The other day, the cost of filling up our family car rose to €109, and the price of oil is going up and up every month. Looking out on the huge reclamation work going on in front of me at Abu Dhabi’s Corniche region (where I am speaking at a conference), I pondered on the vast wealth of this place, where money for public works is no issue because of oil dollars.
Out beyond the white beaches, to the north lies Iran and, to the west, about 100 miles or so away, are the strategic Straits of Hormuz.
All the talk here is about Iran and the fear that America and Israel are on a collision course with the Islamic Republic. Iran’s closeness to the Shia Muslims in Syria worries these Sunni Muslims, who see a Shia Muslim arc running from Iran through Iraq and Syria and into South Lebanon.
Last night, an Arab friend suggested that “all Abu Dhabi has to do is stay out of trouble”, then he quipped: “That is easier said than done.”
But the price of oil isn’t rising just because, geopolitically, this region is once again jittery. The blame for the rise in the oil price can equally be placed closer to home.
I was speaking on a platform on the future of the euro with the former president of the Bundesbank, Axel Weber. Weber, the monetary hawk, was discussing the ECB’s giant ‘cash for trash’ scheme which has seen the ECB lend close to €1,000,000,000,000 to Europe’s banks since December.
One trillion is a very big number. It is followed by 12 zeros. And just to put that into context, if you were to spend a million euros a day, it would take you 2,740 years to spend a trillion euro.
Although Weber was talking about the euro, the ‘cash for trash’ scam explains the price rises in oil at least as much as the tensions down the road from here.
With all this excess money sloshing around, it is not surprising that the price of everything is rising. The banks are borrowing at 1 per cent from the ECB and buying into the oil rally and exacerbated the initial upward movement in prices. Ultimately we, the people, pay for this at the petrol pumps.
The ‘cash for trash’ scheme also explains why the fiscal compact will not make the euro more stable, despite the German and French suggestions that it will. In fact, their fiscal compact obsession simply reinforces the fact that they have totally misdiagnosed the eurozone’s affliction to suit themselves.
After all, if the problem for the eurozone was fiscal in nature, why the ‘cash for trash’ initiative?
The €1 trillion bank subsidy tells us that the problem in Europe is not excessive government borrowing, but excessive bank lending which has destroyed the balance sheets of the banks. This is forcing the ECB to break all its own rules and give the banks anything they want to stay afloat.
Why are they in trouble?
Because they destroyed their own wealth in the boom by lending too much money to dodgy investments – many of which have gone sour.
The crisis is not the cause of the euro’s problems but theconsequence of the euro’s problems.
Weber gave an insight into German thinking. The Germans want German-style federalism as soon as possible and the fiscal compact is another step to that. But the problem in Europe is not government deficits. In fact, government deficits are the consequence of excessive bank lending and excessive current account imbalances.
The problem in Europe is that the rest of Europe can’t keep up with the industrial might of Germany. This causes countries to run trade deficits with Germany. To pay for these German imports, the countries need to borrow money. They borrow this money from Germany and what we see then are huge current account imbalances and huge accumulated debts on the periphery.
Sitting in the middle doing all this lending are the German and French banks – as well as the major banks in all countries. However, because the other countries are borrowing German savings to pay for the German goods that Germany makes but chooses not to buy, German banks are significant lenders.
When this borrowed cash flows into the peripheral countries, the price of everything goes up, including the price of labour. This propels the costs on the periphery upwards, making them less competitive – exacerbating the original competitive imbalance with Germany.
Because the banks see only the very short term, they see a demand for more loans from the periphery and a supply of new savings from the Germans. One side-effect of all this is that governments’ tax revenues expand in the boom. They increase expenditure and then, when the bust happens, the tax revenue collapses and you have a fiscal problem.
But the fiscal problem is the consequence of trade and current account imbalances, not the other way around.
So what the peripheral countries need to do is pay themselves less; the Germans need to pay themselves more.
If we had our own currencies, we would devalue against the Deutschmark and the Deutschmark would revalue against everyone else. This can’t happen now, so actual wages need to fall. But aggregate wages in Ireland have not actually fallen since the bust. Take-home pay has fallen because of increased tax, but wages haven’t generally fallen by much. Obviously trade unions fight against wage cuts for their members, as do constructs like the Croke Park agreement.
