Morgan Kelly: warns our real economic crisis will begin if ECB credit stops

Morgan’s latest Op-Ed is here, following his UCD lecture linked to by Seamus here.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

99 replies on “Morgan Kelly: warns our real economic crisis will begin if ECB credit stops”

“Irish universities were never any great shakes but they did do one thing well, which was to produce a lot of well-trained graduates at extraordinarily low cost to the Irish taxpayer.”

Not a bad summary of Irish third level education.

Of course, in comparative terms many Irish universities have BOTH few academic staff AND few administrators, because the total number of employees is so low.

Mr Kelly mixes a couple of disparate themes together in this article. But what he says about university administrators rings true, based on what I’ve heard from anyone working in an Irish university.

The perverse thing is that as the ratio of administrators has grown, so has the burden of administrative work that academics have to do. The reason is that administrators actually spend a lot of their time thinking up new types of red tape to tangle up the academics. At the heart of administration after all is the belief that forms, processes and procedures are the path of righteousness for delivering “Quality”, “Customer Care”, and “Innovation”. As a result the more admins you have, the more time academics must spend filling in forms and proving compliance with this or that process and procedure …At some ratio the amount of academic work actually being done must approach zero.

MK is right about the rise of university administrators at most universities in Ireland (and, really, throughout the English-speaking world) and in the implicit claim that this has taken place at the expense of teaching and research, the two core activities of any university. Class sizes have rocketed in the last 5 years as retiring academics are not replaced.

What few recognize is that the rise of this (unaccountable) bureaucracy is due to something skeptic01 just alluded to: the demand on the part of government and to a lesser extent the public for “accountability.” Huge bureaucracies are what happens when, thanks to a concerted national propaganda campaign and not based on much in the way of evidence, you no longer trust your staff to do their jobs. You end up putting in another layer of staff, even bigger than the first, who are themselves unaccountable but whose job it is to make the others “accountable.” Which system is worse? Which is more modern: the lean system where a few staff might be getting away with something but most are just doing their jobs, or the top-heavy leviathan where copious waste isn’t a bug but a feature?

So let this be a warning for those like our own MH, for whom the word “reform” is like a big squishy pink marshmallow to be dragged through any debate because it can take any shape he likes and anything and everything sticks to it: be careful what you wish for.

That said, I’m vaguely encouraged by the new president of UCD, one of whose first gestures was to slim down the UMT (university management team in Newspeak) and who, when he visited our School, made all the right noises about how under his administration, the point of administration will be to serve teaching and research and not the other way around. He seems to get it although only time will tell.

Kelly’s points about university administrators serve conflate the administration functions which have always been a part of any university or which has, of necessity, to be integral to any complex organisation, with those layers of administration which serve the ‘innovation’, ‘excellence’ and research funding agendas. Administration that supports teaching and academic staff in their day-to-day has been as squeezed as teaching posts themselves.

I hope Kelly is not calling for a cull of or the outsourcing of those administrative staff who work on examination boards, students registrations and records, academic programme administration, library and student recruitment. If he is, then he’s missing a rather big point. The suggestion that university administration be outsourced will multiply the burden on universities here. Calling a Capita call centre worker to see what degree class X graduate from 1989 got will not be a pleasant experience.

However, if Kelly is referring to growth of administration attendant on the splurge in EU and state research funding, or the administration needed to make the university a pleasant consumer experience for students, then he has a point. I have zero sympathy for academics belly-aching about the latter. Most of this administrative layer are academics or former academics. The entry level qualification to this club is a PhD. The lack of any sort of solidarity among academics concerned with this development, which will consolidate and change utterly the nature of the university, means that this layer’s dominance will only increase. Then you have academia’s collective pusillanimity in face of these developments and the ‘keep your head down’ mentality and you’re guaranteeing these guys win out.

