Philip Pilkington: The Irish Begin to Wake Up to the Fact That They are Repaying Money That is Then Burned

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?

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  1. TC

    At last. A clear explanation of how the “banking crises” affect the Euro in our pockets.

    Any equivalent figures available for UK, Greece and Portugal?

    1. Sally C.

      Good Question. As a UK citizen, I would love to know the comparable figures for the UK. We know that the equity holders of the banks were pretty much wiped out but what happened to the bondholders is really hidden from public view.

  2. YankeeFrank

    This is of course the absurdity of our entire financial system today: banks create money out of thin air, loan it out, make interest/profit from that debt, and once paid back the money disappears the same way it appeared — poof! So who is actually “hurt” when we don’t pay our “debts”? The whole thing is a farce of incredible destructiveness. This is why the bankers feel so free to pull the scams they do: they see the illusory nature of the whole thing and how easy it is to simply “take the money” — private equity is the most transparent example of this that I have seen: use a company’s credit lines to pay yourself lots of money and leave the company holding the bag. Its all funny money anyway and those closest to the spigot apparently can’t help themselves if they happen to siphon a bit for themselves, its just too damned easy (and its not like you’re stealing grandma’s retirement savings ;). Actually it is, but only because Grandma has to live in the pretend world where money is real, while the banksters get to live in funny money land (the real world) where there are no consequences to them for their theft — let that bend your mind for a while.

    I can understand why so many are demanding a return to the gold standard — they think it will limit funny money and re-tie our financial system to reality. Unfortunately it ain’t that simple. The only real answer it to take money creation rights away from private entities altogether. No more fractional reserve banking, but with a fiat currency.

    This is also why MMT, a/k/a the way our money system operates, clearly shows that there is no excuse for all of the people to not have enough to eat, be educated, have shelter and healthcare. The money is limitless and as long as the food, doctors, housing etc. exist (and they do, and where they don’t create them) then we must all have the minimum necessary for life, period. No excuses. This whole system will collapse from its own internal contradictions… its only a matter of when , not if, and its heartening that the Irish people are starting to grok this!

      1. reason

        Well actually (absence central emergency rescues) it is much more than that. It is in order, bankers, bank shareholders, bank bondholders, bank employees, bank depositors.

      2. cwaltz

        On the contrary, they seem to be soldiering on just fine.

        They have managed to rig the system so even if they don’t get paid by debtors that they’ll get paid by taxpayer funds.

      3. rjlaures

        That would mean they would have to do actual work that contributes real wealth to the real economy. I find it hard to sympathize with them.

    1. Ignim Brites

      “…we must all have the minimum necessary for life, period.” Why only the minimum? Why not all that is possible for happiness, satisfaction and fulfillment — for everyone. Especially leisure time.

      1. Yellowrose

        Ignim Brites you are absolutely right! Read Sacred Economics by Eisenstein to see how this is already starting to happen within local economic systems, even today. We aren’t obliged to go along with an economic system created by elites, for elites. This is true for countries, but for individuals too.

  3. Max424

    If you were a country, wouldn’t you like to have your own central bank? Think how nice it would be. Imagine having control of your own money! Think of all the great things you could do, if you only possessed the fiat currency, that by all rights, belongs only to you!

    Instead, just about every country on the planet has handed over their fiat currency –and with it, a majority of their sovereign power as well– to international banking houses.

    It is a very strange thing. Stupid countries everywhere have chosen, of their own volition, and for no reason at all, to be both broke, and powerless. It is almost as if their is a heated international competition underway, to see which country can allow itself to get robbed, cheated and bamboozled the most.

    It’s the Dummies Olympics, is what it is, and every dummkopf , from the US, to Ireland, to all the nations of the EU, deserves a shiny gold medal and the top spot on the Idiot’s Podium.

  4. Ralph Musgrave

    Not a desperately clever point by Philip Pilkington.

    All money created by central banks appears from nowhere. And all money repaid to central banks disappears into a black hole.

