizens who must become so obviously tyrannical that the remaining citizens band together. I have spent some time in actual ‘banana republics’ during their revolutions, I was in Nicaragua for example not long after the Sandinistas ousted Samosa and the dynamics are not all that complicated. The citizery must become at least a threat to the ruling-class or progress does not happen. In the US for example the black voters must join forces with the bubba voters and other working-class groups and then change will occur. Otherwise things remain the same. Citizens always have a choice though. It is just necessary for hardship to bring people together.


  54. “How can we benefit from natural competition without falling into competition’s follies? I think the next generations will have to harness and steer the laws of Darwin just as we have learned to harness the laws of physics. Does this seem too theoretical? Change is needed, very fundamental change. It must start right where we stand.”

    Without any limits, or rules, set on “competition”, you get belief in the idea of “creative destruction”. If I can figure out a way to climb inside your head and steal everything from you – your identity, your job, your house, your future, your freedom, your HEALTH, so that I can “win” – then I guess I’m the superior gene, right?

    No limit hold-’em

    Turn on the hose to suck it all up…and it’s all a “secret” until I throw on the switch.

    Yeah, “stupid”….that’s what we call human brains wired over a loooong time to be cooperative.

    Ironic, though, that after all that settling of single-cell organisms to the point of where all you had to do to live was throw a seed in the ground, spend months watching it grow, and while with all that free time on your hands, don’t go piss on your neighbors tomatoes and water yours, and keep it zipped up with reproducing yourself until you figure out how many mouths YOU can feed without punishing one of your kids with the piss tomato from the neighbor that you stole….well, I guess it all gets back to what you do with your free time over the months the seed takes to grow…

    But the point is, all you had to do was throw a seed into the ground – you didn’t have to rearrange atomic huddling proclivities into a tomato, or grow a schlong…

  55. otherguy,(innocent until proven guilty of course),

    I wouldn’t bring this up except I recently had an argument with a very pompous econ professor who foolishly claimed that the currency war is an “overblown” issue because the dollar has stopped falling. But, Brazil’s currency for example has risen some 30% since March mostly as a result of dollar carry-trade activity being more than 10 times normal (this is somewhat hazy because ‘back-door’ activity increased as capital controls were increased, so who knows how much?). The point being that the demand for capital being what it is in some emerging nations, that demand is causing concentrations of carry-trade activity, and so the big currencies do not need to move much for the little currencies to make radical shifts. And this, because QE/ZIRP and etc. is obviously to blame for this instability, has given nations like Brazil the right to take the approach the US has so often taken. That approach is often summed up in the phrase:”yes, it is our currency, but it is your problem”, but that was always been spoken from a position of strength, and, until recently, the advanced nations cooperated to a degree that made that strength unassailable. But now with at least Germany siding with the nation’s saying:”these are our currencies and they are your problem, Uncle Sam”, there now exists a very real possibility that the US will have ‘all’ of the responsibility for the GFC thrown back in its face via currency appreciation.

    There has of course been some talk about the US devaluing its debt onto the ROW, but, it seems everyone assumed that the reverse of that dynamic is not doable, but it is, obviously, and justifiable. Then too, this is what bullying causes, unified enemies. So, as for “austerity all around”, I don’t think so. I suspect that about 10 of the emerging nations are about to have a very prosperous period because they are finally about to rid their nations of the global financial services parasite, (G-5+). Those ’emergers’ will then continue to pull some poor nations along with them, (as we have seen China doing with the ASEANs). I think what we are witnessing in other words are the last breaths of colonialism in most of its forms.

    The citizenry of many of the unproductive and exploitive nations though are in for some hard times. The current lesson is I suppose about the limitations of paper wealth and its value between nations. The marginal utility theory has mislead the faithful regarding the value of human capital in the service sector, so, nations such as the US and the UK will be hit the hardest, if my theory is correct?

  56. Annie,

    By posing your question thus:

    “So, rayllove, what is “torture”?” I am at a loss for what you are getting at. The word ‘torture’ being in quotation marks implies that I have used that word here but I do not remember doing so.

    So the only correct answer to your question is: the word ‘torture’, presented with unnecessary quotation marks is a solecism.

    But if I am allowed to use your other comments here as a reference, and thereby assume that the solecism is unintentional, then the ‘logical’ answer is: ‘get a dictionary and take an English class or two, you need to learn far more than just the definition of ‘torture”. (Perhaps too, while you are out, you could find a book on manners.)

