Debt Bubble 11

August 5, 2013

chartLast blog title Debt Bubble you can view here

Knives are out for Ashoka Mody who suggests Ireland should take a break from austerity.

“He told RTÉ’s This Week programme that the likelihood of Ireland getting money back from the European Stability Mechanism for its legacy banking debt was “almost zero”.

Yet ESM has been continually heralded by the present government along with European Banking union as a source of legacy banking funding to give relief to Ireland from odious debt due to its current troika bailout of circa €67 bn.

The need for a backstop could see this figure climb to €100bn over coming years. Pouring cold water on such false hopes was not received well.

http://www.irishtimes.com/business/sectors/financial-services/imf-distances-itself-from-ashoka-mody-comments-on-ireland-1.1471321

” Mr Gilmore said: “when the Government was formed we determined that the route to recovery could not just be by budget consolidation alone. There had to be a strategy for jobs and growth.”

He said the government had been pursuing a strategy to boost the economy and getting growth into the economy.

“That is why we brought in last year a stimulus package announced by Brendan Howlin. That is why we have brought forward the action plan on jobs.”

The irony of drying up jobs in the public sector especially for the young, the elimination and culling of jobs with the  ‘action plan on jobs’ part of the black white propaganda machine has not gone unnoticed by opinion polls venting public anger at the performance of the government since coming to office.

The plan is to continue with austerity and to bring forward an action plan on jobs. The purpose? Bring Ireland’s debt to GDP ratio to reasonable levels?

Yet austerity is making little or no headway:

http://www.finfacts.ie/irishfinancenews/article_1026303.shtml

Though government revenue is increasing its liabilities due to general government debt

“This was mainly due to increases in capital transfers (in particular, payments under the Eligible Liabilities Guarantee Scheme – – bank guarantee – – related to the liquidation of IBRC (the rump of Anglo Irish Bank) and interest expenditure.”

mean that the rump of debt due to our failed banks and odious bailout repayment schedule are crippling the economy and bringing it under water.

Unlike the 80’s when Ireland went through economic hard times, this new economic situation is cripplingly different.

The crippling debt bubble did not exist in the 80’s. Austerity in the 80’s was a good thing. Austerity meant that savings made due to austerity made the economy leaner and more fit for purpose and most of all more competitive. The benefits of austerity fed directly into the economy.

When jobs eventually came and trade increased due to greater competitiveness with our neighbours, the benefits led to more jobs, higher salaries.

Most of all such benefits stimulated the real economy and were not sucked out of the economy through excessive debt levels on a personal and government level to benefit only bondholders, troika bailout lenders, banks leeching every last penny out of mortgage arrears and negative equity.

There is a queue of austerity beneficiaries and last on that queue is the real economy. More unemployment, emigration along with higher taxes and more of them is a disaster for Ireland. Austerity means more unemployment. More emigration, more taxes on a decreasing workforce exporting its young is not a real economy.

The official lenders, the troika funding of Irish banks, can be summarised as official funding of bankrupt Ireland lent more money to help indebted Ireland pay its debts both on a personal level and on a national level.

The real economy is relegated to a small player in this fantasy game. Let’s examine the official fantasy and lie spread by many leading economists and politicians in Ireland. Let’s condense the lie into the simple to understand ‘apparent’ axiom that we must cut our deficit spending, not spend more than we earn, we must bring spending into line with our revenues.

Furthermore the official line or propaganda also states that if we do not carry out this exercise the markets will not lend to us.

Beware of the induction arguments  such as the above that state the EMU is facing austerity because Ireland is undergoing austerity. On the contrary, Germany is doing OK at present, its economy along with that of the UK on the cusp of real growth. Its refusal to countenance debt write-down for countries such as Ireland and Portugal and its management of such debt bubble economies spinning them enough to cocoon them etherised on a table of debt for decades, seems to have gone down well with the markets.

Iceland faced down such arguments and refused to allow its taxpayers fund the liabilities of renegade banks.

A key to understanding the lie is to examine the term government spending above. What austerity junkies ask for is that we do not cut a deal on our debt repayments by simply refusing to repay them. No, austerity junkies like to consolidate our debt repayment schedules into stronger lines of credit for our lenders. So we get our Promissory notes recoined/laundered into junk bonds we must repay.

We spread propaganda that our future economic well being is contingent on paying all our debt liabilities to the last penny.

What we need to do is cut spending on health and education and social services and increase spending on our debt repayments. In fact, looting Ireland’s assets to pay off its debts is a good thing? Some economists and politicians have become unofficial agents for our lenders warning us of the risk of capitulation on our debts!

I put forward the view Ashoka Mody grasps better what the austerity junkies miss, the truism that austerity that takes more out of the economy than it puts in when what is taken out of the economy is purely debt repayments made with Ireland’s lifeblood fueled by emigration and unemployment and extinction of the domestic economy, is foolish.