    Philip Pilkington asks in his final paragraph why the “Irish people continue to ruin their economy through austerity measures..” The answer is that the EZ is sucking money out of periphery countries so as to impose deflation on the periphery (in both senses of the word deflation). And the purpose is to make them more competitive. Of course that has dire consequences, but that’s an inherent flaw in any common currency system.

    1. James Sterling

      “more them more competitive” = make them work harder for less

      This is about asset owners making labor cheaper for themselves to employ, enabling them to use other people’s labor to accumulate capital, which they can then use to employ more labor cheaply to accumulate more capital. Instead of having to give away capital to get labor.

      Meanwhile, it makes it harder to labor to accumulate capital, such as e.g. buying your own house to live in, instead of paying rent to a landlord.

      You haul sixteen tons, and what do you get? Another day older and deeper in debt.

  5. Whitaker Lim

    For the fiat currency system to be applied in this case, wouldn’t it mean the ECB has to issue the currency? Which it doesn’t currently have the power to do? And to which Angela Merkel & co would sooner slice their wrists than see happen?

  6. psychohistorian

    But, but BUT, what about the sanctity of the contract?

    It would be fitting if one could construct a noose out of a contract to put around the neck of the salesman for the global inherited rich of Irish slavery bought with this contract

    1. Philip Pilkington

      Shhh! Don’t tell Irish policymakers! They’ve come to MMT conclusions without anyone pushing them in that direction…

    2. MDBill

      Gee, thanks for clearing that up. You persuasive and closely reasoned argument has completely changed my mind on this issue.

  7. Luciano

    Unbelievably stupid post. It completely denies the economic principle at the heart of the debt: that it represents the present value of a sum of future flows of money made from the investment made with the money borrowed, flows that are in part used to repay that amount.
    So the author wants us to believe that we can borrow money and that refuse to pay it back? That it is RIGHT? And that the money borrowed by the Irish citizens during their boom hasn’t been substantial in letting that boom EXIST in first place?
    I can accept that a part of the debt assumed every day, everywhere in the world will not be paid back because not every investment will bear fruits, and some debtor will go broke. But i can’t absolutely accept that a whole nation has embarked in a debt binge, lived well over their current means, and then, when presented with the bill, is starting to think that is morally acceptable to refuse to pay!

    1. Philip Pilkington

      Hahaha! Moral truths handed down by our very own Moses.

      Read the article properly, brother. No one is being paid back. The money is being removed from circulation and destroyed!

      1. F. Beard

        Moral truths handed down by our very own Moses. PP

        More like an anti-Moses. Moses wrote that usury was forbidden between fellow countrymen in Deuteronomy 23:19-20.

    2. Lesson #1

      Private vs. public debt.

      What is being discussed here is public debt. “the people” didn’t borrow it, the banks did. Then the banks were bailed out with public money and guarantees.

      The rest of your attempt at a “moral” argument is flawed in the same way article discusses.

    3. F. Beard

      Even with private bank debt your moral argument fails since the banks are effectively counterfeiters who FORCE people into debt since the alternative is to be priced out of the market by those who do borrow.

      1. F. Beard

        I’m with Graeber that debt is just a promise. Lambert Strether

        Actually, credit creation is a gamble by the banks that they can be repaid what they lend PLUS interest that does not even exist in aggregate.

      2. 1whoknu

        Or perhaps we should think of money as representing our labor in the form of an iou held by those who employ us. Afterall, our productivity has increased by multiples of ten over the past 30 years while the amount we are actually paid for that same labor has either stagnated or decreased. The really clever part is that in order for us to redeem our iou’s we are given that money as debt, charged interest and then required to give it back through even more labor. What a clever concept those rentiers have sold us.

        1. F. Beard

          Money should be spent, not lent into existence. The question then is why we would accept anyone’s money? In the case of government money the answer is simple; we accept it because we need government money to pay our taxes. In the case of private money, I suspect that the issuers would have to issue equity in order for their money to be accepted.