  57. Rien,

    About this:

    “1. EUR weakness vs USD: export advantage >desirable but fickle”

    I didn’t make this very clear, I think I just mentioned “momentum”, but I meant to suggest that the euro’s devaluation may not be “fickle” if the dollar is driven up by the emerging nation’s dollar purchases. Which would help explain in part why the Europeans might see this as an opportune time to get some political mileage out of Ireland’s misfortune. There most definitely is not enough global AD to go around. And by having non-euro nations doing the heavy lifting so to speak, the Europeans seem innocent of any currency manipulating while still getting the boost in exports.

  58. second that too.

    remembering other comments from her over time, i think annie’s ideals are ok — but she seems to have a brain worm when it comes to reasoning.

  59. “But, corporations are made-up of people”

    Nobody says aristocrats, inquisitors, members of the Nazi party… are not people. However they are not The People, as defined in Democracy.

    … and these are the very people who gain from the status quo…

    Exactly. So the ones who have to pay, primarily, when things go wrong. Yet they are still making benefits, thanks to the artificial, unfair, forced and, importantly, ILLEGITIMATE, indebtedness of The People.

    Banks should be falling down, in Ireland and in Germany (and elsewhere) and then the state should just take over (at no basic cost) in order to guarantee the small people’s money – but not external debt or big capital. That’s part of the risks of making business and speculative investments.

    Now we are being squeezed beyond our capabilities and our patience in order to pay speculators so they can keep their luxurious way of life.

    All with a pretext of economic stability and recovery that each day seems more obviously impossible, utopic, absolutely failed.

    “The point is, the power is in the hands of not just the bankers as you say, but in a class of citizens who must become so obviously tyrannical that the remaining citizens band together”.

    The remaining citizens are the vast majority. Not sure about the figures right now but for countries like Ireland or Spain they are more than 95%, if we count working class, epi-worker subclass (lumpenproletariat in a very broad sense) and small bourgeois, who are being plundered as well (and in Portugal at least have begun supporting actively the worker struggles: in the last general strike they decided to pay wages to strikers as sign of support).

    Otherwise I agree. I just do not consider oligarchic vampires as part of The People even if they are still technically humans and citizens… of some country.

    “The citizery must become at least a threat to the ruling-class or progress does not happen. In the US for example the black voters must join forces with the bubba voters and other working-class groups and then change will occur”…

    I think now you are speaking properly. This is true, very true. I’d dare say that all the achievements such as universal right to vote, welfare state, universal education, human rights (even if somewhat theoretical)… all and each of them were conquered through organization and political class struggle, with whatever variants. And we have lost some of those precisely because we are not struggling back enough and/or our reaction is being carefully dampened by the mechanisms of the system (media concentration, tamed unions, corrupt politicians…). It is only popular organization and action what creates and keeps Democracy, which now has to be extended to the economic realm, for too long in the hands of a minority that now is revealed as parasitic and not anymore useful for society.

  60. Re: @ tippygolden press___My thoughts remind me of a “Financial Bloodless Coup” imposed on the Irish Middle, and Lower Class with absolutely no sympathy from the Monarchical (Northern Wealthy Upper Swine?) Class? A modern day travesty reminding me in such, of twisted surreal illusional memoirs…that of past injustice of two wrongs making it right – that being the “Treaty of Varsailles” (6/29/1919) versus Wilson’s “14 Points Treaty” post WWII. Ref:
    This created the “League of Nation” and we all know where that went…but never the less this fomented the rise of HItler’s popularity. The French and English once again, via America? What we have in Ireland is a very, very dangerous, and volatile situation! The Bank’s (exactly like the U.S.and TARP) easy lending with pure corruptness, methodically layered within the system within, created this aberration, this diabolical man-made banking crises, and yet, banks have taken zilch for a hit! Why? Luxembourg is quite similar to Ireland, but their corporate tax structure closes the gaps for fleeing capital with unique, and equitable progressive taxation that all parties seem to agree amicably with – whereas Ireland’s (AG) leaders left the doors open for “in-your-face-daylight-robbery” on the common people. Ref: Leaked attendance list for Bilderberg conference 2010″…Note: Belgium Chairman Etienne F. Davignon…USA participation…IRL particpation…FRA participation, Minister Christine Lagarde…GBR participation, Chancellor George Shadow Osborne…IRL participants…INT participants, Hoop SG`NATO; Kroes, Commissioner EC: Lamy, GD WTO; Maystadt,P EIB; Pisani-Ferry D Bruegel;Stgson,P WBCSD & IOBE; Tanaka eD IEA; Trichet, P ECB; Zoellick, P WBG…end
    Why is this relavant? Watch the news in the coming days weeks ,and months and see the collusion, malfeasance that comes to light once the common look under the the sheened hood of secrecy. This “Irish Hot Potato” will be unbearable to cook – a forked handled etible naught…never minding the sword-swallowers advarice remorse? Thanks Simon ,and James :-) Thanks again, TP

  61. Maju,

    You have been getting a little carried away on how you are representing what it is that I have said. For example, I in no way suggested that “aristocrats, inquisitors, members of the Nazi party…” are what I consider as part of “The People”. But you clearly imply otherwise.

