Many years ago, just before the fall of communism in Russia, I lived for a while with a Russian family in a small village about 100 miles west of Moscow called Novi Ruza. The experience was a bit like going to a Russian version of the Gaeltacht. I lived with a family who didn’t speak English, except for the daughter whose only access to English was a scratched recording of Hey Hey My My by Neil Young.

In this atmosphere – listening to Neil Young and going to Russian classes every day – I tried, with limited success, to learn Russian.

Most mornings, the official radio carried riveting stories about bumper grain harvests in Ukraine and how the collective farms had beaten all expectations. Yet the shops in the village had no bread.

We heard stories about how much industrial machinery the Soviet Union was producing, yet there were no spare parts for the Lada, which kept breaking down.

Every week, there was a story about how the great triumph of socialism was just around the corner.

I suppose we would now call this sort of stuff ‘talking up’ the economy.

Communists were great at it. They would spot a recovery, a new dawn, at the drop of a fedora. They believed in the ‘incantation’ approach to economics, which held that, if you incant or even chant long enough about something, that something will eventually come true. Daft, I know, but the communists were great believers in positive thinking, even if there was no evidence to back it up.

Now is it just me or do you get the sense that you are listening to Pravda on the radio these days? There seems to be a concerted spin, delivered by politicians and so-called economists, who never saw this bust coming and were preaching ‘soft landings’ two years ago, that Ireland is now on the cusp of recovery. We are going to experience some mythical ‘export-led growth’, which will drive down unemployment and, by next year, we will splurge again, spending all the savings we are sitting on.

Quite how we could possibly have labour-intensive, export-led growth when we have one of the highest wages in the world is beyond me. For that matter, I can’t see how we will splurge our savings when the government deficits are so huge that they will absorb our nest egg. I can almost hear the sheaves of wheat bursting out of their ties on the steppe.

The truth – a strange concept which ultimately broke the communists – is that Ireland is not going to experience a recovery any time soon, and this year will feel worse than last year. Behind all the spin and incantation, there is a barely audible sound which will get louder and louder. It is a large sucking sound: the sound of money leaving the economy.

What is now faint will become a cacophony.

We don’t seem to realise that we are now in a phony war situation where our sense of stability is based on the European Central Bank (ECB) injecting soft loans into the banking system. This massive monetary injection was carried out all over Europe to make sure the European banking system survived last year.

The ECB is now unwinding this credit. Let’s just recap on the way the banking system works. If the banks stop lending to each other (as happened in September 2008), the Central Bank, acting as the ‘lender of last resort’, steps in. It says to the banks: ‘‘Give us what you call ‘assets’ on your balance sheets and in return we will give you money so that you don’t run out of money and go bust.”

In Ireland, the assets on the banks’ balance sheets are our mortgages and all sorts of loans to property. So the banks package all these mortgages into what is called an asset-backed security (ABS).

This product, which could be thousands of performing mortgages, is rated by the rating agencies and then given to the Central Bank in return for cash.

This cash goes into our ATMs and we spend it. The ECB did this all over Europe from September 2008, because every banking system was experiencing problems.

The pathetic spin put out by the government and believed by many is that Ireland has some sort of sweetheart deal with the ECB, whereby the Europeans looked favourably on Ireland.

This is not true. The ECB treated the Irish banks the same as any other banks in Europe. In fact, it could not have legally treated us any differently to any other country. It loosened its rules on what did and did not constitute ‘security’. So banks in Europe that couldn’t get money anywhere else went to the ECB and exchanged ‘assets’ for cash.

In normal times, the ECB will only accept assets with an AAA rating as collateral. In the past two years, it has loosened this and accepted any old trash in return for cash to protect the system. Look at the chart for Europe as a whole, and we see that the ECB provided over €500 billion in this type of financing across the eurozone.

In July, it intends to pull €442 billion out of the system, as it reverts to taking only AAA assets and signals to the rest of Europe that the banking crisis is over. But it’s not over in Ireland.

In the crisis, different countries needed differing amounts of cash, depending on how delinquent the country’s bankers and regulators were during the boom. It will come as no surprise that Ireland is the most badly affected. Today, Irish banks are getting €98 billion from the ECB in this type of ‘cash for trash’ funding. That is 17 per cent of our banking system’s assets, which are about €520 billion.

Nearly as fragile are the Greeks, who are getting €42 billion or 8.8 per cent of total assets. For Italian and French banks, only 0.8 per cent and 1.8 per cent respectively of their total requirement comes from the ECB. In other words, when the ECB changes its rules, it will have no effect in Italy and France, a nasty impact in Greece and a catastrophic impact on the amount of money in ATMs here.

The major problem for Ireland is that the ECB will accept only AAA assets from March, but we don’t have any AAA assets.

Our government debt, the least risky (apparently) asset in Ireland is not even AAA any more. The ABS packages of our mortgages are clearly nowhere near AAA and will be further downgraded as mortgage defaults rise.

So where are we going to get €92 billion and how much will our banks have to pay over and above ECB interest rates? Someone will lend to us – but at a huge premium and probably a rationed amount of cash.

This means the most heavily indebted country in Europe is facing interest rate hikes and a massive contraction of credit from bust banks, which are looking for more cash from us. This can only be generated by more government borrowing, which drives down the rating on the debt further, drives up the cost of money to businesses and increases the likely tax hikes. Recovery, how are you?

I lived in Russia too long and listened to drivel about the whopping grain harvest in Ukraine as we queued for bread. We are hearing the same nonsense from our government and their lackeys on the radio and in print these days. As that great economic thinker, Chuck D of rap group Public Enemy, once said: ‘‘Don’t believe the hype.”

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