          1. 1whoknu

            Well of course, creating money through debt is the insanity that we all accept because they have sold us that particular lie in order to skim their rent off the back of our labor.

    4. Doc Who

      “But i can’t absolutely accept that a whole nation has embarked in a debt binge, lived well over their current means, and then, when presented with the bill, is starting to think that is morally acceptable to refuse to pay!”

      But that is exactly what Iceland has done. Then again, the Viking sense of morality does not translate at all well into English.

      Perhaps I can explain it this way: the Icelanders saw the whole financial morality thing as just another slimy Anglo-Saxon trick, and said “to hell with it”. This would be typical of Scandinavians.

  8. Adrian Docherty

    I’m not sure whether PP understands what “money” is. True, in the digital age, it all feels quite illusory. But the people who have the licence to print money (central banks) need to be careful not to ignore the principle behind the illusion. Devaluation, inflation and depression would result.

    PP should also note that austerity doesn’t just create cash to repay the debt, it also improves the country’s competitiveness and hence long-term prospects.

    One can’t live beyond one’s means
    Loans have to be repaid
    Money creation / destruction is a symbol of trust

    1. Philip Pilkington

      Where on earth are we pulling these comments in from?

      Read the article. The money that is injected into the bank is not inflationary. Just like the TARP bailouts were non-inflationary.

      I’m afraid it’s comments like this that display an almost crushing ignorance about inflation and devaluation. Indeed, note that the commenter says that inflation AND depression would result. Eh… earth to moonbase: depressions are deflationary economic events.


      1. Adrian Docherty

        Well, PP, I defer to your confidence in your superior knowledge. But let’s state opinions as facts. For example, most people use the term depression to label a long period of economic contraction; inflation can be concurrent. And TARP bail-out wasn’t inflationary? Says who?

        1. skippy

          One bubble to replace another? Seems to me that oil was a bother (pre pop), then not, but, then again.

          Hay how about all that “imaginary” hot derivative liquidity pre pop, was that inflationary?

          Skippy… where the fook does one plant a financial stake in the ground to find spirit level…eh?

        2. Philip Pilkington

          Re: depressions. No, inflation cannot take place in a depression. That would be like water freezing due to too high a temperature. Check the wiki article for a primer (also do a search for the word ‘inflation’ in that article):

          “Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.”

          Who says TARP bailout is not inflationary? Eh… everyone, the figures, reality… I dunno… The real question is who would dare say its inflationary. Barring cranks like Peter Schiff or Ron Paul.

          1. Adrian Docherty

            OK, seems like you’re convinced by your own arguments. But you should also want to consider other arguments no?

            The nature of money is important, as are the views of people who see money supply as important.

            Do you genuinely advocate that the Irish national debt is annulled? And the Greek borrowings? Italy’s? Spain’s?

            I can see the Keynesian logic of pulling people off the dole, but it’s not a universal or a foolproof doctrine – especially if the new “money” is used to pay for unproductive work – as anyone who has lived through negative economic growth and a rapidly devaluing currency can attest.

            In short, I hope that the owners of the Euro don’t print more to pay for the Irish populace to continue to live well beyond its means. That would be a default in effect and would hinder economic recovery.

          2. Philip Pilkington

            Okay. Let Europe keep the pro-cyclical policies in place while the Irish economy burns and the debt-to-GDP rises until we end up in the situation the Greeks were in.

            When you have friends like these who needs enemies…

          3. John

            I’m confused. Im new to this blog, but are you
            being sarcastic about Schiff, Paul and MMT?

            The ‘cranks’ have valid arguments against the current
            central bank/money creation system that we have.

            Keynesian economics is oft touted as the soloution to our problems but Keynes is misrepresented in most neoclassical analysis and I would suggest you read Minsky’s “Stabilizing an Unstable Economy”. Money creation is totally ignored in
            neoclassical economics and treated as a simple supply/demand issue.