    And your theory breaks down; that is most obvious in this statement:

    “Now we are being squeezed beyond our capabilities and our patience in order to pay speculators so they can keep their luxurious way of life.”

    It doesn’t quite work that way. To begin with when a loan defaults that has no direct effect on a banker’s salary. Naturally, most bankers receive bonus compensation in the form of stock, and they can of course lose their jobs, but if you think their “luxurious way of life” is likely to change because of write-downs, well, that is not how it typically goes. What happens instead is that a bank’s stock diminishes in value and this puts downward pressure on consumption and this in turn leads to unemployment which causes more write-downs, and that, is a classic adverse feedback loop.

    Ultimately, as always, the consumer pays in the end. That may occur in some other country, but the justice you seek does not exist where you are trying to find it.

    And so far as I know, “speculators” deal in commodities, currencies, real estate, and horse racing etc., ‘lenders’ and ‘bankers’ apply here.

    And using the US as an example, about 50% of the population benefits directly from owning stocks and bonds. I doubt if any of the European nations with investments in Ireland have such large investment-classes, but all citizens are stakeholders at some point. Many do not benefit much, but you seem to have a ‘oligarchical’ view that is making the dynamics difficult for you to understand. There are some oligarchies in existence in Latin America, Africa, etc., but we are talking about democracies here that are relying too heavily on their service sectors, not ‘banana republics’, oligarchies would be easier to find solutions for… and less entrenched because far fewer people would be on the ‘gaining’ side, and repercussions would be far less of a concern, but you are ignoring the repercussions.

  62. I do not make any difference between oligarchs and aristocrats, they are interchangeable words. I was talking all the time of oligarchs, banksters, and their grip on power (that they won’t release unless forced to, of course).

    As for what you say about how things supposedly work, you happen to be limited to the Capitalist frame of thought. And what I am saying precisely is that Capitalism is offering nothing: a rock and a hard place, a trivial lose-lose alternative and no plan for any foreseeable future.

    It is conceptually exhausted but it will still take us some time to realize this fact collectively, to accept this historical failure, this historical juncture we are at. How much I do not know but the longer the worse because there is nowhere to go right now under Capitalist premises.

    So we need urgently a change of paradigm. And that’s why we are at the beginning of a revolutionary cycle. This what I say now (and have been saying for a few years) will soon become common understanding. The European crisis in particular is clearly opening many eyes to this hard reality.

    And eventually, unless we are totally suicidal, that we are not, this will cause an effective and not just theoretical change of paradigm, a revolution in common language. It won’t be easy, there will be many struggles, sometimes violent, the Capitalists will try to entrench themselves in their grip of power, even summoning their fascist minions and arming them. But all that has no run, as they cannot offer a model that works anymore.

    And that reality is what to have to awaken to. We do not want to reproduce the Stalinist totalitarian failure either but we do need to think the economy in other parameters: in democratic parameters and not just ones of mere unlimited private property and uncontrolled criminal markets.

    “… all citizens are stakeholders at some point”.

    No. Only in the sense that if a company goes awry or migrates to a less regulated, cheaper, country jobs and productive fabric may be lost unnecessarily. Except in Germany, where unions do have a say by law in company policies, Europeans are no stockholders. Yet we do want the real economy (agriculture, industry, communications) to persist and improve but we do not really need the banks, as they only perform a bureaucratic function (as they do not even lend almost anymore).

    Money is virtual. Machines, buildings, roads, optic fiber… are real. Food is real, homes are real… and people dying in the streets out of poverty is real as well.

    So we need to reorganize the virtual, bureaucratic, accountancy aspect of the economy on democratic parameters and not let it stay in the manipulative greedy hands of the oligarchs.

  63. Rayllove (they have to charge me first)

    The “Austerity all around” comment was directed at the developed nations that are ageing out, the decline of western civilization is implied in your argument, if I understand you correctly. I don’t intend to sound pompous or to put words in your mouth. If I’m misreading, sorry, not my intent.

