In early 1931, the German government under the stewardship of its finance minister, Bruhning, was facing an enormous economic challenge. The economy was contracting rapidly but Germany was dependent on loans from the US to maintain the Gold Standard’s exchange rate. In order to qualify for these loans, the Germans followed orthodox policies, the sort that peripheral Europe is following now, to stay in the monetary union.
But qualifying for loans is very different from being able to pay them back. If you doubt this, ask the thousands of Irish people who “qualified” for loans in the credit splurge and now find themselves in an impossible position.
But as long as Germany followed austerity policies in the face of the recession, which soon became a depression, it secured the financing of its government deficit. So although the deficit was still in place (like Ireland now), the government’s commitment to austerity was enough to allow it to qualify for the loans from the US.
But the economy kept contracting.
Bruhning wanted to keep the flow of US money coming, so he had to stick with the austerity agenda. The plea to the German people was: “If we don’t keep up the programme, we won’t get financed.”
By June 5, 1931, with unemployment rising, retail sales and asset prices rising, Bruhning changed tack and announced that to make the austerity palatable at home, he would have to tear up the reparations from World War One. Germany couldn’t bear austerity and pay back the reparations at the same time.
In the event, Germany kept with the austerity, amplifying the deflationary effects on the economy, which ultimately made a problem, which was that there was already too much deflation, worse. In 1932, Bruhning et al lost their jobs in elections, paving the way for Hitler.
We see that the immediate cause for Hitler’s victory was not the hyperinflation of 1923 but the hyper-deflation of 1932-33 — almost 10 years later.
This episode should resonate with us in Ireland because it seems that the treaty debate has come down to whether we qualify or not for further loans, which will finance our deficit after 2014.
Like Bruhning’s obsession with securing loans to finance his deficit and stay in the Gold Standard, this policy is ignoring what’s happening on the ground in the economy.
We are following a policy of securing loans but, if the economy doesn’t recover, this new credit line we might qualify for will just destroy more wealth, not protect wealth.
Let’s try to explain why credit lines, if you can’t pay them, destroy rather than preserve wealth.
It’s good to see that financial crises don’t destroy wealth; a crisis tells us how much wealth has already been destroyed by too much borrowing in the so-called boom.
In Ireland, if we look at household debt, which according to Citibank in a report last week stands at 220pc of income although it was only 98pc of income in 2000, we can see that it was the borrowing in 2000-08 that destroyed wealth. The crisis only signals this.
The huge debts cause what is called a liquidity trap and this has its roots in the state of the national balance sheet.
Many Irish people’s balance sheets are broken because on the one side we have assets — houses, land and apartments — which are falling in value, but on the other we have debts, which are fixed. At a time when income is falling due to rising unemployment and taxes, this means the debt burden is getting heavier every day relative to income.
As a result, people with savings are saving yet more. Those with debts are trying to pay them down. The same goes for companies. Ireland’s savings ratio has exploded to 17pc of income; it was -5pc in 2007.
People don’t want to borrow because they have too much debt and banks don’t want to lend because they have too much bad debt. Yet the deleveraging is destroying their capital base, too. Again, the paradox is that deleveraging my balance sheet might make my position better, but when we all deleverage at the same time, we drive down asset prices further, demanding yet more deleveraging.
If everyone is saving, who is spending? The rise in government spending is the logical reaction to, not the cause of, the liquidity trap.
By qualifying for loans now that the economy can’t make good on, we risk destroying yet more wealth.
People will argue that the Government is just buying time until 2014. This is a fair point and it goes back to the idea of kicking the can down the road in the hope that something will turn up.
But the metaphor we should be looking at is not kicking a can down any road but rolling a snowball down a hill. The more we roll, the more the ball gains momentum and destructive potential, so that by the time it smashes into reality, the destruction will be much, much worse.
Maybe it would be better to call it now and admit we will default in 2014 because growth is anaemic — as evidenced by another fall in monthly retail sales yesterday — and the debt is too big. We know foreign markets are shrinking, we know that the banks are not lending and we know that credit-free recoveries are few and far between.