            The interest on the promissory notes is being paid to ourselves so its effect is nil as it will return to government coffers.

            I agree with the rest of the analysis and we must remember that capitalism is a yin and yang system. You cant have debt without default. Some of the comments re ‘the debt must be repaid’ are simply wrong. When the merry-go-round stops turning someone has to default. The current too big too fail mentality has created a dysfunctional money system
            that has landed Ireland in the sh1t. If the ECB LTRO had been available on that faithful night we would not have the problems that we have now as the ECB would be holding the
            bucket of crap.

            What’s the solution? Theres only 1 and thats a revolution/uprising/boycott whatever takes your fancy but it has to shake TPTB’s grip on Ireland. Its brewing and
            I think the low payment levels for the household tax are the start. There’s not a hope the fiskal compact is gonna pass either. Theres a change in the air and it’s gonna be an
            exciting summer.

    2. skippy

      “One can’t live beyond one’s means”

      Roll eyes and see whom that gun should be pointed>

      “Loans have to be repaid”

      No…. read some law for frick sack. Especially when it was fraudulently issued with intent.

      “Money creation / destruction is a symbol of trust”

      Howl[!!!], try acts done for social well being promote trust and acts that damage social well being destroy trust.

      Skippy… handmaiden

      1. Adrian Docherty

        Sorry not sure I understand your points Skippy. I would add though, that the Eurozone mustn’t just magic the debts away. If that were possible, why not just “create” lots more Euros and give everyone a huge pay rise? That’s what I meant by trust – trust in the exchange rate.

        1. Philip Pilkington

          Or create more money and put people to work to raise aggregate demand. What’s that called again? Keynesianism? Oh yeah…

          1. Dannyc

            You’d think the ONE thing the Irish would’ve willingly and gladly imported wholesale from Great Britain, it would’ve been Keynesian Economics.

        2. skippy

          ‘Electrons of Price’ and you bandy on about rates, cross FX stuff?

          Skippy… if the sheeple can’t pay back the debt, the government has too, full stop or default. Yet after governments have thrown trillions of price at it, to recapitalize, instill confidence, bring back the liquidity needed for the present system to function, the Dow and Russell adjusted look more like 10,000ish.

          PS. the old debt was a bit of magic its self, remember the lowering of standards by 2%, fee based revolving servitude, out with the bad ((less than trigger) she’ll be right?

      2. Lucy

        “Howl[!!!], try acts done for social well being promote trust and acts that damage social well being destroy trust.”

        In that case, we’re in really big trouble.

    3. reason

      “PP should also note that austerity doesn’t just create cash to repay the debt,”

      You really don’t understand do you. Why do you think “austerity” creates any cash? It does the opposite. Throwing people out of work and taxing them more destroys cash. Get it?

      1. Adrian Docherty

        “You really don’t understand do you. […] Get it?”

        Gosh, there’s confidence on this post!

        I must say, if I were the government and I was paying someone 1000 to do something, and only 500 to sit on the dole, yes I would be saving cash by laying them off. And if I raised VAT then yes I would get more cash. With that extra cash, I could hopefully balance my budget.

        What am I missing?

        1. 1whoknu

          “What am I missing?”

          Ummm, maybe spending? Looks to me like there is a loss of $500 somewhere in there. If the government doesn’t spend it and the worker doesn’t spend it, then it is $500 that is effectively destroyed. It becomes just another piece of paper, or more specifically, a number on a spreadsheet that creates nothing.

          1. Adrian Docherty

            But that’s all money is anyway. It’s a token that has exchangable value based on people’s perceptions. Governments who print money to pay creditors should expect to see the relative value of their currency decline and the cost of their debts rise. The consequent rise in the cost of imports (eg. globally-traded commodities, Japanese-manufactured cars) will rise.

            It does not surprise me that money can be created or extinguished by governments at will. But it is not a panacea.