    I don’t know that the dollar carry trade is the sole source of Brazil’s problems, given the planet was awash with dollars. Reserves have to go somewhere. Over heating of local ecomonies in particular those emerging and resource rich is not uncommon. There was not much complaining when the investment dollars helped to develope those economies. Skin in the game is the price they pay.

    The dollar, in my view, serves two purposes, first as the common language of trade and second as a tax on those engaged in the conversation of trade.

    It is to our advantage. The rest of the planet doesn’t like it, but when the credit card users take away the credit cards, what do the emerging markets complain about?

    We (royal) are guilty of wanting our cake and eating it too. And they are not?

    The odd fellow out is the German’s. Export power house. Euro manipulator. Soon to be in bed with the other evil empire(Mr Putin’s). Crying foul. Really!

    The price of nationalism is blood and treasure. I don’t know how or if there is a way to correct or adjust that.

    We as a nation have no leadership. We have authority and misguided intention. Should the dollar go they way of the Pound, so be it.

    When Ghandi was asked: What do you think of western civilization? He replied: I think that would be a good idea. Me too.

  64. Maju,

    All citizens are ‘stakeholders’ in a society, literally, even the most lowly.

    And as for my being “limited to the Capitalist frame of thought”, you are confused. We are talking about a situation that exists within a capitalist framework. Your counter-factual rant is beside the point.

    Your assertion regarding my limitations also drips with presumption considering that I mentioned a stint in Nicaragua during the Sandinista Revolution. I also joined my first trade union in 1973 and I have been part of the Labor struggle ever since. In other words, I’m trying to be polite to someone who doesn’t yet know the terms and having to answer to insults. Tiresome.

  65. Annie wrote:

    “I think the next generations will have to harness and steer the laws of Darwin just as we have learned to harness the laws of physics.

    Does this seem too theoretical? Change is needed, very fundamental change. It must start right where we stand.”

    My take-away from Darwin was, adapt or die. To my knowledge our generation is far from being able to “harness the laws of physics”.

    That was my impression when I had a brief discussion with Lisa Randall recently about entangled photons. A charming lady.



  66. Under pressure to take dramatic action to arrest a systemic threat to the euro before markets open in Asia

    Sunday, Nov. 28, 2010 4:02PM EST – Globe & Mail – excerpt

    “We have to make decisions which show that in the future, we are capable of resisting where there are shocks and turbulence,” Belgian Finance Minister Didier Reynders told reporters. British finance minister George Osborne said that although London is not a euro member, it would contribute to the Irish rescue to protect its own strong economic ties and stability.

    Debt worries have driven the crisis for the past year, severely denting confidence in the 12-year-old euro currency and producing what amounts to a showdown between European politicians and financial markets.

    Crucially, private bondholders could be made to share the burden of any future sovereign debt restructuring of a euro zone country, subject to a case-by-case evaluation without any automaticity, Rehn said.

    “In a key concession, Ireland was given an extra year, until 2015, to bring its budget deficit down to the EU limit of 3 per cent of gross domestic product, based on a more cautious annual GDP growth estimate than the government’s 2.75 per cent.

    Prime Minister Brian Cowen, whose unpopular government is close to collapse over the EU/IMF bailout, said the deal was* “the best available for Ireland” and did not involve any change to its ultra-low 12.5 per cent corporate tax rate.*

    Tens of thousands of Irish took to the streets of Dublin on Saturday to protest against the looming bailout. Opposition parties said they would not accept excessive rates of interest.

    Under pressure to take dramatic action to arrest a systemic threat to the euro before markets open in Asia on Monday, the 27 EU finance ministers approved the broad outlines of a permanent crisis-resolution mechanism, based on a joint proposal by Germany and France.”


  67. stillatlargethen,

    Not that it matters, but I don’t so much see a decline of western civilization, as I do a slow grind downward for the nations that have become too dependent on FDI, hegemony, the ‘demographic dividend’ and MNC gains. Of the G-5 for example, I think Germany will continue to prosper, it is wise to remember that reunification has held them back some. France too might do all-right.

    This I disagree with:

    “There was not much complaining when the investment dollars helped to develope those economies”

    There was something of a dividing-up of responsibilities as ‘globalization’ was agreed upon and there has always been at least some resistance to the concept of needing FDI with fiat currencies. The short-term flows have been especially questionable of course. And all outside investment is something of a foreign tax on the nation’s with cheap labor considering how easy it would be for them to develop their banking sectors (see China, Singapore, etc.).

    Had more been done with development loans there might now be more to consider, but, if China is removed from the poverty reduction equation, all other global poverty is on the rise. That makes the case for the validity of Bretton Woods II weak. As does the ‘currency war’. The WTO has little, if any, credibility left, which is why it has been benched since the start of the ‘currency wars’.