Armed with this, we could go to the ECB and say, with a No vote, we know that we will default because the ESM isn’t open to us. We will start this process right now by not paying a cent extra to unsecured bondholders. We will not pay money due next month, and you can help us all figure out what to do next.
This forces the ECB to react and this forces it to think about the political legitimacy of continuing to lumber the Irish people with bank debt, the modern equivalent of reparations.
Then we look like a reasonable country. We say we will never default on sovereign debt as normally understood — debt incurred for schools, hospitals etc — but when it comes to all this bank debt we don’t have any choice. Now that we don’t have the ESM to facilitate rolling the snowball down any more hills, we have to negotiate now.
This will focus the minds of everyone and inject urgency into proceedings. The Americans have an expression: “the extreme urgency of now”. Now is urgent.
The situation in the eurozone is not getting any better. The fiscal treaty, by imposing austerity on an already enfeebled economy, will make things worse, prompting more capital flight. Rolling the snowball down the hill is not an honest option.
Mightn’t it be better to open the negotiations properly now?
Im voting no.
It is time for Ireland to stand firm by calling the bluff of the ECB et al with a No vote. As the Spanish are doing right now with their banking crisis, except they aren’t going to back down and fold their hand. The ECB will finance Spanish Banks directly because that’s what the Spanish want. Unlike Ireland, of course who prefer being the poster boys of Europe.
Federalism is the only way to fix this mess. That will take decades to implement. We have only weeks. Europe is going back to 1960s in a hurry.
I am voting NO, thank you very much.
Will also be voting no today…
Sorry I thought their is a 24hr pre vote media blackout on referendums and elections, so people can make their own mind up without constant background noise from all sides. Between yourself and Sinn Fein with the looney media attention grabbing last minute high court case does anyone play by the rules anymore!
I am disappointed with you David.
Me too voting no. I am a dedicated fan of McWilliams and in all of the years I have been following him this has to be the definitive article. McWilliams in this article proposes that the people exercise leadership and demand it from our politicians. Leadership is the taking responsibility for our own actions and destiny. In s time of crises true patriots take the hard options. Politicians take the easy options. Remember JFK stated that America chose to go to the moon not because it was easy but because it was hard. JFK helped to extend freedom to millions… Read more »
David, I agree with your argument in this article, however my worry is the present government, as with the previous administration, have not and will not stand up to the ECB / Troika / Germans etc and do what you suggest. I think we should vote no and begin to bargain as you suggest and stand up to these bullies but if a note vote is carried I think we’ll be voting again in Sept and keep voting until there is a yes vote, ala Lisbon. The government is spineless and afraid of the aforementioned ECB etc and that will… Read more »
I agree with you analysis David but I think its probably too late in the process now. The time for burning bondholders was three years ago. We had more leverage then. Surely to God the Germans know we will never pay back all the debt. Do they honestly think we can pay back the 300 billion we owe with interest? I cannot believe that these leaders of Europe are so weak in themselves. The kick the can down the road mentality is alive and well. They all travel to Brussels, get wined and dined , arrive in their plush cars,… Read more »
We’re seeing further economic declines in periphery countries with Spain heading towards a massive bailout. The periphery countries are inevitably suffer from the same symptoms of asset deflation and sharp GNP contraction. The illness was caused by being force-fed credit in an attempt to grow an economically powerful eurozone. The periphery countries are the foie-gras geese of europe. This has been a failed experiment. European share of world production has actually fallen over the past decade to Asian competitors. Rather than global competitiveness, our collective enterprise was focussed on products and services which are reliant on buoyant economies and reckless… Read more »
As we have seen in Zimbabwe, hyperinflation alone hasn’t been enough to force a leader from office while in the case of 1920s/19330s Germany, as in the Euro Zone today, situations normally change as a result of a myriad of issues rather than any single event or cause. The 1920s laid the foundations for Hitler coming to power which was a period characterised by economic instability, social chaos and political ineptitude, which the Nazis capitalised on. The problems with the Weimar Republic, the ludicrous Versailles Treaty, the massive financial repayments and yes, hyperinflation all played their role. The problems that… Read more »
I shall also be voting NO today. If this Treaty ends up being ratified then you can kiss goodbye to any kind of recovery taking place in this country. All FG/LAB and FF want is to maintain the status quo in the EU and as you can see all that maintaining the status quo does is get you even further into the mire. The bodholders and the banks should have been told where to go back in 2008, but of course our government at the time made a complete hames of things and now we have the ‘Altar Boy’ who… Read more »
This treaty will be comfortably carried because we have too many teachers, civil servants, farmers & other “yes men” plebs, who simply have a personal vested interest in this country borrowing way beyond its means and handing the beleaguered and largely unrepresented private sector worker, the bill for Celtic Tiger salary arrangements, all held in place by a rediculous Croke Park Agreement. This state is beyond repair, because people cannot see further than their personal narrow interests, time and time again.