        2. reslez

          yes I would be saving cash by laying them off. And if I raised VAT then yes I would get more cash

          A government that’s sovereign in its currency neither has nor doesn’t have money. The government is the source of money. What does it mean to say an alchemist “needs” to save up a supply of gold when he can create an infinite amount of it at any time? By raising VAT the government extracts money from the private economy. The private sector has no place to obtain money other than government, or by borrowing — and as we know borrowing is temporary in nature and must be paid back (it nets to zero.)

          In the case of Ireland which belongs to a monetary union we would be looking to the ECB to at minimum guarantee the debts. The ECB (and through it the EU) has no fundamental limitation on its ability to issue Euros or pay back debts denominated in its own currency. Any perceived inability to pay back debt is imaginary, a political fiction convenient for the wealthy and deadly to average citizens.

    4. Leverage

      By definition, austerity can’t create money. In fact the contrary, it only can destroy money (diminishing net financial assets) as you try to ‘balance’ budgets.

      So one way or an other the debt won’t be paid (at least by the usual means), if austerity is the way then reduction of money flows and expansion will force defaults eventually.

      1. Adrian Docherty

        I don’t see it that way. Yes, 100 saved by the government may result in the population being say 60 worse off in balance sheet terms – but added together, there’s 40 more resources to pay down debt. The way I see it, austerity DOES create incremental debt repayment ability.

        1. F. Beard

          The way I see it, austerity DOES create incremental debt repayment ability. Adrian Docherty

          Is debt to counterfeiters morally valid?

          But assuming National Debts should be repaid then the way to do it is with brand new fiat since the debt of a monetarily sovereign nation is ITSELF a form of money. Thus the inflation occurred when the debt was issued; repayment with new fiat should not be inflationary. In theory, repayment with new fiat should be deflationary since fiat does not pay interest while government debt does.

          Yes, Ireland is not monetarily sovereign – a strategic error on its part. Still, it should reinstate its own currency and use that to pay off its debts, should it decide to repay them.

          1. Adrian Docherty

            Yes, I couldn’t agree more. I have heard extremely authoritative finance types (eg. French politicians involved in the creation of the Euro in the 90s) admit that control over one’s own currency is the only way out of crises. I also don’t believe the doomsday analyses of what happens when say Ireland leaves the Euro.

        2. Leverage

          Debt is paid in the unit of account it was created. If there are X less monetary units injected into the private sector because deficit is cut or balanced then there are less 40 m.u. to pay debt.

          No way around that! And the private sector can’t create net m.u. to repay debt the way the credit system works, the increase in financial assets means an increase in liabilities (more debt).

          It does not matter if you can produce more coconuts, coconuts are useless to pay debt. A deflating quantity of money means is more ‘expensive’ and harder to come by to liquidate liabilities.

          Also, there is no ricardian equivalence, increasing cuts in deficits does not mean there are more available resources to the private sector anyway. We have plenty of spare capacity because there is scarcity of money into the pockets of the people (and too much money on very few pockets for gambling, creating bubbles and create a toxic favour-the-rentier environment).

          1. djrichard

            Yep, what you’re describing is naked short sellers caught in a short squeeze. Can’t have that now, can we. Instead counterfeiters sell the nirvana of never-ending naked short selling, as if the chickens never come home to roost.

            And we’re all complicit in this; we’re all naked short sellers, at least those of us in debt.

  9. Thomas Barton, JD

    Yves, I hope you will weigh in on this nifty video and how the staggered and staggering Greece default aka restructuring plays into this. I was also under the impression that the Irish debt could not be resolved with the merely huge figure of 31 billion euros. I thought the total amount was much higher. Maybe some of it has been magically sucked into the darkest recesses of the ECB’s Quasi-QE machines, LTRO and LTRO Deux. Perhaps I could get some LTRO liquidity by putting up my 15 year old Ford Escort as collateral. I bet I could use it to help Citigroup and MetLife pass their stress test re-test.

