I met a small businessman during the week whose business is down by a third this year. He used to have a business with an annual turnover of €1 million in 2008 and 2009.This year, turnover is down to €650,000.
So he is slashing prices and doing deals to stay afloat. He is optimistic that he can survive, if this is as bad as it gets. If there is another slump next year, he’s gone.
He also told me that one of his main landlords was his local council, which owned a site he used for storage. His business needs this land, which is not being used for anything else and is only useful for surface storage of machinery.
So his turnover has slumped, his prices have been slashed and his margin has evaporated, but the council still put up his rent this year. He went to the council, and explained that he was barely surviving and couldn’t pay.
The council responded by saying it didn’t care and it also had to survive. He made the point that, if he went bust, the council would get nothing, because there was no other business around to take up their land. The council acknowledged this, but said that, based on previous years’ margins, he could easily afford this.
In short, the civil servants concluded that, if he was still in business, he was wealthy enough to pay the extra rent. For them, there are only two states of private business: either you are open, in which case they can saddle you with any bill, or you are closed, in which case they will find someone else to pay the money.
The problem is that both sides are hurting. The council has seen its money dry up. The cash it was getting from planning applications, rezoning and the like is gone, so it needs to get cash somewhere else. It sees the businessman as a revenue source, rather than a wealth generator.
For the businessman, his business is down, his overdraft has been cut and his working capital is now his diminished cashflow. He is facing austerity, combined with a credit crunch and a rent hike. He sees the council as a bloated government organisation that needs to give him a break.
This is what austerity looks like in a hard currency system, and it is by joining up the dots, from bottom to top, that we see why our current obsession with the euro is killing us.
The euro limits the amount of credit in the country and forces deflation. But, without credit and inflation, the inherited debts will grind us all down.
When you have disparate countries in a currency union, you get huge variations in demand. In the good times, too much money flows in, creating the illusion of wealth. This creates expectations of inflation, so people front-load their spending to catch up with a moving target.
In bad times, too much money flows back out, creating the reality of stagnation.
This creates deflation where prices are falling, so people postpone spending and hold back. When you can’t print your own money in a deep downturn, the recession gets worse. It also goes on for longer than necessary.
The businessman in the above case goes bust – and, ultimately, so too will the council. Having squeezed all it can out of the businessman, it must turn to someone else or cut back dramatically. So taxes are raised. But the more taxes that are raised, the more the people who have money take their money offshore. We saw this classic behaviour in Ireland in the 1980s and 1990s with deposit interest retention tax (Dirt).
If we don’t do a deal between bankers and debtors, where both sides take the pain and debts are restructured with a significant portion of debt forgiveness, we are simply going to blow the currency apart in the next big debt crisis.
The Greek crisis isn’t the real thing. It is just a warning sign of what is to come. In geological terms – given that we are all volcanic dust experts now – Greece is the smaller volcano whose eruption is the warm-up act for the really big one.
The most obvious solution is to change the currency arrangement by concluding that the German economy is too strong for the rest of us and should go off on its own with its own currency.
History also tells us that this conclusion is not radical, but actually quite normal. Either the government presides over this currency change in an organised fashion, or it happens anyway, in chaos, through capital flight, currency speculation and a financial crisis.
Consider what is happening now, just five days after the bailout that was supposed to save the euro. The demand for gold has skyrocketed in Germany over the past few days. Ordinary Germans are reacting to their government’s willingness to print money in order to bail out everyone else. Fearing inflation, they are buying gold.
Meanwhile, in Athens, the financial markets are full of rumours that Greeks are hoarding euro notes with German serial numbers. If Greece leaves the euro, they can redeem these German-issued notes at their full value. (The assumption is that euro notes printed by the Greek central bank will be worth much less.)
All the while, the euro is weakening against the dollar, yet politicians talk about having borrowed hugely to save the currency.