Real wages in Ireland – wages adjusted for inflation – haven’t fallen, whereas, for example, real wages in Iceland expressed in euro have fallen because it could devalue. Even in Latvia, where the economy has shrunk, real wages haven’t budged. This shows that wages don’t fall in a recession. The fabled ‘flexibility’ of the Irish labour market is just a horrible expression for unemployment and emigration. Yes, the market adjusts all right; but it adjusts with more people on the dole. Now, with more on the dole, government spending goes up, not down, resulting in a higher deficit.
In the US, when this happens, as it did to the Boston region in the late 1980s, fiscal transfers from the core ease the burden. Bostonians, when they are weak, pay less tax and get more help. That is how a real fiscal union works.
The German fiscal union envisages penalising the weak country precisely at the moment it is weakest. So the weakest must raise taxes in the face of a slump. This is obviously unworkable.
It is all the more unworkable if the ‘cash for trash’ scheme, which is designed to save reckless bankers, is pushing up the cost of living for essentials like oil. Equally, how does reducing individual wages make the individual debt overhang – which is the human face of the current account imbalances – any easier?
So the fiscal contract is not going to make Ireland any more stable. In fact, the ECB’s current policy of monetary incontinence on a monumental scale simply underlines that the euro’s problem is capital flows through the banks, not fiscal deficits. Egregiously, the German and French are wilfully misdiagnosing the illness to suit their own ends, and people like Axel Weber know this.
Fighting current account imbalances with a fiscal compact is like fighting heart disease with chemotherapy.
Here we go again, folks!No sooner did the government make the announcement that the Irish electorate were to be given the chance to voice their opinion on the Fiscal Compact by way of referendum they come out with the usual scaremongering. I shall be voting No in the referendum and if the referendum is defeated, which I hope it will be then I’ll just keep on voting No if they keep coming back and they asking us for a different result. Even if the referendum produces a No result it’s not going to make any difference whatsoever as it only… Read more »
Willkommen im Club Axel Weber ex-Bundesbank President taught Hans Eichel [prev. Min. of Finance]at Bonn University where Jens Weidmann [Bundesbank President] also studied. Waidmann previously advised Angeka Merkel on Finance. ECB Board of Directors member Joerg Asmussen studied there too; Asmussen negotiated with Christine Lagarde who was mentored by Nicolas Sarkozy. Asmussen also has a close relationship with Ramon Fernandez, Gen. Sec. of the French Treasury and was on the Board of Directors of the ECB where Mario Draghi is now President. Timothy Geithner [US Min. of Finance] and Asmussen are described as ‘Weggefaehrten’, companions.[Might explain why Geithner [bankers take… Read more »
Rating Agency Moody has put the boot in http://laroucheirishbrigade.wordpress.com/2012/03/05/voting-no-to-stop-austerity-treaty-in-spite-of-moodys-diktat/ Moody’s , the filthy Wall Street rating agency, today had the effrontery to “advise” Ireland that we “may need” a second bailout and that a NO vote in the upcoming referendum would bar Ireland from receiving further funds under the European Stability Mechanism (ESM) How dare they? Now, we’re supposed to be reeducated on a Irish citizen’s referendum by the hungry fox minding the hen house. Moody’s even said that just making a decision to HOLD the referendum was “credit negative.” Just the fact that this Wall Street gang are pushing… Read more »
Promptly after agreeing to the brutal ESM treaty finalized at the latest European summit, Spanish Prime Minister Mariano Rajoy called a press conference in Brussels to announce that his government’s deficit target for 2012 is 5.8% of Gross Domesic Product, not the 4.4% demanded by the European Commission. European Council President Van Rompuy responded that “the markets” will punish Spain for not meeting demanded budget objectives of the (Orwellian named) “European Stablity and Growth Pact,” and drive up the cost of the bankrupt nation’s debt. ––- Rompuy threatened Spain, like Moody Eire today. But it looks like Rajoy’s announcement makes… Read more »
Printing 1 trillion leads directly to hyperinflation showing up as oil prices etc which have nothing whatsoever to do with supply and demand. Weber and the rest of the ideologues fear a Weimar II, so what are they playing at? Do they really believe federalism will avoid this?
