In global economics, the two big stories of the past decade have been the rise of the middle classes in China and other formerly poor countries including India and Brazil, and the related weakening of the middle classes in formerly rich countries such as the US, Britain and, of course, Ireland.
The common denominator in both stories is debt and its handmaiden, credit. The new growing middle classes are presiding over economies that make things. In contrast, the old threatened middle classes are presiding over the gradual erosion of their economies, swapping production for consumption and savings for spending.
And, so long as we believe that we can get rich by borrowing money from the likes of China and Brazil, not to mention the Gulf countries and the ageing, prudential bastions of Germany and Japan, our middle classes will continue to suffer.
This simple problem, where some countries are spending too much and others are saving too much, is referred to by economists as creating ‘‘global imbalances’’. Ultimately, unless we cut back dramatically and wean ourselves off their debt, there will be another global financial crisis, which could dwarf the one we have just seen.
One of the major global policy dilemmas for the coming decade is whether we can achieve this reduction in our standard of living – bloated by unsustainable borrowings – without a massive crisis, which might not just be financial.
If you doubt the severity of the problem that the ‘‘rich but indebted’’ countries face, a quick look at history might be advisable – because, after all, economic history, even distant history, has a terrible habit of repeating itself.
Let’s see what happened a few hundred years ago, when a powerful country decided to live on credit, rather than production. Let’s go to imperial Spain, because the impact of South American gold on the Spanish economy was the 16th century equivalent of Chinese savings on the Anglo-American world in the 21st century.
In 1540, Juan Acosta returned from his second trip to the New World with a galley laden down with gold. The voyage, notwithstanding a scare involving English pirates off the Cuban coast, had been relatively uneventful. Eight years earlier, Acosta had accompanied Pizarro on that fateful day in Peru when the Spaniards garrotted Atahualpa, the Inca King. That week, the conquistadores had plundered more gold – as a ransom for the God King – than the entire continent of Europe produced in a year.
Acosta promised himself that this would be his last trip, and set about building himself the most extravagant villa in Cadiz. No expense was spared. Dutch tradesmen and expert woodcutters were transported from Amsterdam. Arab roofers and master tilers came in from Morocco. All carpets and curtains were bought at exorbitant mark-ups from Genoese merchants whose original sources in the Levant were impeccable. By 1546, the Acosta Villa was the talk of Andalusian society, as was Acosta himself, an amiable adventurer of humble origins.
Sixteenth-century Spain was awash with these rags-to-riches stories, and gold robbed from Latin America paid for everything. A monumental mass of gold and silver crossed the Atlantic between 1540 and 1580. In 1564 alone,154 ships, each carrying over 200 tons, docked in Seville. In the 50 years after the death of Atahualpa, the total amount of gold and silver in Europe increased fivefold. Almost every single ounce passed through Imperial Spain.
One would have thought that, given their windfall, the Spaniards would have been the richest people in Europe by the end of the century. But amazingly, Spain blew it. The impact of the flow of gold was felt elsewhere.
The Dutch, in particular, benefited enormously from Spanish gold.
There was hardly any lasting positive effect on the Spanish economy.
How did Spain manage to waste one of the biggest financial windfalls in human history? And are there any lessons for Ireland in the history of the Spanish gold rush?
Spain went on an almighty bender.
The Spaniards proved themselves to be better at spending money than saving the stuff, and acted like renaissance lotto winners, blowing their new money on anything they could get their hands on. They bought spices from the Orient, clothes from Italy, guns and firearms from anywhere.
Gold flowed out of the country. With their new credit, nothing was too expensive. Even today, a stroll through any regional Spanish town reveals churches, great houses, palaces and ornate fountains built by Italian architects and paid for with Latin American gold. By 1590, of all the goods shipped from Spain to its new colonies, 80 per cent had been imported from elsewhere in Europe.
(This was in direct contrast to the British Empire, for example, which shipped British-made goods from Britain to its colonies.)
Pretty soon, Spain forgot how to make things. Production of everything from food to clothes faltered.
As one observer at the time put it, ‘‘Agriculture laid down the plough, clothed herself in silk and softened her work-calloused hands. Trade put on a noble air . . .went out to parade up and down the streets.”
Apart from general idleness, another far more insidious enemy emerged to face the Spaniards. The Spanish rapidly went into debt with other nations, paying over good Spanish money for what, at the time, were called ‘‘puerilities’’ – bangles, cheap glassware, playing cards and the like. Prices in Spain began to rise.