However, experience going back to the 19th century indicates that, after a huge credit bubble, the choice is simple: either you can save the currency or save the economy, but you can’t save both.
If European governments want to keep the currency, they must impose austerity on their countries in order to squeeze more out of the budgets to pay the debts that their countries and peoples incurred in the boom. They transfer the debts of the private sector to the state, or vice versa, with guarantees and backstops. So the marginal euro in tax revenue goes to pay the rotten legacy of history, rather than to build the foundation for the future.
What European governments don’t seem to understand is that you can’t have a weak economy with a strong currency. The only way you can sustain that is by borrowing even more now to plug holes, which is precisely what the EU is doing.
The fundamental truth that our establishment has yet to appreciate is that a strong currency comes from not having any debt, rather than from incurring more debt.
Real business thrives as long as the currency in use is accepted by all, and there is enough of it around to lubricate the economy. The history of currency changes is dramatic. There is no easy way to do it, but the wealth of a country is real wealth: the wealth of people, the brains, talent and the growth of the economy.
If an economy doesn’t grow but tries to pay back huge debts, it will turn into a debt-servicing agency, which hollows out the productive marrow of the society. This is not a recipe for success, but a harbinger of disaster.
If we want to be a dependency of the European Central Bank, then giving €7 billion (which we don’t have) to Greece is the right way to go.
If we keep going this way, Ireland will end up with a huge EU-subsidised public sector, a small but highly productive multinational exporting sector and hardly any domestic small businesses in the middle. Is that what we want?
[…] inspiring stories about innovation in this week”s Sunday Business Post, and then there was one cautionary tale from David McWilliams on how harmful government can be to struggling […]
Does David have any innovative ways for combatting inflation by printing your way out of debt? Or how pensioners can protect the value of their savings? Inflation may well wipe out financial debt but it also wipes out financial assets. So should those who didn’t partake in the property bubble and put away savings instead. Should the old age pensioner who saved in An Post for their retirement for 40 years. Should all these people now be penalised for others actions? And going forward if incomes rise at the same level as costs then we will still have a €20bn… Read more »
Piranha capitalism – what do you expect from an exploitative system, they are turning on each other for survival. Not only has council revenue declined, they too are sitting on inflated housing stock, which they tried to re-inflate but which they will soon have to offload, they have massive financial problems which they too are just keeping from the door. I was speaking to an auctioneer on Friday night who said he could get me a 4 bedroomed house within a stone’s throw of Cork City (needed some work ) for €100,000 (sale price €120,000), I guarantee you in 12… Read more »
European Commission management of the Euro crisis appears to be rudderless at the moment. Reports that Merkel had to be brought kicking and screaming by Sarkozy to the €750bn bailout table, plus Merkel’s alliance’s drubbing in local elections, plus all appearances the bailout has made matters worse for the euro, plus emergency meetings of eurozone leaders called for this week, all make the continuation of the eurozone in its present form less and less likely.
David, the establishment must be terrified of you. Anyone catch the love-in last Friday on the Late Late? Bertie’s old chum Bill Cullen rambling on about moaners, whingers and how JFK said we were the greatest people on earth……Keynsian stimulus for gombeen car salesmen and bankers, thatcherite austerity for the rest of us.
Its not to late for a real and lasting change which benefits ALL humanity!
