It has been three years since the Celtic Tiger party topped out. Since, we have the same discussion and blame game with the same commentators who are offering nothing new and are not highlighting the real cause and effect. The public are getting tired and sadly with all this coverage are feeling more confused.
We will go back to the analogy of a big party that many use to describe the Celtic Tiger. We went on a massive CREDIT bender and in mid 2007 the party stopped. When we woke up with this killer hangover to the shame of the thing we got up to during this party we were left with many options. To name a few, we could take the pain with the knowledge that we would come out the other side stronger and wiser. We could take the easier option and go for “the hair of the dog” which had often eased the pain before. Of course there are also loads of quack solutions to ease a hangover but what is important to remember is that is was doing the dog at the party that caused the problem.
It is widely discussed that Credit was the drug of choice at this party however what is not widely understood is that this was a synthetic credit. Economist would have you believe that this credit was money borrowed from the saving of thrifty Germans. This is only mildly true as their saving may have been the base for this credit. In the fractional reserve, central bank controlled fiat money system that exists LOANS CREATE DEPOSITS WHICH CREATE LOANS WHICH CREATE DEPOSITS and so on until the credit expanded faster that the wages that are used to pay back the principle and the loan. In a world where language is used to confuse rather than enlighten this is loosely called INFLATION. In a nutshell investment banking is a licence to print money. Again money and credits are interchangeable term that experts have difficulty in drawing the line between.
This system is CREDITISM. Like Capitalism and Socialism this ideology works well on paper. If you have a steady growth of this credit, say up to 3% P.A. it can go on for ever and a little morning after stimulus cure will work ok for the minor excesses. However since the introduction of the Euro there has been over 8% monetary and credit expansion P.A. which came to an abrupt halt and now Governments and Central Bankers are trying to get this party started.
See ECB Monthly Reports www.ecb.int/pub/mb/html/index.en.html
Diagnoses and Cures
Governments and the financial industry know the illness is self inflicted creditism but are disclosing it as free market capitalism gone mad due to lack of regulation and enforcement. Their cure is stimulus of synthetic credit and more regulation which is seen to be vigorously enforced. Many main stream economists also mistake Creditism for Capitalism. The difference being, Capitalism requires savings and a natural outcome of a society being more productive is a reduced price of goods. Creditism also allows for productive gains however due to an increase supply of credit it takes more and more money to acquire goods.
If we were to take the cure for excesses and poor investments in Capitalism and apply them to Creditism you would get a total wipe-out of deposits and a total inability for those indebted to pay down their debts. The idea of just protecting deposits is not a Capitalist solution. As was highlighted earlier, many if not all deposits are created from loans. For example if a dump site in Dublin was sold for €450 million, the buyer puts up €50 million of their savings and borrows €400 million. This €400 million loan is created by increasing the broad money supply (it is not the saving of thrifty Germans). The seller of the site now gets their €450 million which they put in their deposit account known as M1. The broad money supply increases by €400 million as does the amount of money on deposit. Should the seller not also lose out if this system breakdown? This is the bulk of deposits while the saving from earnings that is used as a case against this radial cure is just pittance. As the debts are wrote down or wrote off there would be a dramatic reduction in the money supply. Some of the outcomes of using a Capitalist cure for Creditism problem in the Euro Zone would be a strengthening of this currency against other pairs that chooses a stimulus route (why? because less Euro will exist). Also bonds rates would go up and countries as well as corporations would find it difficult to roll over debt and issue new debt at reasonable rates. All goods and services including public services wages would collapse. Ideologies would quickly move from the centre to the extremes. The happy medium that we have experiences since WWII would be over. Knowing this the wise Politicians that we call thick are going to do all in their power to “GET CREDIT FLOWING”. In Ireland changing government is pointless as other main parties’ ideology is also in the spectrum between Corporatism and Creditism. The rest are in extremes that have already proved themselves as utter failure.
The key is to understand that the problem is not the use of credit but the reckless expansion of monetary and credit supply. Now that this has blown up we need to see why there is a massive effort to “GET CREDIT FLOWING”. With this knowledge the debate can move to what are really the best solutions to the problem and how best to prevent it from happening again.