    1. Philip Pilkington

      You’re right. The bailouts were a lot bigger than €30.6bn. Funds were pulled in through different methods.

      But huge amounts of it fell on the shoulders of the Irish government. The promissory notes payment system is particularly interesting because it nakedly shows what is really going on with the bailout when it is transferred to the Irish state. This should have mainly been a standard lender of last resort procedure by the central bank and the ECB, but its turned into something else altogether.

  10. Kev

    Good article, because it explains the dynamics of a fiat (credit) money system.

    The only mistake is the suggestion that creating new money doesn’t lead to inflation. Academic research shows that money printing always leads to rising prices. It doesn’t show up as inflation because Ireland was already in a deflationary environment with prices falling. The two forces cancel each other out.

    The right way to look at it is that without the money printing, prices in Ireland would be lower than where they are now. Repaying the debts means the purchasing power of the remaining money goes up.

    1. Philip Pilkington

      “Academic research shows that money printing always leads to rising prices.”

      It’s a bit more complicated than that. If you’re referring to Friedman’s work it is largely recognised as being outdated. It got the causality all wrong.

      Inflation is not, always and everywhere, a monetary phenomenon.

    2. F. Beard

      MV = PY

      P = MV/Y

      A rising price level, P, can be caused by an increase in M, the supply of money + credit, but increases in Y, aggregate output, or decreases in V, the velocity of money can cause P to FALL.

      And the above assumes that the banks are lending. If they are not lending then the repayment of existing credit debt can cause M to FALL even if money (bank reserves) is increasing since most of M is credit debt.

      1. craazyman

        I dunno about those equations.

        They seem so Newtonian — like the old model of the atom we learned in science class — you know, a little solar system with little teeeeny balls orbiting the nucleus.

        If your hand was small enough, you could grab an electron and throw it like a baseball. But if you were that small, you probably couldn’t even see the nucleus itself.

        It used to boggle my mind.

        Same with money. Not sure it moves around like little teeeny baseballs from person to person, with a velocity. It may have a momentum too, and there may be an indeterminacy. And it’s also hard to separate output from price, since output sort of IS price, because atoms are mostly empty space. And everthing is really only FORM, which is purely imaginary, or at least exists in its own universe and radiates into ours. Like money. LOL.

        1. F. Beard

          Money is far simpler if approached from an ethical viewpoint. Yes, the “gun” may or may not be loaded BUT DON’T POINT IT AT INNOCENT PEOPLE is the proper approach.

          Ethics in money creation solves/prevents so many problems that it MUST be crucial to the process.

  11. craazyman

    I freely admit I don’t really understand any of this. I sort of get the surface nomenclature, but I can’t SEE the entire energetical architecture in my mind. I need to do some more homework.

    But what I don’t get is this. In theory, isn’t the austerity supposed to produce direct investment that would represent a source of new money.

    Sort of old money dying so new money can be born? Is it so simple as the money going back to the Central Bank to die but with no resurrection elsewhere?

    One could argue that the direct investment won’t happen due to the depressionary state of the economy. I would get that. I understand the argument against the futility of austerity as means of spurring growth (and the ethical outrage of it), the argument that investment won’t materialize. Sort of starving yourself to gain weight.

    One of these days I need to figure this stuff out for real.

    1. Leverage

      The liquidationist way is not the same as the austerian way. For old money to die there needs to be the possible of defaults happening, otherwise what you are facing is a mathematical impossibility: there won’t be more investing and money expansion while you need to pay current loans and debts. There is a ‘peak credit’ every society will reach eventually (it depends on incomes mostly, and productivity, but that’s not the real problem here).

      The troika has forbidden the D word, even when there is a de facto default (Greece) they will use euphemisms, in case anyone thought that option is better! We can afford a Greek default, but italian or spanish? The world economy would fall off a cliff.

