It is important to point out that the export-led sector of the Irish economy including agribusiness, electronics and pharmaceuticals is doing brilliantly and has recorded year on year increases during the last few years despite the demise of the Celtic Tiger. Ireland is exporting a lot more than it imports.
However Ben Dyson’s excellent blog describes vividly the death-spiral that is the rest of the Irish economy. This death spiral is directly caused by the collapse of the Irish banking sector and the consequent collapse of the money supply in Ireland.
As Ben explained, in a boom banks create a lot of credit, new money, and during the Celtic Tiger the Irish banks led by Anglo Irish Bank, but rapidly followed by all the other banks, created money out of thin air as if there was no tomorrow. Some reports have the loan-book of Anglo-Irish Bank doubling in a 4-year period, which was unprecedented. I have heard many anecdotal reports of builders / developers requesting a loan of say €1,000,000 but being persuaded by their banker to borrow €5,000,000 during the boom.
However like all banking booms, caused by an increase in the money supply, caused by banks creating loads of credit out of thin air, with real people borrowing this credit, the boom ended. We are now in the deflationary spiral eloquently described by Ben Dyson. The reality of the deflationary spiral is evident all over Ireland with ghost estates (boarded up housing estates with houses half-built, or fully completed houses with only a few houses sold and occupied), and small businesses closing down in very village and town in the country. Ireland now once again is becoming a nation of emigrants.
The solution lies in understanding the fundamental problem. The Irish banks are all bankrupt. Their share price is 2% or less of what it was at the peak. Free-market capitalism means that if a business goes bust, it is declared bankrupt and the business is wound up. But in the case of the Irish banks they have not been declared bankrupt. The Irish government and by proxy the Irish people guaranteed the bondholders of the Irish banks that their speculative loans to the Irish banks would be guaranteed by the Irish tax-payer: Hence the Irish banks cannot be declared bankrupt.
The amounts of money guaranteed by the Irish government to these bond-holders is at least €40 billion Euros. The Irish banks are bankrupt and their costly bankruptcy is threatening the economic viability of the Irish state: Hence the Irish government itself was bailed out in late 2010.
There is a two-part solution to the Irish banking crisis:-
1) Nationalise the Irish banks immediately
Nationalisation of the Irish banks would mean that the shareholders of the banks lose the remaining 2% of the value of their shareholding. More importantly it would mean that the bond holders instead of getting a “hair-cut” of 10% or 20%, would get a hair-cut of 100%. This would mean in simple English, that because the Irish banks are bankrupt, the bond-holders who lent to the Irish banks would lose all the value of their bonds, just like the shareholders have lost the value of their shares. The Irish people would no longer be burdened with this enormous debt that the current Irish government has foolishly guaranteed the bank bondholders.
2) Nationalise the creation of money
The nest step is to understand why this banking crisis happened, why it was inevitable, and why the next banking crisis is imminent. This Credit Crunch is by no means over.
97% of our money supply is credit and only 3% of our money supply is cash. The fundamental problem with our system of banking world-wide (and not just in Ireland) is that credit is not money but is in fact a Promise to Pay hard cash. Credit is a Promise to Pay money but is not money. Credit is counterfeit money. The process by which banks create money out of this air is caused fractional reserve banking. Fractional reserve banking is the underlying principle behind our world-wide banking system. The banking system world-wide goes bust if more than 3% of the population demand hard-cash for the money in their bank-accounts.
The solution to this problem is that instead of granting banks the enormous privilege of creating the nation’s money supply, the Irish government should issue and spend into circulation 100% of the nation’s money supply. Ben Dyson’s Bank of England Act 2010 clearly demonstrates how this could be done.
Finally once this new “Government-Created money” has been working for a few years, the banks should be privatised because banking is not a monopoly business and therefore is not a natural business of Government. Banks would continue in the business of lending money, but they would be forbidden from creating money ever again. Fractional reserve banking would become a criminal offence similar to counterfeiting.
The Irish general election
There will be an election in the Republic of Ireland within the next two months. There will be a change of government. That much is certain, but will there be change that we can believe in?
Ireland has 13% unemployment and massive emigration. It has a chronic shortage of money caused by a declining money supply. It has several hundred thousand people who want to work and who need to work in order to feed their families and pay off their mortgages. Money is an artificial entity. Why should real people suffer because of our stupid and insane system of money creation called fractional reserve banking? The key political decision for the incoming Irish government is whether they continue to burn the People on behalf of the banks or whether they change tack and burn the bankrupt banks in order to save the Irish people.
The solution to our banking crisis is to end fractional reserve banking and for the Irish Government to issue and spend all new money into circulation into the economy. Other nations will follow suit rapidly once the benefits of this new way of creating money become apparent.