We will go back to the analogy of a big party that many use to describe the Celtic Tiger. We went on a massive CREDIT bender and in mid 2007 the party stopped. When we woke up with this killer hangover to the shame of the thing we got up to during this party we were left with many options. To name a few, we could take the pain with the knowledge that we would come out the other side stronger and wiser. We could take the easier option and go for “the hair of the dog” which had often eased the pain before. Of course there are also loads of quack solutions to ease a hangover but what is important to remember is that is was doing the dog at the party that caused the problem.
It is widely discussed that Credit was the drug of choice at this party however what is not widely understood is that this was a synthetic credit. Economist would have you believe that this credit was money borrowed from the saving of thrifty Germans. This is only mildly true as their saving may have been the base for this credit. In the fractional reserve, central bank controlled fiat money system that exists LOANS CREATE DEPOSITS WHICH CREATE LOANS WHICH CREATE DEPOSITS and so on until the credit expanded faster that the wages that are used to pay back the principle and the loan. In a world where language is used to confuse rather than enlighten this is loosely called INFLATION. In a nutshell investment banking is a licence to print money. Again money and credits are interchangeable term that experts have difficulty in drawing the line between.
This system is CREDITISM. Like Capitalism and Socialism this ideology works well on paper. If you have a steady growth of this credit, say up to 3% P.A. it can go on for ever and a little morning after stimulus cure will work ok for the minor excesses. However since the introduction of the Euro there has been over 8% monetary and credit expansion P.A. which came to an abrupt halt and now Governments and Central Bankers are trying to get this party started.
See ECB Monthly Reports www.ecb.int/pub/mb/html/index.en.html
Diagnoses and Cures
Governments and the financial industry know the illness is self inflicted creditism but are disclosing it as free market capitalism gone mad due to lack of regulation and enforcement. Their cure is stimulus of synthetic credit and more regulation which is seen to be vigorously enforced. Many main stream economists also mistake Creditism for Capitalism. The difference being, Capitalism requires savings and a natural outcome of a society being more productive is a reduced price of goods. Creditism also allows for productive gains however due to an increase supply of credit it takes more and more money to acquire goods.
If we were to take the cure for excesses and poor investments in Capitalism and apply them to Creditism you would get a total wipe-out of deposits and a total inability for those indebted to pay down their debts. The idea of just protecting deposits is not a Capitalist solution. As was highlighted earlier, many if not all deposits are created from loans. For example if a dump site in Dublin was sold for €450 million, the buyer puts up €50 million of their savings and borrows €400 million. This €400 million loan is created by increasing the broad money supply (it is not the saving of thrifty Germans). The seller of the site now gets their €450 million which they put in their deposit account known as M1. The broad money supply increases by €400 million as does the amount of money on deposit. Should the seller not also lose out if this system breakdown? This is the bulk of deposits while the saving from earnings that is used as a case against this radial cure is just pittance. As the debts are wrote down or wrote off there would be a dramatic reduction in the money supply. Some of the outcomes of using a Capitalist cure for Creditism problem in the Euro Zone would be a strengthening of this currency against other pairs that chooses a stimulus route (why? because less Euro will exist). Also bonds rates would go up and countries as well as corporations would find it difficult to roll over debt and issue new debt at reasonable rates. All goods and services including public services wages would collapse. Ideologies would quickly move from the centre to the extremes. The happy medium that we have experiences since WWII would be over. Knowing this the wise Politicians that we call thick are going to do all in their power to “GET CREDIT FLOWING”. In Ireland changing government is pointless as other main parties’ ideology is also in the spectrum between Corporatism and Creditism. The rest are in extremes that have already proved themselves as utter failure.
The key is to understand that the problem is not the use of credit but the reckless expansion of monetary and credit supply. Now that this has blown up we need to see why there is a massive effort to “GET CREDIT FLOWING”. With this knowledge the debate can move to what are really the best solutions to the problem and how best to prevent it from happening again.
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