    The point is, some global lending has been simply tolerated in exchange for other considerations such as less than detrimental terms with the WTO and the IMF. FDI too is about making money, not altruism, so look at which countries have benefited the most and those are the ones who should have the fewest complaints, those also just happen to be the nations which dictated the rules.

    On a per capita basis the US comes in last where development aid is concerned, and a sizable portion of what it does provide, is for the ‘spreading of democracy’, which somehow explains why nations such as Isreal, Egypt, El Salvador, Iraq, and other strategically located places ‘always’ top the recipient list.

    Germany, for the sake of comparison, gives more than twice what the US does and 80% of that goes to Africa.

  68. It is almost ludicrous to think that the bailout of a nation and its creditors, considering the potential ramifications of a counter-party tsunami, that is about half the size of AIG’s ‘initial’ bailout, could end any other way.

    thanx anon

  69. In 1973 I was just five. But you only “win” me on this because you are considerably older. I have 42 years behind me and I have been politically and socially active (including but not restricted to unions) since I was 15.

    “We are talking about a situation that exists within a capitalist framework. Your counter-factual rant is beside the point”.

    It is not any rant. It is an important point to make: Capitalism is at the Game Over screen… still baffled. And we are too as we live within that paradigm.

    My whole point is that there are no solutions within a Capitalist frame.

    “In other words, I’m trying to be polite to someone who doesn’t yet know the terms and having to answer to insults”.

    I have not insulted anyone.

    “All citizens are ‘stakeholders’ in a society, literally, even the most lowly”.

    They are not stakeholders of the banks. So let the banks fall, let’s save the productive fabric via state/social intervention and start all over in a new paradigm.

    We do not need to be hostages of the financial esoteric hypnosis. There’s nothing in all those figures that holds any real value: it’s nothing but numbers on a computer screen. What matters is: do people, citizens, “stakeholders”… have homes, clothing, food, jobs, education…? Or are they being thrown to the streets to die like stray dogs as it is actually happening as we speak?

    That is the only real matter. The crux we have to address, the sooner the better.

  70. Maju,

    More problems:

    “It is not any rant. It is an important point to make: Capitalism is at the Game Over screen… still baffled. And we are too as we live within that paradigm.”

    I did not say nor suggest, that the point above is not important; the rub is that you fail to give me any credit for having the same view at a different level. Which brings up the other rub:

    “My whole point is that there are no solutions within a Capitalist frame”.

    I believed that too, once, but the truth is that if “solutions” are in fact what you really care about, as opposed to just sounding ‘progressive’, the “Capitalist frame” is that which exists. And there is no pure Socialist revolution, so at a certain point it all becomes a waste of time. It also hurts the movement when the material is not understood, and the truth then gets lost as a result of vanity.

  71. rayllove


    But, demographics do matter. As the world’s population swells and economies grow demand rises. I don’t think the West will collapse. Despite all the fear mongering. We Americans have very deep pockets and a very broad economy to draw from. I think the discussion on what we spend the money on is valid. In my view, access to the American market is a form of aid. It is not altrustic. China might not be the manufacturer it is today without access to our market. Are they more democratic or less democratic? Will it matter to their future? Did we deny them entry based on their form of government? Yes, until it suited both their and our needs. Real politic. That takes money. Dollars.
    And would Germany be united without us?

    We are the Empire. The Western Empire. If we fail to heed the rule of law, dollars will not matter.

    Corruption kills empires just slower than conquest.

    You’ve given me some things to look at, thank you. And thanks for not being so harsh on the grammar and spelling. Have a good night.

  72. FX prices do not behave in a logical way, and the FX markets are mostly not efficient. They could not be because of large assymmetries existing between participants and manipulators (mainly gvts).

    However one enduring property of FX prices is that they tend to have a fair degree of mean reversion, around trends that appear to be linked to fundamentals. Looking at those fundamentals (trade and investment flows) one should always count the Gulf oil producers (and since a few years also China) as USD sinks, that buffer the effect of otherwise structural pressure on the USD.

    All in all, I do not think that policymakers in Germany (ECB) have or should have (coming from the same tradition) very strong beliefs about EUR weakness as something that is desirable and could be engineered. For public consumption, politicians in exposed sectors of the EU may have comments on FX rates (depending on the audience they solicit), but let us put that type of discourse at the level of discussions about the weather.

  73. otherguy,

    I think we have a minor misunderstanding due to my previous comment. Where I began with: “Not that it matters”, I should have written: ‘Not that my opinion matters’, that is what I meant to say.