Sounds occult to me.
Real wages haven’t fallen because A) we can’t devalue and B) we have the CrokePark agreement. Are you suggesting real wages must fall? If so, how the hell are those of us still working supposed to pay our way? we’re not all on the upper end of public sector or indeed private sector wage rates. With 12,000 people at the RDS last weekend trying to get out of the country to a job half way around the world we are in really deep trouble. I don’t have the figures to hand but it galls me to hear of FF apologising… Read more »
Something else to watch
Last week Geithner was arrested and released!
http://www.youtube.com/watch?v=q5j6Yk0qAgQ&feature=related
David, I see you’ve finally begun mentioning the Croke Park Agreement in your articles now. Come on now, get off the fence fully and denounce it for what it is, an ATM for inept mediocre clock-watching incompetents who wouldn’t know a hard day’s work if it hit them between the eyeballs. There is no need for Unions in the 21st century. Yes, in Dickens’ time there was a need, but the laws of the workplace now gives employees many more rights than Dickens could ever have imagined. We have employment apartheid, where Unionised workers in mostly public sector environments are… Read more »
Excellent article. Nothing more that I could add. “Unsurpassable”. Wow.
Just watch for the next few months as a collection of school teachers who never taught, landowners who never farmed, lawyers who never practiced law, and student politicians who never got a job in the real world, combine give us lectures on economics.
The whole thing is just mad.
What we are seeing is the intellectual deficit of the leadership of the West. You can be certain that they will make a mess of it.
Each and every one of you should learn to prepare accordingly.
The objective it appears in my opinion to be a *currency war* between dollar and euro for world reserve currency slot.
The Insiders and their monopoly board game seems to be slugging it out over who gets to keep the world reserve currency slot.
France and Germany fighting to put euro in as world reserve currency. USA fighting to hold onto it. And UK in the background readying to slip in with sterling if the boxing match ends in both fighters knocked out.
The Icelandic when making their independent decision they did so on their closeness as a small society and banks did not form part of their immediate priority . Instead it was their national natural resources and their confidence that they could exist together alone on what they already own . And they believed they owned a lot . Their physical isolation did not hamper their mindset and their determination was second to none. The banks and their bankruptcies were consequences to bad decisions made and corruption. Their remedy was to take control of their national resources and manage them properly… Read more »
Stop the exporting of our people!!!
Stop the importing of foreigners to replace our exported people!!!
Stop the import of foreigners to replace the exported people imported here to replace our exported people…all undercutting the natives left behind.
Stop the population swaps!!!
We are not stocks or herds to be traded for the slave masters profits at the international people mart!!!!
Excellent article on the true situation in Greece, the true causes of the crisis there are far more complex than ‘tax dodging Greeks’, which was never a very serious analysis.
“Neoliberal economics planned in Brussels and Berlin will push Greece into third-world working conditions”
http://www.guardian.co.uk/commentisfree/2012/mar/05/greece-collapse-or-resurrection
As for Ireland, 4000 in for FF Ard Fheis, 20,000 for jobs abroad, the two Ireland’s so often written about.
Four points: 1. The price of oil is going up because theres more demand – China and less supply (Americans and others denying Iran the right to own the same murder machines that they have. 2. The Germans didnt force anyone to buy their BMWs. Paddy over borrowed to keep up with the Joneses. 3. The euro is a method of measurement of wealth. The Irish can either take the forty percent opay cuts needed to balance their budget in euros or set up the punt again and have a currency worth forty percent less than the euro. Different route… Read more »
Obviously, there’s a big problem with main the relative uncompetitiveness of the peripheral countries, especially Greece. So here is my cunning plan, worthy of Baldrick at his best: all German workers would be required to be given a 30% wage increase by their employers. (Same would happen in quasi-German satellites such as Finland, Austria, Netherlands.)
This would, at a stroke, level the competitiveness playing field within the Eurozone while, at the same time, putting lots of new Euros into the hands of Germans to spend on Greek holidays, Spanish wine and Italian shoes.