Hello All I reported some time ago that “we” a small group of interested people in Skerries decided to research the treaty over a period of about 4 moths. We met every Friday evening and swapped the results of our research. We then canvassed about 500 homes in the Skerries area for a NO. Should this treaty be a “yes” we will feel no guilt as we did all we could to fight the darkening of our skies with the veil of stupid fascist thinking. I hope it’s a “No”, but who knows. They threatened the unprepared citizen with everything… Read more »
If we vote Yes, more integration with the EU will result in an attack on corporation tax; Further integration means standard policies across the whole of Europe, we are getting to a stage we cannot choose what policies we like and what we don’t, we are either in or out; Let’s face it our Government is folding by the EU’s hand of the ESM. If we say NO and the treaty passes we do not have access to the ESM but in 2014 it is in the interest of the EU to not let Ireland bring down the Euro! A… Read more »
“Armed with a No Vote”. This is the only aspect we have a say in. We don’t have a government that is willing or has the “minerals”(to you a quote from a famous film) to deal with the explosion of a default. The other Euro members will be to busy fighting their own fires to worry about little auld Eire with 2 % of the popoulation and will move on with out us and we will be the bottom of the pile for every scrape that happens in the furture. Surely there must be an option of doing everything that… Read more »
I am bemused by this article and have only quickly browsed through some of the titles of your recent articles. Both the titles and the content of this article clearly imply, that in your opinion the people of Ireland should be returning a No vote to our Political puppets and their EU masters. I briefly heard you on RTE radio 1 on Sunday past, and you were clearly sitting on the fence. Maybe you where in awe of McCarthy? If you truly believe that a No note is the best way to go, then why the hell did you not… Read more »
[…] […]
The young who matter to the country don’t get a chance to vote because they are all in Australia. The demographic left behind will push the balance to a yes vote which will keep us in shit creek with Enda and Co. for years to come.
Some constructive criticism David….
Your points as always are accurate in my opinion but your metaphors and examples are growing dated:
-Einstein/Keane?
-Josey Wales?
-Your Boston experience.
As a regular reader they are now dated and overused.
Might be time to freshen things up.
http://www.weeklywaffle.ie
I too will be voting No and for the record I am a public servant (I was also against the Croke Park agreement but not for the reasons cooldude might suppose – pay cuts are coming to the public sector irrespective and I didn’t want to go along with losing conditions of work built up over decades) Tough times ahead no matter what. Time for us to become a better people than we’ve been since independence or take the consequences. I fully expect the majority of Irish people to vote yes as they’ve done ultimately in every prior referendum –… Read more »
Form David above, actual today after reading the above I will call you Mr. McWilliams but only for today… “Mightn’t it be better to open the negotiations properly now?” YES unquestionable without a doubt and finally Gilmore might get the arousal he badly needs but he will have to be careful as we know what Clint Eastwood (Angela Merkel maybe) does when he sees a man with hard on. Our headless chicken government needs to be told what to do by us and today might be the only chance we get to give them the hard on they need. No… Read more »
A high turn out = “Yes” majority A low turn out = “No” majority I believe a “Yes” vote will divide and conquer the Irish people, as it legally enshrines the schism between the publicly and privately employed, the ‘insiders’ and ‘outsiders’. It’s a “Yes” for me and a “No” to you when it comes to the borrowed goodies. It will polarize this country as the sham of “Sharing The Pain” is exposed by the me-me-me status-quo-on-the-pig’s-back brigade who may be numrous enough to win today’s vote. All future discussions will be futile. The losing “No” vote brigade may as… Read more »
I was never good at maths in school and not very academic,and David is the only economist that doesnt give me a pain in me head.