      Austerity without big defaults is delusional! (Mostly in the private sector, including zombi propped-up banks, we know public sector can print if it wants too! though the situation in Europe is a bit more complicated.) What we have mostly is a lot of rentiers try to suck the life of debtors who won’t be able to pay because damn mathematics.

      1. craazyman

        yes, I think I see that, but I guess I had in mind foreign investment, where the base money was created by some other central bank.

        So domestic money goes to die, but foreign money seeds the resurrection.

        I have something under the period key on my keyboard, maybe a crumb

        This is a progression of group consciousness that seems to me to be a natural phenomenon that expresses itself in money similar to the way it expresses itself when two distinct cultures collide and merge.

        But the Lord is no respecter of invididuals It seem to me like Zeno’s paradox You just have to abandon the notion of the sacred increment if you want to get anywhere

        1. craazyman

          all right or maybe even some German with a load of cash in a bank

          I don’t buy the notion that saving = investment

          I can think of lots of ways to save without investing a dime

        2. Leverage

          Craazyman would you invest money in an economy with decreasing demand and economic activity? Would you invest money in an old man who is about to die or in a promising youngster full of life?

          Greece is an oldman, and decreasing prices are not going to make it younger if there is falling activity and demand. Off course at some point you may look to invest some money in projects with little added value which need cheap labour. So yes, eventually Greece could become an european Vietnam and be in line with other eastern Europe nations (which have their own trouble anyway), but with more debt over their back. The question is if this is affordable or there will be a revolution first, and off course the only one winning in that case are the oligarchs (both creditors and capitalists exporting jobs, which usually are the same person anyway).

    2. JurisV

      Mr Craazyman —

      For your homework regarding the “magic” of Austerity may I suggest the “Gnomes” episode of South Park. Cartman and his buddies discover the Gnomes (actually known as the Underpants Gnomes) business model — which I think may have come from Hayek’s Austerity model. This needs more research.

      The Gnomes business model:

      1. Collect Underpants
      2. ?
      3. Profits

      The “?” can also be an asterisk and the model remains consistent.

      The austerity model follows directly by simple substitution and the use of Gnomeian Logic:

      1. Austerity
      2. “confidence fairy” (replaces the “?” term)
      3. Profits and work for everyone

      Putting real people out of work, decreasing aggregate spending somehow through the “?” step results in big profits.

      As an aside, Paul Krugman referenced this model (he called it the magic asterisk model) is critiquing Paul Ryan’s plan/model for “saving” Medicare.

  12. But What Do I Know?

    When I was in grade school, we were taught about the feudal system and slave cultures, and I wondered (as many children must do) why the serfs and slaves didn’t revolt, since there were so many more of them and the lords/masters couldn’t do without them. I suppose it’s because they have internalized their master’s philosophy that the existing order is somehow “right.” Discussions such as the one describe by Mr. Pilkington at the beginning of the post are very much in that vein. People think it is “right” to repay debt (and I suppose it is) but they then assume that the system is set up so that everyone follows the same rules–banks included. Meanwhile, the hierarchy is butressed with faith in a “conventional wisdom” taught by universities and written about so pervasively that it seems true. The lower classes are told that they must do pennance for past sins while the aristocracy continues with business as usual.

    Why didn’t the slaves and serfs revolt? Human nature, I suppose.

    1. Adrian Docherty

      At some point, they do refuse. Sadly, most revolutions end up recreating the same problems in the end. Only the most cohesive societies (Scandinavia?) seem to keep things together. Beyond the rich/poor divide though is the recent emergence of the old/young divide, which is truly staggering.

  13. paulie46

    Excellent post Mr. Pilkington

    Rarely is a subject presented with such clarity.

    So simple a caveman should see it.

  14. MSB

    A very good article describing the crisis of liquidity (as opposed to solvency) the Irish Banks faced and the monetary policy imposed by the Central Bank to address it.

    However, as described, the fact that fiat money is flowing through the banking system and then taken out by austerity measures only to be destroyed can be misleading.

