By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
About a year ago a couple of friends and I were sitting around drinking beer and talking. As so often happens today in day-to-day Irish conversation, the economic situation and the repayment of debts was raised. One of my friends said that, naturally, the debts had to be repaid. I pointed out to him that by repaying the debt we were just sending away money to be effectively destroyed.
He couldn’t believe what I was saying and I didn’t blame him because it sounded like madness. But I pointed out to him that the money the Irish people were repaying by accepting decreases in government spending and increases in taxes was simply going to the central bank and from there it was being destroyed. I explained that what had happened was that the central bank had created a load of new money and thrown it into the crumbling Irish banking sector. Now the Irish people were paying back this newly created money so that it could be destroyed by the central bank.
My friend thought about it for a while and then pointed out that if the new money wasn’t paid back and destroyed it would result in inflation. Not so, I said, because the money has already entered the economy. The Irish banks loaned out the money during the boom years and this had driven a speculative bubble in the property market. But now we were just trying to prop up the banks that had made these loans. Effectively we were taking newly created money, throwing it into a black hole in the banking system and then scalping tax payers and citizens so that we could pay back money that would be destroyed by the central bank.
He refused to believe me. The story was too incredible. After all, why on earth would the central bank want the money back if they were just going to destroy it? Why would they want to destroy it if it would not lead to inflation? Politics, I said. He shook his head and took another sip of beer.
That was almost a year ago. To say such things in polite circles was to be labelled a crank or a joker. But now the Irish politicos are beginning to see what’s really going on. In order to understand why this realisation has finally started to dawn on them we have to look at the structure of borrowing that was put in place to raise the money to save the Irish banking system (not to mention all those bondholders, both at home and abroad that want their money).
The Irish central bank basically created the money out of thin air in order to prop up the insolvent banking sector. It did so by negotiating a scheme called Emergency Lending Assistance (ELA) which the banks signed up to. The central bank then effectively created new money to the tune of €30.6bn and handed it over to the banks to keep them intact. The government then stepped in and issued IOUs called ‘promissory notes’. These promissory notes promised to pay back the newly created cash by about €3.1bn a year (give or take) – this included interest payments on the ‘debt’.
These repayments are added to the government deficit at the end of every year. And as we know, the government is then forced to engage in austerity measures in order to reduce this deficit. Needless to say, if they had €3.1bn more ‘breathing room’ every year the austerity measures would not have to be so harsh.
Recent discussions over interest payments on these promissory notes have brought this point of discussion out into the open in Irish policymaking circles. Politicians and commentators are beginning to see the patent absurdity that, while the country is scrounging for cash to pay for public services, it is making interest payments to the central bank that are effectively being destroyed. This has already raised a debate in Ireland about these interest repayments.
The underlying point that all these payments, including paying down the debt itself, are just going into the proverbial incinerator is beginning to gain sway, however. Yesterday an Irish economic think tank released a video (below) which explains the situation while clearly making the case that the Irish government are raising vast amounts of money that are then being forked over to be effectively burned. And all this is taking place while spending within the economy itself is so low that the unemployment rate is around the 14.5% mark.
The questions is for how long will the Irish people continue to be intimidated into handing money over to be burned while the country itself goes up in flames? How long can this farce, propagated largely by the Eurocrats, be maintained until someone raises the question of why exactly the Irish people continue to ruin their economy through austerity measures in order to repay what is effectively a phantom balance sheet?