    And the term ‘demographic dividend’ is a euphemistic way of saying ‘labor exploitation of the masses’. The term has fallen out of favor with economists because its use lead to economists being ridiculed some for being callous toward the downtrodden in poor countries. I’m not sure if this had anything to do with what you said or not but what you said about ‘demographics’ makes me think that I was not quite clear in the first paragraph of my previous comment. What I meant to suggest with the use of ‘demographic dividend’ is that there was trade-off. The rich nations contributed the capital and the poor nations shared their cheap labor. This arrangement was questionable though because the development of industrialized nations had been most successful in the past at the point when cheap labor and cheap capital had combined to make for prosperous periods. And with fiat currencies the only constraint on the endogenous creation of capital is very development being funded, so FDI is nothing more than a ‘sharing’ of a nation’s ‘demographic dividend’. But of course some nations have resisted this arrangement and that is why China now has the world’s 3 largest banks. The Chinese though have paid their ‘membership fee’ by lending their dollars back to the US and they also of course allow some outside investment as well. But whether any developing nation actually benefits from FDI is at least questionable in a keyboard capital paradigm. And that questionable contribution is now being challenged with capital controls.

  74. Rien,

    Nonsense. “FX prices” are absolutely predictable in the context being discussed in this conversation. Every time the PIIGS issues heat-up, the euro falls, asymmetrical information has nothing to do with any of this.

    And as for governments manipulating the currency markets, again, that does not apply in this conversation. The splill-over effects of QE are not in dispute, even those who are the most responsible for the disruptions caused, Bernanke and Geithner, are on record admitting that QE has driven up the currencies of some emerging nations.

    Then too, the “buffer” effect that you mention in support of your otherwise unsupported claims, is declining as nations such as China, Russia, Turkey, and others are establishing direct trade agreements that exclude dollars. Plus, the Chinese have made no secret of their intention to curtail their t-bill purchases and that trend is well established.

    So what your argument in this most recent comment comes down to, is that if many obvious factors are ignored, and if the work that won Stiglitz his Nobel is hinted at, logic does not apply. Again, nonsense.

  75. otherguy,

    An afterthought: When the US establishes a direct trade treaty with another nation, like the one the S. Koreans turned down recently, capital controls are strictly forbidden. So, why would the US need to do this if FDI is so ‘helpful’?

  76. Mondo wrote it, not me :-)

    And I agree, mostly, with “to my knowledge, our generation is far from being able to “harness the laws of physics”.

    But oh-so-good at blowing things up…”creative destruction”….whatever THAT is supposed to be…

    The certainly got all faggy-snitty at growing tomatoes – against their religion to work with the hands…

  77. Rayllove

    The three large Chinese banks are a result of holding huge reserves (liquidity trap?)in all the currencies currently in print or digital form.
    I’ll include bonds and bills under currency if you agree?

    The USD is just a tool. It does produce large benefits to the producers of it. Something for nothing and the chicks are free, I think that’s how it goes.

    And at what time have the masses not been exploited? The exploitation has less to do with USD hegemony then it does with politics of power and capital in a world of oligarchs. Good short hand for socialists if the equation is USD = oppression. You could ask India what they thought of the pound? Or the Georgians of the rubble? The Africans of what ever the Dutch were using way back when?

    We are barely getting around to human rights and we’ve called ourselves civilized for how long? Workers rights will start when wars end. You can quote me on the last sentence.

    It will not be because the USD goes defunct. Or if Ireland defaults. It would be doing the world a favor if it did.

    The answer to the S Korean question is an easy one. We learn by our mistakes, the S Korean’s have learned to not make our mistakes.

    I’d like you to understand that I’m optomistic about the future. I’ll give you an Irish quote:

    The reason they look like giants is that we are on our knees. RISE UP!

  78. Rayllove

    PS: The fellow who said that was Jim Larkin. I think you and he would have hit it off.

  79. I didn’t say MASTER the laws of physics. You participate in an internet conversation while presumably living in a home with electrical lights and conveniences and an auto awaiting you outside, and then say we are “far from being able to harness the laws of physics” ?????

  80. guy,

    If an economist wants to be recognized in this country, an easy way to do that, to get published or heard, is to speculate on how China is about to fail. China has thus been on the verge of collapse for decades while averaging growth rates twice those ever sustained by a large western nation. How their banks could be in a liquidity trap while the economy is showing double-digit growth is impossible for me to reconcile. What I have no trouble reconciling though, is how hypocritical it is for economists to incessantly make inaccurate forecasts about China, but then say that economists are not ‘forecasters’ when asked how they have missed so much about their own economies.