See http://puckstownlane.wordpress.com/2011/11/14/my-cunning-plan-to-solve-the-eurozone-crisis/
MC
I have to say I agree with you. I dont really see you as a yes man because I am not one either. We were always thought to think for ourselves however I keep my opinions to myself in a work situation. I think you are better off abroad working as there really isnt much happening in this country and wont be for about 10 years. As regards the price of petrol I have recently started taking the bus and leaving my car near my work for run arounds. People need to stop using their cars and start walking more.When… Read more »
To Bonbon, My point about Massimo Mucchetti is not what he thinks about Glass-Stegall etc., but what he propogates about Ireland. As you know, given you follow Italian matters, Mucchetti is a well respected economic commentator here and that he communicates such negativity about Ireland (“stato canaglia”) is what concerns me. He also blasted Google for running their business out of Ireland. I, like hundreds of others, have headquartered my businesses in Ireland with real employees (by the way) supporting the industrial parts based here and in Germany and the danger of Mucchetti’s opinions is that, over time they became… Read more »
This whole saga is very simple. Its a game the very rich are playing with their money, exploring the best route out of this mess whilst minimising their loses. They’re no different to you or me, none of us like to take a hit or write off bad debt. We’d all try to recoup what we can. This is just being played out on a much bigger scale with much bigger numbers than most of us can even contemplate. So for as long as we (the taxpayers) of Ireland and other countries are willing to pay up the game will… Read more »
I would like people to support Anglo:notourdebt in their campaign. A PETITION TO REPUDIATE THE ANGLO DEBT… Despite it having nothing to do with the overwhelming majority of Irish people, the reckless behaviour of Anglo and INBS is set to cost the Irish tax payers more than €90,000,000,000, that is unless we can do something about it. This sum of money consists of; €30.6 billion that we owe the ECB and the interest that will accrue as we repay it over the next twenty years. Bondholders invested in these financial institutions so as to make as big a profit as… Read more »
A couple of things I find interesting and of course, I’m prepared to read the worst into these. Appalling how little much is under reported on the European Economic crises except, of course, for the opinion of the politicians. I’m impressed today to find out that the Spanish new Prime Minister rounded on Angela Merkel telling her in no uncertain terms that Spain would no way confirm to her view on Europe and in fact would refuse point blank to restrain the Spanish economy to the control limit of 4% deficit, instead he plans a 5.8% deficit as a direct… Read more »
This explains what I meant in my earlier comment.
http://www.telegraph.co.uk/finance/debt-crisis-live/9125198/Debt-crisis-live.html
Why is it that so many feel they way the Spanish do, yet, elected representatives – you know, those who ‘represent’ our views – never seem to voice them, instead being more interested in ‘agreements’ in ‘fiscal responsibility’ in ‘measures to resolve a crisis’
Not good enough in our pretend democracies.
I’ll be voting NO but for a slightly different reason. Germany is entering a long-term geoplotical pact with Russia. Russia is offering to secure Germany’s future oil and gas needs in exchange for technology transfers from Germany into Russia’s energy and other industries. Germany is offering special work visas to Russians. This is why Germany wants nothing to do with America, the UK and France’s energy wars in Iraq, Libya, Iran, etc. etc. Germany plans to get all its future oil and gas overland through pipelines from Siberia and Central Asia. This is key because it explains why Germany is… Read more »
David talks about the dangers in ‘ the strategic Straits of Hormuz’. Well , if anyone cares to look around them these are a lot closer to home than you might imagine. I am experiencing in practice from the Revenue strategy new modus operandi whereby they ambush clients into something totally different and fabricating and conspiring small trades people to make it seem they are ‘wrong doing’ when all the actual facts show the opposite .I am 35 years in practice and I have never seen anything like this before . Some new clients have come to me from elsewhere… Read more »
The Dutch Freedom Party has become the 1st EU zone party to demand an Euro exit! After they got hold of the London-based Lombard Street Research report concluding it would cost Euro country creditors more than 2.4 trillion euro to hold monetary union together over the next four years. They say bring back the Guilder to be masters of their own house.
This was a good article David.
I wondered why the price of petrol was rising while consumption has been falling.