We should be telling our lenders to take a hike while we fix our economy. We should be negotiating debt write-down on the basis of what we are willing to pay, not on the puppet basis of what official agents of the lenders in Ireland say we have to pay/extract from those not responsible for such debt.

Ireland has been blown into a large debt bubble to be fed with the hot air of politicians and austerity agents in academia and in journalism preaching Hamish practices of austerity closing hospitals, schools and state-run institutions.

The intermediate certificate in Ireland which brought numeracy and literacy to Ireland’s population through its state-run examination system is now to be replaced with school’s based assessment, teachers to develop the curricula, correct and set the examinations, all part of a money-making exercise.

The Seanad originally set up to examine and bring due diligence to legislation as part of a money-saving operation similar to the above is to be got rid of. Democracy is under threat.

Austerity is sucking up credit in our economy. People with money are refusing to spend out of fear of further charges and tax increases. Austerity should be returned to those who give it to us.

So let’s impose austerity on the troika.

Pick any date representing the maturity dates on Irish debt and simply announce we will default on that amount if we cannot renegotiate a percentile reduction called burden-sharing. We’ll call this the new austerity. I’m sure official lenders who appreciate the value of austerity will gladly be willing to impose on themselves some of their own medicine. After all, this is not without precedent, Greece has already gone down this road.

The problem is our negotiators and local austerity agents represent the lenders, including our banks, not taxpayers.

It’s possible official Ireland will be both horrified with such a sensible maxim to turn austerity on lenders. The alleged 20% strategic defaulters of AIB at the stroke of a pen could be given, as happened in Iceland, a write-down of their mortgage debt to current values. The true losses of Irish banks through such an exercise would have to be written down and passed on to lenders such as the troika. Instead the fantasy bubble of debt must be preserved, both that an economy can exist with such a level of personal debt, even more absurd, that it will ever be repaid.

Moving the perspective away from Ireland, the austerity road to failure is part of a european policy pursued and supported by Merkel and Germany in particular. It wants its money back. Lack of regulation in the financial services industry that led to the collapse of Wall Street on Black Monday 2008 still has its repercussions.

“Posted on July 22, 2013 by Ellen Brown

Rather than expanding the money supply, quantitative easing (QE) has actually caused it to shrink by sucking up the collateral needed by the shadow banking system to create credit. The “failure” of QE has prompted the Bank for International Settlements to urge the Fed to shirk its mandate to pursue full employment, but the sort of QE that could fulfill that mandate has not yet been tried.”

Fractional Reserve Lending Without the Reserves

The post-textbook form of money creation to which Kessler refers was explained in a July 2012 article by IMF researcher Manmohan Singh titled “The (Other) Deleveraging: What Economists Need to Know About the Modern Money Creation Process.” He wrote:

In the simple textbook view, savers deposit their money with banks and banks make loans to investors . . . . The textbook view, however, is no longer a sufficient description of the credit creation process. A great deal of credit is created through so-called “collateral chains.”

We start from two principles: credit creation is money creation, and short-term credit is generally extended by private agents against collateral. Money creation and collateral are thus joined at the hip, so to speak. In the traditional money creation process, collateral consists of central bank reserves; in the modern private money creation process, collateral is in the eye of the beholder.

Like the reserves in conventional fractional reserve lending, collateral can be re-used (or rehypothecated) several times over. Singh gives the example of a US Treasury bond used by a hedge fund to get financing from Goldman Sachs. The same collateral is used by Goldman to pay Credit Suisse on a derivative position. Then Credit Suisse passes the US Treasury bond to a money market fund that will hold it for a short time or until maturity.

Singh states that at the end of 2007, about $3.4 trillion in “primary source” collateral was turned into about $10 trillion in pledged collateral – a multiplier of about three. By comparison, the US M2 money supply (the credit-money created by banks via fractional reserve lending) was only about $7 trillion in 2007.  Thus credit-creation-via-collateral-chains is a major source of credit in today’s financial system.”

Do you see the bubble?

What austerity is doing is pumping money out of the real economy into the shadow economy. QE in the US, bailouts in EMU and Ireland, pump money into the banks which exists in the form of highly collateralised debt in the shadow banking economy. Eventually, this debt has to be anchored in the real economy.

But if the real economy has its oil pumped into a sea of bubbles inflating stocks and shares, see the increase in the DOW over the past 2 years, while the real economy is etherised on its table of debt, eventually with little to hold it together, a pin pricks the bubble and we got 2008 again.

Austerity in Ireland means the crippling extraction of odious debt out of the population and its individuals especially those in mortgage default.

With such an economic model for Europe neither EMU nor Ireland is sustainable as a going concern.

Other economic models should be looked at, taking a break on austerity, negotiating burden sharing and debt write-down, existing the euro, devaluation.

Austerity junkies blow bubbles that eventually burst.

Mr Mody knows austerity is not working for Ireland. Does he need to spell out for austerity junkies we should impose austerity on our lenders, not the other way round?

End.

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