http://www2.thevenusproject.com/
I read two things in the Sunday Business Post this week. The first was a “work to welfare” program that would allow unemployed to claim benefit and work, pay tax, if they also did community service. The Minister Eamonn O’Cuiv is at the very least being innovative and open to a more enlightened view of society that is not always black and white when it comes to operating with the Black economy. The second article I read was this one where he relates the struggle of a businessman on reduced turnover battling it out with the local council who insist… Read more »
A few things have struck in the last few weeks. Ireland is more Boston than Berlin. But we all knew this. And, Ireland exports a lot to the UK. The actions by Europe to ensure peripheral nations can borrow and refinance their debt should be a net positive for Ireland. Lowering cost of borrowing. ECB buying bonds – well if they don’t make a good job of sterilisation then we’ll have QE and weaker currency – this is what the plunge in the Euro suggests. A weak Euro is just what Ireland needs, to export to its main markets of… Read more »
Shop around? Private landlords? The penny hasn’t dropped their neither! I wanted to set up a small tourist orientated business in our local area, and like your business man I needed a place to store my units, these were water based units (paddle boats) I approached the local counsel as they have ample storage facilities in our area, just going to waste! I found the cost of renting out such facilities so expensive that it just was a non runner apart from the public liability insurance (another big story), it was amounting to 50% of my costs per year. I… Read more »
David. I reckon the last few articles are bringing the puzzle of the mess Irelands economy became very close to a clear picture of understanding for the average reader, so, excellent. The euro project and its cooking books opened the gates of a property Ponzi bubble scamaramadoo in Ireland and Spain and Portugal etc. The magical thinking of euro technicians over relied on human moral conduct, or maybe not, maybe the euro intelligensia knew the euro could be used as an excuse to centralize more power down the line, which has now arrived. Either way we are involved in a… Read more »
David, I was concerned to read your article of 16 May 2010 headlined ‘A Matter Of Life and Debt’. My clinical observations and analysis are as follows: ‘Manic-Depression Economics’ This Irish patient known as ‘F.F’ remains in denial with an erroneous self-diagnosis of imminent recovery. No appropriate medication regime is in place. Therefore, the prognosis remains grave. As you know, ‘FF’ had previously been placed under observation during a series of manic episodes which began in 2003. Whilst initially internally generated, it was soon discovered these manias were radically amplified by ‘street drugs’ sourced from economist-dealers who ensnared the patient… Read more »
I’m considering taking any surplus cash out of my business bank account and buying gold and silver with it. Not certificates, but actual gold and silver if possible.
Public spending has to fall if we are going to get back to growth. I know this year we will cut another 3 billion maybe more but the real issue is to start repaying the debt which will only happen post 2014. It is all happening at an incredibly slow pace it is like slow death, I wish we could take this pain as quickly as possible so we can start again. That means downsizing the public service and increasing the private sector. I don’t think the public servants understand the problem. I spoke to two nurses over the weekend… Read more »
Financial Suicide by Stealth :
Am I reading correctly what the newspapers are saying in relation to contributory pensions being made ‘means tested’ ? Contributory pensioners have always paid PRSI over 40 years in some cases and its system qualifies the recipient / beneficiary the Contributory State Pension.
Are they seriously considering to Stop this ?
For the past few years there has been a lot of talk about “giving more power back to local authorities”. Now if you give power to local authorities, you have the take it away from somewhere else. I assumed, rather naively, that this meant a reining in of the excessive centralization that exists in Ireland. This is a good objective, because it removes/undermines the role of local TD as glorified county councillor. Surely such a move would result in councils becomming more thn talking shops and politicians could think about national policy. Surely the state would operate more efficiently without… Read more »
I think we have a cost problem, and it has nothing to do with the Euro. If we dropped the Euro in the morning and went for Punt 2.0, the same inefficiencies and power based economic rent seeking regimes would remain in place. We would be uncompetitive with a devalued currency. The only thing is that oil and other imports would be more expensive. The capital base would be depleted. Cash would be scarce. And Irish people would live outside a hard currency regime. If anybody thinks living in a hard currency regime is tough, then try living outside one.