However, the rise in prices was not due to any economic shift in the economy, but to the non-productive abundance of gold. This is the same story in Ireland. Our prices over the years rose because of too much credit.
As inflation took hold in Spain, those Spanish manufacturers who had still managed to trade found themselves becoming increasingly uncompetitive. Having been the richest nation in Europe, Spain experienced successive financial crises as it tried to pay for its gold-inspired extravagance.
Ireland is in the same position now:
small manufacturing can’t compete with our neighbours, particularly as Britain and the US are – logically – allowing their currencies to fall in the face of the new realities. We have decided to tie our currency to countries that are virtuous savers like Germany, while we are delinquent spenders. This makes no sense but, like the emperor with no clothes, no one in the Irish establishment is prepared to admit this fundamental financial folly. In the end, silly policies don’t hold.
Back in the 16th century, the Spanish tried to keep afloat, but they ran out of gold, as we will run out of credit. Ultimately, the Spanish Crown defaulted on its loans in 1557 and further defaults occurred in 1575, 1596,1607,1627, and 1647, leading to serious crises in major financial centres such as Antwerp, Genoa and Lyons, since they had been the prime financiers of the Spanish loans.
The same is likely to happen in the next decade as the US, Britain and of course Ireland realise that they can’t pay all the money back that they borrowed in the good times. Britain and the US are likely to try to generate inflation or seek some debt renegotiation either officially or by stealth.
Ireland, is locked into the euro, so we won’t experience inflation and, therefore, are likely to default on mortgages, credit card bills and other loans.
The big question for the world is whether the creditors – the middle classes of the emerging powers – will stand idly by and watch their investments debased. Remember that Spain fought desperate wars of expansion to mask its economic decline in the 16th century. Whatever about financial history, let’s hope military history doesn’t repeat itself too.
Splendid comparison between modern Ireland and old Spain,both chock full of “fool’s gold”, in Spain’s case plundered and in Irelands case borrowed (although the youth of Ireland were also “plundered” to facilitate the developers greed). My son was searching for a hotel room in the west of Ireland tonight on the web and despite the woeful state of that industry it is amazing how many hoteliers still quote prices that reflect a now gone era. The government’s imposition of travel taxes on incoming tourists also reflects a suspension of reason, with regard to one of the few possible sources of… Read more »
Spanish Arch –
Galway benefited directly from the Spanish Gold when their merchants arrived there and became Merchants in Galway and the Cladagh was the centre where they lived.Galway grew at the same time and it became ‘little spain’ .
Military history does repeat itself and has done so here in the past.Ever since the State was founded there have been various skirmishes even into the 80’s and all of that seemed to give civic discipline to the general populace not to over indulge and to hold tight – until the rise of the 90’s until recent times when all that discipline was lost and casino money was the game in town…..at any cost. Now the game is in reverse without casino money and with lots of debts and time will tell will that be enough to cause another skirmish!… Read more »
Irish middle class will be decimated organically and by being taxed out of existence .Somehow I believe ‘travellers’ will make great gains financially although not transparent to the public eye.Their sharp eye always knows how to adapt and make money in changing times………and for the records …thats evasive .
David, You say “The big question for the world is whether the creditors — the middle classes of the emerging powers — will stand idly by and watch their investments debased.” Emerging powers won’t have that choice. They will be forced to stand idly by and eventually the penny will drop – they’ll realise that war against USA & UK is not an option. The real losers will be those worker bees in China. They’ll realise they were led down the garden path by the Chinese government. All hell will break loose there. Where will this leave Ireland? We’ll have… Read more »
Even among those who say “those who don’t know history are doomed to repeat it” there are few capable of such a telling an economic interpretation as you have given here, David McWilliams. Excellent stuff! However, while the fundamental problem most certainly does involve credit and debt, IMO, John Allen touches upon an even greater underlying cause of why we repetitively drive ourselves into penury: we continue to tax ourselves for being productive and reward ourselves for earning speculative incomes, as you show the Spanish to have done, David. The once great United States of America now produces little real… Read more »
Perhaps we Irish, with our erstwhile delusions of grandeur, are cast in David’s mind as Don Quixote, Cervantes’ embodiment of Spain’s golden era; the banks are our windmill adversaries and Brian Cowen is the worldly wise Sancho Panza who guides us lugubriously along the road back to sanity?