    And yes, the masses have always been exploited, but I think my point was, or at least should have been, that unlike when the US convinced the ROW to allow the dollar to fall in the 1980s (Plaza Accords), this time the US is unable to claim that the global economy depends on a prosperous US economy. Dollar hegemony takes capital out of foreign hands and puts that capital in the control of the US government and US investors. That has resulted in a shortfall in global AD after a period when the US spent foreign savings on wars, tax cuts for the wealthy, conspicuous consumption, and etc. So the justification for continued control of global savings through dollar recycling is being met with rolled eyes by the ROW. A far larger percentage of US citizens will be getting blisters on ‘all’ of their fingers.


  81. “But oh-so-good at blowing things up…”creative destruction”….whatever THAT is supposed to be…”

    I have heard PhD credentialed people use this term as if it is a reality. The use of the term drives from the cold war apologists for explaining the self destructive realities of handling unbridled polical economy as a capitalist progression towards perfection. It is a se;f contradiction …period. it should have been halted by academic intellectuals the moment it was uttered. It served a particular class agency at the time and now (…I kid you not… it is literally taught as a principle in “leadership” courses across the country and is practically accepted as an axiom that is part cult and part stupidity in the academic community).

    You are right on the money. Creative destruction is an excuse and apologia for confidence peddling in high stakes corporate rape and pillage.

  82. Bruce,


    Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto (Marx and Engels, 1848)[1] and were expanded in Marx’s Grundrisse (1857)[2] and “Volume IV” (1863) of Das Kapital.[3] At its most basic, “creative destruction” (German: schöpferische Zerstörung) describes the way in which capitalist economic development arises out of the destruction of some prior economic order, and this is largely the sense implied by the German Marxist sociologist Werner Sombart who has been credited[4] with the first use of these terms in his work Krieg und Kapitalismus (“War and Capitalism”, 1913).[5] In the earlier work of Marx, however, the idea of creative destruction or annihilation (German: Vernichtung) implies not only that capitalism destroys and reconfigures previous economic orders, but that it must ceaselessly devalue existing wealth (whether through war, dereliction, or regular and periodic economic crises) in order to clear the ground for the creation of new wealth.[1][2][3]

    From the 1950s onwards, the term “creative destruction” has become more readily identified with the Austrian-American economist Joseph Schumpeter,[4] who adapted and popularized it as a theory of economic innovation and progress. The term, as used by Schumpeter, bears little resemblance with how it used by Marx. As such, the term gained popularity within neoliberal or free-market economics as a description of processes such as downsizing in order to increase the efficiency and dynamism of a company. The original Marxist usage has, however, been maintained in the work of influential social scientists such as David Harvey,[6] Marshall Berman,[7] and Manuel Castells.[8]

    I used the term ‘creative destruction’ on the ‘Kids’ thread in an effort to explain how stimulus has given the illusion of there being more demand for skilled labor than what would exist if the ‘creative destruction’ dynamic had run its course. The term, and the dynamic, are in fact integral to capitalism, especially considering just how misleading the theory of Marginal Utility is, in regards to the value of ‘skilled labor’.

    As it turns out, Marx was wrong on the importance of ‘creative destruction’ and if Marxian thinkers better understood just how difficult it is for an economy to adjust efficiently in an ever changing world, well, then they would not have become irrelevant.

    Creative destruction is indispensable as a term, and as a dynamic because how else does the configuration of the workforce match the demand for skills? Same applies to goods and services. And it is always in play, through good times and bad.

  83. Bruce,

    Afterthought: When someone losses a job, that is a demand shortfall for that labor. When the person who lost that job finds other work, that is an example of ‘creative destruction’ in play. Sometimes it simply requires a step back so as to take two steps ahead.

  84. From the 1950s onwards, the term “creative destruction” has become more readily identified with the Austrian-American economist Joseph Schumpeter,[4] who adapted and popularized it as a theory of economic innovation and progress. The term, as used by Schumpeter, bears little resemblance with how it used by Marx. As such, the term gained popularity within neoliberal or free-market economics as a description of processes such as downsizing in order to increase the efficiency and dynamism of a company.


    Nice work on the research, but don’t feel defensive about protecting the idea of “creative destruction” since it was adopted by the big wigs at MIT along with the whole systems program that has lead the courses of MBA degrees.