Local Authority Tax ( a’ la dalkey supreme ) :
sea View Tax .1%
cockle smell tax .1%
a waves roar tax .1%
U2 sound tax .1%
musical fame tax .1%
vroom vroom tax .1%
organic food tax.1%
bella sorrento a’ caprese tax .1%
talking shop cafe tax .1%
rugby club badge tax .1%
poodle poop tax.1%
piddle doodle water tax .1%
roseanne mug tax .1%
negative equity tax .1%
church tax 0%
Full marks for shoulder to the wheel, Deco, MK1, cbweb, laughingbear, AndrewMMooney et al. Why is the applecart not moving? Because it’s upset and lying on its side. David diagnosed this problem above when he wrote ” the marginal euro in tax revenue goes to pay the rotten legacy of history, rather than to build the foundation for the future”. IMHO we need a Bonfire of the Vanities, get rid of non-productive politicians and public servants, tear up all the contracts and treaties and start afresh. Done quickly and cleanly, in five years we’d be well ahead of where this… Read more »
Bareme du Terre :
Merrion Square Mandarins are, as we speak, constructing a new ‘bareme’ for Irish property tax and will be a fixture to be applied all over the country.There are going to be essentially two taxes on properties namely :
D Living debt
D unLiving debt
Essentially the Landlord pays the owners tax as in its present form to be amended and the occupier will pay another tax .Eventually an apartment with a bareme in Dalkey will cost €2,000 pa with the breakdown to be 60% and 40% respectively.
Just to say that Richard Dowthwaite, living in Mayo, an alternative economist has written great books on a way to run the economy that works! I wish they had listened to him, before they went mad for money. We all know that walking on the beach and playing with the dog gives us more pleasure than the drive often out of fear to have more of this that and the other!
Hi David, Bleak stuff indeed. The Euro rose then quickly dropped after the EU announcement. I believe the ECB policy has effectively locked in the vicious cycle of deflation that you outlined. I believe this realisation is some of reason for the decline but also that the debt guarantee will eventually force to a zero interest rate policy. The Euro-zone problems are unique in history. We have a policy of states guaranteeing banks and now in return the banking system guaranteeing the same states. Added to this, there is unique inability for nations to stimulate their economies with newly minted… Read more »
Folks, Very interesting research from Tasc showing the real Golden Circle in Ireland – (via Constantin Gurdgiev):
http://bit.ly/aHVo3U
o Tull McAdoo Ref 8 I believe it’s up the creek without a paddle and no offence taken! As for the E – voting Machines, I’m not in the golden circle lads, and the circles I hang with would try and flog them back to the state as fine pieces of art with historical value and energy efficient, as they will never be used and they can put one in every town square in Ireland (for a small price and a sizable donation to the local big wigs of course !) Anyway, things are not that bad I still have… Read more »
Folks, good ol’ Constantin’s been busy with the BoI rights issue today:
Exclusive analysis of Bank of Ireland rights issue: how much did we lose on our original investment?
http://tinyurl.com/37m2pdx
Folks, some good news: Linkedin to setup International HQ in Dublin:
http://www.idaireland.com/news-media/press-releases/linkedin-establishment-of/index.xml
Well done, IDA! (and well done Irish workforce!)
Folks, “Would Ireland be sticking to its current course of fiscal rectitude if there wasn’t some guy called Gunther or Franz to answer to every Friday?” (via Stephen Kinsella).
http://bit.ly/cOIiCX
Folks, on the Frontline shortly:
Michael Kennedy (FF), Brendan Howlin (Lab) Constantin Gurdgiev & Brian Lucey
… worth a look?
“”If we keep going this way, Ireland will end up with a huge EU-subsidised public sector, a small but highly productive multinational exporting sector and hardly any domestic small businesses in the middle. Is that what we want?””
I’d humbly say David, that if you wrote this a year ago, it would be timely.
But today, it is actually what we have, in effect.
Remember this?? There are no American infidels in Baghdad. Never!. My feelings – as usual – we will slaughter them all. Our initial assessment is that they will all die. I blame Al-Jazeera – they are marketing for the Americans! God will roast their stomachs in hell at the hands of Iraqis. They’re coming to surrender or be burned in their tanks. No I am not scared, and neither should you be! Are these the Americans? People remain silent and placate the Americans. By God, they only deserve scorn. We slaughtered them yesterday and we will continue to slaughter them.… Read more »
axel therepy – the pull of the Full Moon is beginning so brace yourselves .Its a mighty force .Crack & Crumble will make headlines while Bluff & Bluster will remain on the sidelines and Wright & Rong will be the menu du jour .