David. My read on article is it really puts Ireland in the frame. Article reads as an accurate tale of two different ‘distribution’ systems, pushing up against each other, all the while a social darwinistic experiment plays itself out under the detached eye of willy wonka. One system is all about scamming and smashing and grabbing and ego tripping on who ‘s the daddy, and, the live within ones means system, spending what you earn doing an honest days work system continues to produce real wealth all the while the gamblers and scammers come along and blow it away insanely… Read more »
Hey, Malcolm! :)
Now who can draw the cartoon?
The Imperial Spain anaology was screaming out to be written, well done David for putting the pieces together, this and the Mayan article you wrote are up there in my estimation, good when you play to your strengths and raise your own bar. We could equally look to Latin America for political and civic inspiration, Bolivia in particular is doing amazing stuff, with the odds firmly stacked against the people. It is by far the most exciting place on the planet, maybe Charlie Bird will get the finger out (unlikely) and shed light on developments, it would seem however that… Read more »
I often wonder why with all the empty hotels we have that we don’t just open up the gambling casinos and give those who want (and have money left) to place their bets. It certainly can’t be any worse than waht has already been put at risk.
Well David you are hitting 2010 running a well written article. The comparison is perfect , I have spent some time down in Spain recently and they still haven’t learnt at least this time their cost base is not as high as ours today nor do their dumb politicians get any thing like our wise guys. As G said above we should be looking at South America ,, I have said this before and also take a look at Holland ( where is there double digit unemployment ? ) South American countries have through their Supreme Courts have begun decriminalising… Read more »
David – are you suggesting we leave the Euro!! Its a basket case currency made up mainly of basket case countries – and in anyway normal times it would be weak against all major currencies (Forecasters are betting on a resurgent dollar this year). I would wager that our currency competiveness will be restored by end of 2010. I dont think 16th history recaps have any relevance to Ireland today at all – but if we want to look at historical data then lets look at 19th Century Ireland. Population 8m people. Had it followed European trends then we should… Read more »
To see ‘world map of social unrest’ from ‘The Economist’ simply click on the link below, Ireland is considered a ‘medium risk’. Global tinderbox Dec 28th 2009 From Economist.com 2010 could be a year that sparks unrest “If the world appears to have escaped relatively unscathed by social unrest in 2009, despite suffering the worst recession since the 1930s, it might just prove the lull before the storm. Despite a tentative global recovery, for many people around the world economic and social conditions will continue to deteriorate in 2010. An estimated 60m people worldwide will lose their jobs. Poverty rates… Read more »
Useful stuff from Paul Krugman “Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary – and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder. But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt… Read more »
Posters –
Check link out. Bono using ‘inverted robin hoodism’ term. Perhaps a reader here????
http://news.bbc.co.uk/2/hi/technology/8439200.stm
Defending corporatism and advocating totalitarism to defend profits in one speech is no mean acheivement for a ’simple boy from the Northside of Dublin’ as he referred to himself during his performance for Barack Obama prior to his inauguration. Any thoughts on Palestine, Iraq and Afghanistan El Bono?
How much money does this man need? Transferring it offshore at the moment of Ireland’s need having benefitted handsomely from the artist’s exemption.
Sums up the end of the Celtic Tiger nicely, cream on the neoliberal cake.
Make Bono Pay Tax website
http://www.makebonopaytax.com/
Eamon McCann article
http://www.counterpunch.org/mccann02262009.html
And what of Spain today ? Spain today has once again a hard currency just like in the days of the Conquistador – the EuroMark. And Spain has been borrowing again from the bankers of Southern regions of Germany. And Spain has been financing all sorts of political tom foolery, and inflating it’s cost base. In fact Spain today is even more reckless than when Spain was run by the Habsburg King Phillip. Spain today can get bankrupt much faster. http://www.guardian.co.uk/commentisfree/2010/jan/03/peter-oborne-end-of-eurozone For the sake of political background, it should be noted that this is from the UK’s main left of… Read more »
PhilRuss1 – The point of NAMA is what you say. But, other points exist alongside the ‘sell NAMA to the sheeple’ points. Look at it like old fashioned snakes oils man s supposed magic solution. It appears good. Flash packaging. He plays on ignorance with a fake re assuring voice. The ‘magic solution’ becomes more and more inviting. Rational short circuits. Spirals appear on eye balls. A warm fuzzy feeling inside sparks up. Suddenly your money is moving floating toward the magic medicine man and off you go under the illusion that the magic solution will work. NAma, in this… Read more »
POsters –
This NAMA cr@p, ‘theres no choice cr@p’ and ‘we’re all in this together cr@p’ smacks of the victim been conditioned into accepting the crime about to be inflicted.