Maybe its something to do with the fact hes the only one making sense,I never loose track of his explanations of whats going on,and am 100% confident in voting NO.
This is laughable.. the implication that a yes vote would pave the way for hitler was particularly amusing. The tag line on this website says “Economist, Author, Broadcaster”.. It should read “Self Aggrandising Media Hound”.. McWilliams lost his credibility as an economist years ago, his sole interest is to raise his personal profile by being provocative. A no vote won’t have a negative impact for him.. he’s happily sheltered from any financial consequences by the significant income from his true careers in “writing” and “broadcasting”.. This treaty is happening.. with or without us.. anyone who thinks a no would put… Read more »
Realist Is it the same realism that has a bailed out State Bank meeting to decide on lending 3.5 billion to restructure a debt taken on by a State owned property holding company to repay an obligation conjured up by the State run Central bank on behalf of a bankrupt State owned former Bank.
When do you cry stop. This may not be life changing but putting one small word on a ballot paper is one way i can object to this flawed system.
[…] economist David McWilliams, who predicted the Irish crash, has an interesting analysis of why this treaty is doomed here: People will argue that the Government is just buying time until 2014. This is a fair point and it […]
David, you have been quoted in the London Daily Telegraph. http://blogs.telegraph.co.uk/news/edwest/100161937/ireland-wouldnt-accept-starvation-austerity-to-stay-in-the-pound-why-will-it-do-so-for-the-euro/ [ People will argue that the Government is just buying time until 2014. This is a fair point and it goes back to the idea of kicking the can down the road in the hope that something will turn up. But the metaphor we should be looking at is not kicking a can down any road but rolling a snowball down a hill. The more we roll, the more the ball gains momentum and destructive potential, so that by the time it smashes into reality, the destruction will be… Read more »
I survived the property mania by being a property sceptic. By refusing to get drawn into the crowd, by the media coverage. I survived the ISEQ crash by being a ISEQ sceptic. By refusing to swallow the hype in the IT Business Supplement, or the business news on the radio/the television. I intend to survive the EU crisis by not swallowing the stories that the EU knows how to solve this problem. It is clear that does not. Regardless of what way a very close vote works today, make sure that you are prepared according to what way things pan… Read more »
Hi Deco
Prepare – what do you suggest?
Could this go into the history books as the lowest turnout referendum ever?
Ignorance is the true source of all suffering.
For those you intend voting No, I live opposite a polling station (30mts or so) which I have a constant good view of, it is normally a very busy polling station due to the demographic of the area its not the polling station I vote in I have to walk past it on the way to mine about one kilometre away, I am on the wrong side of the road (born on the wrong side of the track too it just keep biting at me even in little ways). So far today I have never seen such a low turnout… Read more »
It was a good article Sir
Personally I would not take all the abuse for all the Whiskey in Ireland
David I voted no today at 1400 & I listen to the whole debate around this referendum over the months.At the start I had intented on voting no as a protest against politicians in the country & their bahaviour.As the debate continued I suffered a bit of wobble & changed to the yes side as im trying to restart a business I lost in 2010.After some research of my own I changed again & went back to the no camp & then I read some of your comments about what may happen if there is a fiscal union & it… Read more »
The euro was built on foundations for this crisis to happen.
The crisis opens up an opportunity for the Insiders to use their Dr.Strangelove solutions and this is what is under way now.
Simple.
“Polling stations expecting rush as turnout remains low”
On Google News at 6:49PM
God they are desperate. Sure Emmerdale is on at 7 then it’s Enders and Corries
Get Your Minds Right Lads. Cool Hand Luke
http://www.youtube.com/watch?v=Y28pFJqDkkU
Democracy does not exist in the EU Sarkozy was a dictation the people of France voted against Lisbon be he the little Bonaparte passed in spite of a popular vote.