Hey does anyone know what happens to my tracker mortgage if we leave the €uro? I have a simple plan to get people off of trackers but am afraid to approach the banks as they will steal my idea. It is a win win idea for everyone but dont want to get shafted by those low lifes. Anyway, if there is some knowledge about what happens to trackers if we leave I would love to know. By the way if you havent seen David in a live setting go to the Abbey. Saw him speaking (for free)in Dungarvan 2 years… Read more »
I got to see on Pravda/RTE last night the PBS Frontline documentary on Brooksley Born, ‘The Warning’ a must see to understand the creaking boat full of OTC Derivative holes the American economy is sailing in at the moment. Also should be seen against Obama efforts to regulate the Over The Counter Derivative Market in the US and Osborne sensitivity on more regulation of hedge funds in UK http://to.pbs.org/b5BUz http://bit.ly/9h5caF “Alice in wonderland of derivatives, a big creaking time bomb” “Expect repeats of the financial crisis, significant disasters because of this regulatory gap in setting up regulatory frameworks”.. to manage… Read more »
Posters & taxpayers, From Gurdgiev http://bit.ly/aBotbE “But what about taxpayers’ buy-in into BofI under this deal? Well, if the value of this offer is negative at the buy-in price of 55 cents per share, think what the value is for the taxpayers, who bought at €1.80 per share! Ok, let’s do the maths: we have post-rights price of BofI at 81.9 cents, for which we paid 180 cents – the net return is the loss of 98.1 cents per share bought by the Irish Exchequer… Amazingly, there is no reason for this loss whatsoever – as an existent shareholder in… Read more »
Velocity to Debt – I must be very frank , this week I have never sensed the acceleration of the demise to the dark bottom pit that I am experiencing with people I am meeting and observing around me.It is frightening . I am questioning everything I ever learned and attempting to prioritise them some other way.Essentially my mindset is on ‘ a subsistent closed system’ that is tax free and without any ‘hard currency’.I am thinking of ‘people with a belief system ‘ such as quakers , amish , monks etc .We have to start again at the beginning… Read more »
Prof Paul Krugman discusses the parallels between US debt levels and Greek debt levels by saying that there are few parallels. http://www.irishtimes.com/newspaper/opinion/2010/0517/1224270548460.html Quotes from Krugman that you should check in 12 months time. { US has a much lower level of debt } { the US has a clear path to economic recovery } { The US economy …finally…is producing jobs } { Britain — which is in worse fiscal shape than the US } { So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. }. Well, there you have it. I think that Nouriel… Read more »
Posters.
EU offering new legislation on Hedge funds.
Stiff resistance coming from City of London and also of all places, POnzi Rep of Ireland.
The news today reports Ireland is the, I quote, ‘back hedge fund office of the city of London’.
Now there is a topic to brainstorm.
@Deco.
You posted @ 14,
‘Local authority tax regimes actually create a barrier to entry into business. Local authorities also provide enterprise boards to encourage entrepreneurial activity. It is bit like sticking the car in gear and having the handbrake on. The purpose is to perpetuate the myth of their own signifigance. And if they can get away with that they can provide jobs for the boys.’
A cult is running the affairs of our society and siphoning off the productive sector the riches it produces in order to get away with its cult vices.
Folks, this is what Gurdgiev said on twitter:
“My old Prof. John Cochrane on Greek Bailout in today’s WSJ – a must read!”
http://tinyurl.com/33nc5l5
Also, especially RuairÃ, you might have some thoughts on this piece, re gold peaking:
http://www.cnbc.com/id/37209570
Taxpayer Funds Being used for WINDOW DRESSING
http://www.independent.ie/business/irish/boi-bond-buyback-to-result-in-83641bn-profit-1761054.html
It seems all the banks have been using an accounting technicality to generate false profits.