Good to see that you have got your teeth in today and that you are not taking any crap!
This government is worse than the last shower and that’s saying something we are heading back to the 1930s why do we need a second bail out to balance the outgoings that’s a joke if we where run right we would leave euro land ,because the price to stay in will have to much of a downward effect on the Irish people, we should be able to run our own country with outside help.what does this government want every young person to emmergrate to make there dole figures look like they are solving the unemployment the only savings this government… Read more »
The Bundesbank is sitting a debt-bomb.
“Now everyone knows we have to save the euro, at almost any cost.” German economist Hans-Werner Sinn speaking on why Germany is trying to save the Euro.
http://www.spiegel.de/international/europe/0,1518,818966,00.html
Also at the cost of Ireland & Co.?
Interesting read in the English version of Spiegel today. Old news for readers of this blog I guess?
Rgrds from Germany,
LongGone
http://dailyreckoning.com/what-the-greek-rescue-is-really-about/
Interesting read
David, because some people below are questioning your ethics. I read all your articles and so do a lot of people I know, might not always agree totally with you (on balance you have been right a lot more often than me though)but I just wanted to let you know that we all appreciate the fact that you stick to the truth as you see it, even though you could profit more from toeing the line like so many other soul-less people in this country. Your ethics are NOT in question with anyone I know, not even in the slightest.… Read more »
An interesting Report posted on the John Mauldin website recently. http://blog.variantperception.com/2012/02/16/a-primer-on-the-euro-breakup/ If there is this kind of proof spanning the past 100 years it beggars belief that we are still stuck in our current situation.This report is basically a blue print on how to save the country. It should be printed out on some very nice quality paper, tied with a big red ribbon and handed to one of elected party’s to show them how to proceed. Otherwise where are we going to end up! I only hope that the confused masses who have no idea what to vote decide… Read more »
I think it will be a no vote. People talk about scaremongering when the only thing scary about Enda Kenny is that he is Taoiseach. And even scarier for me is I voted for him.
Over 100 Euros for the family car fill up. David you’ll be fine once they start the drilling in Dublin bay.. Shure we’re the new Arabs don’t you know.
David,
Thanks for yet another interesting article. As for Tony Murphy, I think he’s just a ‘jealous guy’!
Any plans to do ‘Economics without bounderies’ intensive course in Paris? It’s a bit difficult for me to attend an evening class in Dublin.
Fantastic. Can’t wait to find out more about it.
Has the Irish government got to much power it seams to me they do I don’t understand why on the major things happing to us that these things in question should go before the Irish people,let the people decide not just on one or two things ,the people we elect have far to much power and to be honest the government have and are very poor so far ,so why should a bunch of people in the dail have all this power if they get it wrong we just cant turn back the clock.
The truth is the majority of self-employed people out there be they plumbers ,shop keepers, ect ect are not making a profit there standard of living is gone if they are lucky you might get some sort of wages and they live week to week,is this the new Ireland that we have to live in ,ask yourself why and the government and others say why don’t you take on one more employee if we all take on one more employee we could solve the unemployed problem are they for reel ,most self employed I know had to let people go… Read more »
I think we need to think about excellence. Countries have faced huge challenges and bounced back. We however badly need excellence in public life, excellence in the private sector, in banking especially, we need excellence in the public sector, we need people to live in the now. Half the problem with the MRSA bug is lack of hygiene in hospitals, people coming to visit and people working there are simply not focusing on the basics, hospitals have become very dirty places, sure bacteria and super-bugs have emerged, but we literally need to go back to basics and start again because… Read more »
To have a look where Ireland really is situated in physical economic terms, not bankers arithmetic, a beautiful map : (Pity I cannot post a graphic here)
http://larouchepac.com/ardev-info
After we finish off this dead financial system we will play our part in this huge development – the Northern Sea Route.
Forget small potatoes – we have a huge economic project to get going in collaboration with the countries on that map. We will generate national credit for this.
The entire EU fiasco is really small potatoes!