    Monetary policy is not fiscal policy. The Central Bank cannot deploy those funds directly to contribute to aggregate demand and aid job creation. Rather the government must decide first to not pay on the promissory notes and then deploy the cash elsewhere.

    Deflationary expectations of the consumer will not contribute to aggregate demand either. Less austerity could very well mean that people save more, until confidence is restored in the overall jobs picture and the value of their homes stabilizes.

    The €3.1bn “windfall” from not paying on promissory notes will not necessarily go to jobs creation and increased demand, but rather could be traded off in order for us to keep our infrastructure and strategically important public assets.

    What will contribute to aggregate demand is a formal and effective jobs creation policy. That can only be achieved if the constraints of austerity are removed through negotiation with the ECB and IMF.

  15. indio007

    It’s not a debt unless there was some real consideration at risk. Central Banks do not redeem their notes for anything therefore the don’t risk anything. No loan of redeemable “money” needs to be paid back ever. No loss will ever be realized if it isn’t.

  16. Diarmuid O'Flynn

    I see a lot of people are beginning to catch up with us in Ballyhea. Eventually this will all come back to the argument we should all been having in the first place – is it right that the ECB should use its financial muscle, and the EU (specifically the Merkozy duarchy) its political muscle, to blackmail/bully/browbeat the weak government of one of its stressed smaller member states into paying a debt that is not its own?

  17. Rodger Malcolm Mitchell

    Excellent article.

    The government of Ireland voluntarily surrendered the single most valuable asset any nation can have — more valuable than its land, its rivers, its ocean shores and (dare I say it?) even more valuable than the people themselves. They surrendered their Monetary Sovereignty.

    Sadly, the Tea/Republican cut-the-deficit hawks with to take away America’s Monetary Sovereignty, so we too can join the ranks for the austerity ridden, monetarily non-sovereign PIIGS.

    What a shame. What a shame.

    But, great article.

    Rodger Malcolm Mitchell

  18. Hugh

    Some random observations:

    It is interesting how some commenters say debts must be repaid and that the Irish were living beyond their means. Where were these people back when Irish banks were making these loans? I mean the Irish banks were making loans and feeding a bubble, indeed creating it. It all had to go splat at some point because that is what bubbles do. So why aren’t these commenters talking about the failure of these banks to discharge their basic fiduciary responsibilities? Or why these bad loans which the banks should have known would or could blow up now must be made good by Irish taxpayers? Especially when the money from them is either destroyed by the central bank or sent to rich overseas kleptocratic bondholders.

    Also inflation can occur inside deflation. It is what we are experiencing now in the US where wages and assets of the 99% are deflating even as commodity prices for basic goods like groceries and gasoline are inflating.

    1. Adrian Docherty

      Good points. My input would be:
      – Indeed. Why oh why did the Irish govt not just let Anglo go bust? That’s half the problem.
      – If you don’t want to repay the bondholders (kleptos? remember, they gave the money in the first place…) then fine but default means you’ll be sued and endure 10+ years in the wilderness, which let’s face it ain’t bad if you never need to borrow again but apparently international trade becomes difficult
      – Living beyond means? Yes – Ireland has a budget deficit. Period
      My solution would be simply to ban debt. Why on earth do governments borrow? And why can’t banks go bust?…

  19. Dannyc


    Will the people of Ireland ever know the identity of the bondholders? Does that matter? I’m thinking that if these bondholders have histories of making nefarious deals; and, that if it were possible to uncover – if in fact it were true – that this whole deal – the defunct insolvency of Anglo and INSB and the rush to force the Irish taxpayers to pay, as well as undermining the health of the entire Irish economy for years to come – could’ve been intentional, or pre-planned. In other words, should the Irish people know if this were predatory or not?

  20. marblex

    They should tell all the banksters in all the world to sod off and prove the money is owed them and that there was EVER money that exchanged hands. Failure of consideration. Plain and clear.

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