What think ye of this crazy Kraut?
http://www.youtube.com/watch?v=5rVdK8r33Pw&feature=sub
Body scanners will be installed in every airport worldwide by 2011;
Whomever got the contract for that did well out of the young boy from nigeria trick,
how could he get a ticket and get through security without a passport?
Hmmmmm….am I too paranoid?
Word up!!!
Linked In group:
http://www.linkedin.com/groups?home=&gid=2614196&trk=anet_ug_hm
German economist in a more optimistic mood:
http://www.youtube.com/user/jberni1#p/a/u/1/P_rvJDsTta0
It was silver that gave Spain most of its wealth – Potosi in Bolivia was a mountain of the stuff. I think the debate about european inflation in the 16thC is still going on. Certainly the Spanish had their arbitristas (officials and intellectuals) who debated for decades on how to pull Spain out of its decline – DMcW may be the modern day equivalent. BTW, Spain’s military decline only came about in 1639 – the tercios kicked ass for about 90 years, while the Spanish navy gave way to the Dutch (not English). Back to reality: can anyone please explain… Read more »
Nigra Espana – slaves were part of the parcel from central america and the conquisitors were the slave traders then .Like Espana we have our own Slave Trader who has captivated the State and its citizens now voiceless in shackles and deep inside the galley of the sinking ship. I have always said that our M for F is surrounded by Dangerous People and I firmly still believe in that .I believe he would be doing good to his family were he to retire and allow himself to recover and become better . I disagree with his logic to remain… Read more »
PhilRuss1 –
Let me for arguments sake play pretend.
I ‘m putting forward the charge NAMA is criminal.
The case i put forward is thus.
Article 45.
G –
Post on positive thinking fraud is so on the money.
Hard work is the enemy of the modern state.
Colin,
Micro-Hydro?
Interested?
progression@imagine.ie
David poses the question “Whatever about financial history, lets hope military history doesn’t repeat itself too”.
The powers that be(Obama included) are doing their damndest to antagonise Iran for the last 10 years, including allowing that butchery in Gaza. If it kicks off, it won’t be no accident. I worked in Moscow and saw how ordinary proud working people were tramped into the ground by “new money”. It was disgusting at the time.
This is a great article by a great economic historian supplimented by some incisive comments here.
LRK. Are you still about??
Phil,
“Colin
Make Ireland a better place to live in is good for the economy — unless you know better….”
In the words of the late great Michael Jackson…” Heal the world
Make it a better place
For you and for me and the entire human race
There are people dying
If you care enough for the living
Make a better place for
You and for me.”
Phil –
Free market capitalism practiced in virtue is equitable.
Moon Wobble – a reminder we are in the course of the first ‘Wobble’ this year and it will show it’s strength next monday 11 th Jan’10 . So the coming week end does not hold up to our optimism and it’s important to ‘go slow’. A black monday ! Maybe , who knows! Lets hold tight and see . Many will have noticed a heavy drag to the start of the year and this is caused by the planet Saturn .Best policy is to go slow and contemplate and wait .From 15th Jan an uplight will arrive and the… Read more »
I wrote about NAMA as a “fiendish Frankenstein like quango” some months ago.
Mr Lenehans unhappy health situation -and determination to be the next Taoiseach by remaining at the helm- indicates
How prophetic the article was..
http://www.soldiersofdestiny.org/frankensteinsquango.htm
While we were busy congratulating ourselves on our ‘world class education system’ others were taking notes.
http://www.independent.ie/health/latest-news/us-firms-call-for-overhaul-of-irish-education-1999084.html
Never mind Imperial Spain, it’s Imperial Japan that is the worry these days.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6927923/Global-bear-rally-of-2009-will-end-as-Japans-hyperinflation-rips-economy-to-pieces.html
What does ‘Zum Teufel’ mean AndrewGMooney?
I heard online that the BRIC countries along with Middle Eastern and the strong Euro zone nations are going to have an international world reserve currency that will replace the US dollar and it will be backed by gold, silver, platinum and oil. Looks like Ireland, Spain, Italy and Greece will not be included in that. It makes me question what is the point in being in the Euro. We need to have our own currency and find our own level or we can continue to be honest and cut costs the honest way without debasing like the US and… Read more »
Sean_Kelly – you are correct but don’t tell anyone .German Mark and French Franc will be part of it or pegged someway.