    The wikipedia article you are following is overgeneralized. Dialectics (from the time of classical Greek thought and Roman Juris Prudence has navigated a course of thought that anticipates corrections from negating the premise and essentially refining truth in the process. Sloppy business really, but no one will dare contest it. The truth or validity of this is found in Natural Law where the process of composition and decomposition is demostrated time and again by every farmer.

    The 1950s creative destruction is an instrument of ideology and was deliverately utilized to act as an exulted explanation for the workings of destructive wealth. We have all been deceived by this divisive rhetoric, since it appears at first sight to make great sense. Sacrifice is not destructive, however, and the idea that you have to alter things in order to reconstruct them inot new emergent material is distinct from the rationale that “real people” must give up cultural heritage and subsistance expectations to accommodate blanket capital expansion. The ultimate criteria is outcome not formula explanations as to why hierarchical domination must be sustained without question. If you look at (real time) how “creative destruction” has been utilized progressively over the last 50 years, and particularly so in the last 15 years, you will find that it is use to cover more atrocities of business in the name of “creativity” than anything else.

  85. Bruce,

    As happens, all too often, the term ‘creative destruction’ was the only term I could think of, perhaps the only one in existence, to explain how its avoidance led to the unintended consequence that came as a result of stimulus funds being channeled to ‘skilled workers’ and thereby causing yet another misleading distortion. Schumpeter and Marx and many other economists could have used more training in basic language skills and it isn’t fair that I should be limited by their shortcomings(In all fairness to Schumpeter though, I am not familiar enough with his views to criticize him). But of course if you were to read my use of that term in context, well, ‘you’ would not have any trouble understanding what is being said.

    The thing is though, terms and words should not be held responsible for their misuse. And even the Wiki explanation required me to explain further, but the two words together have a literal meaning that transcends the rest. I thereby stand my ground in defense of a mistreated and misunderstood term:’creative destruction’. And for me, it simply explains how the laws of supply and demand find equilibrium.

    PS. I have an Encyclopedia of Sociology, which is basically a dictionary of applicable terms, but it does not list ‘creative destruction’.

  86. Ray,

    I hope China doesn’t fail. Nor do I wish it to. Nor do I have a need for recognition beyond those who know me well enough to smile when they see me.

    My interest is more on the political side of the equation and the effects of economics on the citizens of the planet. The history of events and how they relate to each other, the people and the policy and the what were they thinking when they did that element. I don’t have a thesis to write or one to defend.

    The liquidty trap was followed by -?- as there are two camps concerning this question. I’m in neither camp as far as forcasting a vote. I do have concerns with the numbers that China has reported. The same as I have with BLS numbers. Or with Zillow’s for that matter.

    The ROW may roll their eyes and shake their heads and put hands on hips and point a finger or two. Should the ROW decide they don’t want to use the USD that’s up to them.

    What happens after that is going to be very interesting.

    sine qua non theotherguy

  87. Rayllove:

    Everyone seems to like the combination of creative and destructive and it does seem to equate to some process of clearing for changes and potential development. I say “seem to” because true “emergence” does not necessarily entail destruction and true destruction certainly doesn’t lead to construction.

    Logically it is pure equivocation!

    More importantly, it masks competitive exclusion and the tendency for capitalism to actually destroy competitive mutualism towards monopoly and political domination. Think about how it is abused. CEO plans to downsize for profit …creative destruction. Here’s a current issue even more interesting. Which side would yopu say is looking into the eyes of “destruction” for the program of sustaining creative emergence?

    Comcast was just caught abusing its massive media power, stomping on competitors and violating Net Neutrality.
    The New York Times reported on Monday that Comcast threatened to cut off Netflix streaming video unless the company that carries the traffic paid huge tolls.1
    Earlier in the day, Comcast was exposed for trying to bar cheaper cable modems from its network — a clear violation of Net Neutrality.2
    This is what a media monopoly looks like in the Internet age — one company, consolidating its media power to squash competitors, stifle innovation and price-gouge consumers.
    Sign our message to the FCC: “Don’t Let Comcast Kill the Internet.”
    Such outrageous abuse comes as FCC Chairman Julius Genachowski has finally proposed new Net Neutrality rules, which will come up for a vote in December. It’s never been more crucial that he hear from you.
    If the FCC stays on the sidelines, Comcast will turn the Internet into cable TV, where it gets to pick the channels, overcharge you for them, and decide what downloads quickly and whose voices are heard.
    Comcast is the same company that wants to take over NBC Universal in one of the biggest media mergers in a generation. It’s not just the Internet at stake here. It’s the future of all media: television, radio, social networks… and our democracy itself.

    Tell the FCC Chairman: “Stop the Comcast Monopoly. Protect the Open Internet.”

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