FF COLLECTS AT CHURCHES I was talking to a Jim today, a carpenter who installed the kitchen an other stuff here. Of course we talked about this mess, his business is at a virtual stand still. Astonishing to me, he told me that he knows of two places where he lives, where FF stands in front of the church and collects for the party, and…. people throw money at them. He called them ‘die hards’ and thinks there are a great many around in deed. He must know, he is Irish, I am not. Can’t really comment on this, other… Read more »
Folks, Roubini:
http://bit.ly/coRHGZ
Folks, an interesting convergence is occuring, eadair DMcW, Max Keiser, Roubini and the facts before our eyes and ears:
You should listen to @MaxKeiser and his latest podcast. http://bit.ly/95QOQU
MORE LENIHAN SHENANIGANS AND COVER-UP Extract from letter I sent to Members of the Oireachtas, last November “. . . I predict that Boucher will be allowed to keep the extra €120,000; and Colm Doherty, the new AIB Managing Director, will recognise government weakness and ensure that, in the fullness of time, he will receive the €630,000 which the Minister rejected last week.” Now read link below from yesterday’s Independent: http://www.independent.ie/national-news/bank-chiefs-still-getting-topup-cash-for-pensions-2182660.html EXTRACT from article: “Mr Doherty is getting an annual salary of €500,000 and a cash allowance of about €148,000 instead of a contribution to his pension fund. He is… Read more »
Folks, LRK, via twitter:
“€ seems to be consolidating below 1.22. Guess German actions mean that all there is left to short now is the € itself. Could get messy..”
Furrylugs, I hope you are watching.
‘ A matter of life and debt’ – I am reminded of the days of a long ago when I was twelve and I entered a fishing competition in Atlunkard Rowing Club on the Abbey River , Limerick .This is an area steeped in fishing and rugby and packet & tripe .I had decided to enter for the fun and fishing was not something I was then use to .I borrowed a bamboo stick and some gut and an old reel .Many were along the banks and seem to know where to go and had live baits that looked so… Read more »
@Tim 42 Great link. Max Keiser in top form: e.g “Short the euro, hedge fund assassins, naked short those countries, so much criminality involved, hedge funds going to make sure they will be completely obliterated, the banks that we baled out are shorting, they are European banks. If you give these bankers unlimited amounts of money, they will eat you… they can’t stop, you’re guaranteeing your own destruction along with the bankers.”… Here’s interesting interview with Jim Rogers along the same vein: http://bit.ly/c77LWE “JIM ROGERS: What do you mean too big to fail? There’s no such thing as too big… Read more »
Here is a site that you might want to forward to all that you know.
http://www.votethemallout.us
Great idea. Get rid of the lot.
And maybe we could have a competition on the banking sector a bit like them stupid TV “talent” shows….which banker do you want to evict…..Fingers ? The Doc ? Rich Butcher ?
It would have to be on the internet, because there is no way the standard media would do any of this…
A thought: All the Government plans re saving the banks, NAMA, balance of payments deficit reductions are all hitched to the wagon of return to growth. This means they have bet on the wrong horse. What they should have planned for is recession. This is because all the economic indices and forecasts for the forseeable future e.g next 10 years for the eurozone point at recession, deflation. The US economy also because of US need to deal with its own debt obligations should face a contraction as well. Hopefully the US won’t introduce quantum easing by massive military spending based… Read more »
@ G 10
also from Pilger:
“As for journalists, our task is to censor by omission and make the crime seem normal for you, the public. For, above all, it is your understanding and your awakening that are feared”
Not only applies to war, but also it seems crimes of moral hazard against taxpayers, perpetrated not only by journalists but by news organisations such as Pravda/RTE!