Hi Folks This forum is full of well informed and in general well intentioned people if not slightly negative at times. I have decided to do something small to try and change our government’s attitude to the electorate. I may be naive but there is a possibility it could work. The European citizen’s initiative legislation will come into EU law on April the 12th this year. This legislation allows for seven citizens of seven different EU states to come together and to propose an initiative to the EU commission. The seven citizens then have a year to collect 1 million… Read more »
Regarding our forthcoming referendum on the treaty. Before it was announced I was thinking it might be better that Europe would be keeping a closer eye on our elite ie. Politicians, Bankers & high flyers etc. because plain and simple they always look after themselves [must be all Freemasons] and not the vast majority of Irish citizens. Says to myself, I think I’ll vote yes. Then listening to Enda Kenny and his followers, followed by the scar-mongering, including the warning from the ratings agencies which are in turn funded by the super world banks, I changed my mind, defiantly vote… Read more »
I thought perhaps cash for trash was being implemented to give banks a cushion when Greece and some or the rest of the PIIGS default. If this were true, then the Merkozy and the ECB has given up on the PIIGS, or at least some of them. This would mean that there isn’t necessarily a mistaken belief that the problem is fiscal, wouldn’t it? It seems like an acknowledgment that defaults are coming soon and unavoidably. With the banks highly liquid, perhaps some of them will survive to continue the game.
David not only has your analysis and work been most useful and usually spot on but the contributors to the comments section are wonderful also. If would be great if the site had the full functions of a discussive forum private messaging/threads etc – it gets childish and tiresome over on politics.ie!
David interesting article as usual. It is very clear that this 1 trillion that the ECB has lent out at 1% to keep insolvent banks afloat is lowering the purchasing power of the existing Euros in circulation. This is all part of a global currency debasement program that ALL central banks are engaged in and which they actually think is a good idea. The fact that this policy lowers the purchasing power of the currencies does not bother them one bit so you can expect to pay even more amounts of paper money to fill your car in the future.… Read more »
@David McWilliams From what I deduce a lot of the online forums seem to be based on the Free opensource platform – phbb. Imo It’s very user friendly and would be a welcome addition to your site. Just of the cuff projections here but the possibilities for more contributions of a specialist Economic nature would be immense i.e. it would very easy (almost cumulative) in nature for more international opinions & ideas to be shared (Greek/Icelandic etc) on a forum based on the phbb platform. I’m not an IT expert but it stands to reason that a commonly used platform… Read more »
Perhaps there are contributors who post here who are familar with phpbb opensouce platfrom and can illuminate more?
http://www.phpbb.com/
Build a phpbb platform in five steps;
http://www.sitepoint.com/build-a-phpbb-forum/
As this is my last post here I have just one thing to say and that’s -please don’t waste your time crunching numbers, it’s much better to distinguish between what’s Legal and what’s Lawful. All the best- Over and Out…
On tuther hand, the trillion euro(borrowed from our descendents, if any)spread among the 200M odd euroid citizens is only about 100 euro per person for a single year. Not even the dole payment.
Bad enough that the banks are gifted this money @1% but lending, if at all, to the citizenry @ several multiples but, if they start playing the oil futures game, we’ll soon roar past the $150pb reached a couploe years ago.
That will do wonders for the Recovery!
[…] The Yes side, led by Austerians Fine Gael, Labour and Fine Fáil (supported enthusiastically by IBEC) have begun the campaign by proliferating an easily dis-proven fallacy: that this treaty will bring stability to the Eurozone and protect and/or create jobs in Ireland (and Europe widely). On this issue there must be no equivocation or obfuscations: there is no provisions within this treaty that encourage stability or growth or which will create jobs. Growth and job creation are entirely dependent on government stimuli; government stimuli are conspicuously absent from the Fiscal Compact. I would challenge any supporters of the Treaty to elucidate… Read more »
Dear David When you say that there has been a misdiagnosis and the French/Germans are treating the effects of the crisis as the cause of it may it be the case that the Treaty provides indirect protection against similar problems in the future? I mean to say that although private banking practices caused the problem resulting in excess public debt wouldn’t placing limits on debt, deficit and structural deficits indirectly cause Governments to clamp down on unsustainable tax receipts from e.g. property booms and allow States to absorb more of a shock in the even of future crises? I’m not… Read more »
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