Sean_Kelly – language is a rhythm that you dance to – try feeling your pulse and see how warm your blood feels to each.
NAMA Referendum – Iceland is holding a referendum re: Icesave restitution monies to foreign owners.Do we have a choice?
Pass the sick-bag please. Bono’s 10 ideas for the next 10 years:
http://www.nytimes.com/2010/01/03/opinion/03bono.html?ex=1278219600&en=72e6b391f7b6913c&ei=5087&WT.mc_id=OP-D-I-NYT-MOD-MOD-M130-ROS-0110-HDR&WT.mc_ev=click
Sexy finned Cadillacs, Teleportation etc ….. me arse.
Posters –
Reported the UN website had up on it s main page an item relating the UN issuing a Gold coin with its emblem and a day later it was downed.
Reports it part of an easing in of a world currency on the way.
Lets Petition our own President not to sign the NAMA legislation and for her to request a Constitutional Referendum just like what our Icelandic cousins are doing.
House of Petitions :
Tim is the Ard Ri in the room and furrylugs is his photosynthesis that makes light spark in any dark room.Wills is the crier with his bells on his fingers like in the Clancy Bros and Deco is the librarian , Malcolm is the legal advisor and a linguist , Andrew is the musical genius that turns rip rap into a classical melody , Josey is the femme fatale that urges the rest and the sundry are just making a living seeking directions ……so lets hear Tim’s proposals for this opportunity.
G’s top 10 for 2010: January – NAMA is blocked by El Presidente after someone slips her double brandy a pill with ingredients from anti-NAMA posters to the D. McWilliams website. February – Brian Cowen & Mary Harney resign their posts and train for the Dublin City Marathon demonstrating that the impossible is sometimes attainable. March – Professor Drumm writes a considerable cheque for the HSE; Eddie Hobbes volunteers in a soup kitchen; Pat Kenny is heckled by the entire Frontline audience (all at once); Bono relocates his tax money back to Ireland; Tubridy abandons the Late Late and becomes… Read more »
Tax Free Commodities – those of you living on east and near Dublin have an opportunity to ‘break the ice’ and get tax free commodities thanks to the ice frozen fields with rich potatoes ready to be dug out free before they become rotten.Its a rare opportunity and while you might burn calories doing this worthy task you will be given new calories in their jackets to take home.
I must say, I stand in horror and admiration of the simplicity of the logic behind PhilRuss1’s justitifcation of NAMA. And I believe he reflects the policy thinking very accurately. NAMA is really a means of putting the fatcat elitist gamblers in stasis until US and UK recover. And if it does not, well…last one turn out the lights. Phil – what a wonderful vote of confidence you have in Ireland to stand on its own feet. Much like Lenihan Senior’s comment that the country can barely support the population it has right now. As I work in the hi-tech… Read more »
Folks, Greetings to you all. I “shut-down” there, for a while and now I see how much you have all contributed, in my absense. I have spent a long time this evening, reading what DMcW and all of you have written. (Most of the time I lap-it-up, but these days, I am finding it “hard-work”, for some reason.) I have also been watching the progress that we are making on “The 5s” on etherpad here: http://etherpad.com/OwNzsgQpSa Many of you are contributing and it is developing (into what, I’m not sure, yet!) But could I suggest, please, that we debate here… Read more »
I discovered this site some time ago and I knew nothing of economics. It’s been a rough ride since I decided to throw in my lot with Ireland rather than a friend living near Limoges. C’est la Vie. Wills was talking about Mercantilism so I studied that too. Here’s the question. Thinking globally since the Middle Ages superceded the Dark Ages, has all commerce been built on robbing some other poor bugger? If so, Communism etc was only a social experiment to give people the semblance of choice. By definition, profit is non existant. It peaks and troughs but requires… Read more »
“I don’t know but some fool that does know needs to get a grip fairly fast.” [Furrylugs]
I don’t know about you, but that’s why I am here.
What do unstable blowout countries have in common….reasonably good climate all year round, hot blooded people and Catholics. Ireland and Spain fall into that category. Maybe if this snow/frost continues into Feb and March, we might be molded into a new form of thinking. Apparently people become more aware of one another and indeed socially aware during cold snaps. Greed and selfishness is the root cause. Nothing else. The frost is killing off bacteria, preparing plants for the new year and destroying spuds (which make you too fat anyway). People are forced to slow down and maybe think a bit.… Read more »
Philip – you are sensing the Planet saturn now – all will be positive again after 15 th January …..relax.