After the French people rejected the EU constitution in 2005, the president moved the vote to the parliament, which approved it.
– After coming to power in 2007, President Nicolas Sarkozy decided to opt for a parliamentary ratification to avoid the risk of a second rejected referendum.
Vote no is a vote to bring democracy back to Ireland
http://www.youtube.com/watch?v=q_qgVn-Op7Q
I’ve given up on the media. You guys here write a lot more sense and provide a lot more real news and information than the entire apparatus of mainstream media. My thanks to you all. My hope is that Greece’s Syriza Party and Alexis Tsipras is the beginning of the awakening of the European citizenry. We need to take Europe back from the bankers and their eurocrat operatives. We need a democratic and humane civilisation; not a Darwinian free-for-all primeval market where financial mafias and hedge fund pirates are permitted to rob us all blind and destroy our national and… Read more »
ECB warns current euro zone form is ‘unsustainable’
Updated: 19:16, Thursday, 31 May 2012
European leaders must act swiftly and decisively to avoid the disintegration of the euro zone, which European Central Bank chief Mario Draghi said is “unsustainable” in its current form.
http://www.rte.ie/news/2012/0531/euro-falls-as-spanish-borrowing-costs-rise-to-6-7.html
True enough!! Peter Finch’s character was absolutely right. Everyone should now pursue this type of action all over the country and the useless members of this government should face this type of protest from the general citizenry. WE’RE AS MAD AS HELL AND WE’RE NOT GOING TO TAKE ANYMORE!! Let’s just hope that there’s a turnout of less than 40 % all over the country?? First it will show Enda and his cohorts in government that we’re sick and tired of being lied to, and secondly it might and I stress it just might make them sit up and take… Read more »
I voted NO, and everyone I have spoken to on the issue is voting No, and yet the RTE news keeps saying the YES side is increasing. Someting doesn’t add up here!
unsecured bondholders. Maybe I have this wrong are not most of these payed back.
Or have I got this wrong.
I hear our lords and masters are over at the Bilderburg meeting in Chantilly, Virginia, USA. I mean Van Rompuy and Trichet; both unelected; and probably many others as well. Goldman Sach’s local man Peter Sutherland will likely be there too. The inside word thus far is talk of some kind of global treasury. My bet is and has been since the crisis began that they will eventually (probably not just yet) bring forward plans (plans which were drawn-up some time ago in preparation for this) for a new global central bank; which will oversee continental central banks, and on… Read more »
It is high time to mention Brüning. Berlin seems hell bent, at least Merkel, repeating the mistake. But a few critical points – 1) 1923 saw Weimar hyperinflation because of unpayable Versailles debt. Germany well remembers that make no mistake. 2) Austerity after 1929 was the fatal blow to the nation. Joblessness and apathy paved the way for Hitler, whose NSDAP election was funded directly by granpa Prescott Bush and Montague Norman of the Bank of England. Hjalmar Schacht, the Austerity role model, became Economics Minister after leaving the BIS – the Versailles Debt Collector Bank in Basel. 3) At… Read more »
Never fear. We can always have cheese
Russell Howard’s Good News – Irish Economy
http://www.youtube.com/watch?v=idCNZF4xuWQ&feature=youtube_gdata_player
“No generation has a right to contract debts greater than can be paid off during the course of its own existence” – Thomas Jefferson.
[…] McWilliams / Irish Independent – The fiscal treaty will only make things worse: The situation in the eurozone is not getting any better. The fiscal treaty, by imposing austerity […]
A humorous look at bailouts.
http://www.zerohedge.com/contributed/2012-05-31/bitches-brew
Its great to see Enda Kenny leading from the rear, worried his tissue of lies will be ripped to shreds. Scared to engage on the future of this country. Reduced to giving broadcasts from his Dáil bunker telling us to go back to bed Ireland everything is fine, while financial destruction closes in on all sides. He is a thundering disgrace.