Kelly’s point about delivering a high quality undergraduate education for very low cost is pertinent and relevant but by not clarifying who he mean by ‘administrators’ he risks playing in to the divide and conquer agenda within universities with is inextricably linked with the end objective of making them into businesses.

The fundamental problem with the approach of Morgan Kelly to the subject of real importance – the future trajectory of the Irish economy – is that it assumes that Ireland looms large in Draghi’s concerns when the very opposite is the case. The point is conceded to a certain extent in his overall conclusion.

“Instead of our frenzied borrowing binge ending in prolonged cold turkey, as a fortuitous result of the wider eurozone crisis the ECB has kept pumping that sweet, sweet credit into our veins. Should it stop suddenly, most likely through a final clean-up of bad loans at banks, our real economic crisis will begin.”

His conclusion is so ringed around with qualifications, and so intrinsically contradictory, however, as to be largely meaningless.

Meanwhile, the caravan moves on, if hesitantly, as there is still no agreement with the European Parliament on the final details of the banking union, a situation qualified by an ECB board member as “approaching suicidal”.

What Kellys argument around the SME’s seems to suggest is that he has some kind of inside knowledge that the upcoming bank solvency tests will force the Irish banks to start foreclosing and stop extending and pretending for SME’s. He seems to be saying that they will do this in Ireland by way of experiment because they want to see if it will work and then move on to bigger more important countries.

Who told him this was likely to happen? Everything in the last few years suggests that extend and pretend has become the mantra of the ECB.
With other economists and bond traders believing that extend and pretend is here to stay what is it that make Kelly think the ECB are going to start forcing AIB and Bank of Ireland to play hardball?
He has had some insider knowledge of things in the past. The question I would ask Kelly would be, Is your belief that the stress tests will tell the Irish banks to play hardball based on a personal hunch or has someone told you this is what is going to happen.

His central assumption is that the ECB see Ireland as their plaything – that if any banks are allowed to fail the stress tests, it will be Irish banks. We were the posterboy for EU/EZ integration from 2002-2006, and then the poster boy for successful austerity in later years.

It’s all a bit fluffy and carefully scripted. He opened his UCD talk by (almost boastfully) claiming to not have looked at the Irish economy for some years before setting out his prophesy.

He’s got personality and seems to enjoy his position but without figures, this is all a bit like homoeopathy. And as for calling Mario Draghi “Super Mario”…it strikes me as being bad for the credibility of economic analysis.

In financial risk, they consider the Survival Bias, which is to have faith in fund managers that survived previous crises and assume they are best-equipped to survive future crises – without considering environmental factors. Hopefully we won’t have to start applying this to economics analysts.

You can’t argue with numbers and apparently you can’t dispute MK – so why doesn’t he enrich his points with data to support his claims and forecasts?

Please let this comment go as I don’t intend this to be a personal attack on MK or anything.

So many of the issues discussed in that article arise from the monetary system itself.

Why are banks at such risk of insolvency in the first place?

Because banks create the money they lend and so every euro has a corresponding debt. When a bank advances a ‘loan’ it credits its Deposits account and debits its Loans account and that’s it. This point seems to be poorly understood.

When a loan is repaid the banks reverses this feat and money disappeared through debt reduction.

Because money comes from bank loans and banks only create the principal of the loan but expect all plus interest back, it’s not possible for all loans to be repaid. Hence the banks lose assets and are at risk of insolvency. This is systemically inevitable and we can never have a stable banking system under this structure.

To restore the health of the banking system we have 3 choices.

1. We let the banks go bust in which case some of their liabilities won’t exist. We use their liabilities as money so this isn’t a great option.

2. We ‘bail-in’ the banks and this simply involves deleting money from people’s accounts, directly lowering the liabilities of the financial institution involved. Deleting money from the economy when it clearly needs it most isn’t a great option either.

3. We bail out the banks and again this involves deleting money from the economy because a bail-out unfolds as follows.

Ordinarily when you pay taxes it’s not the case that your balance is reduced for a straightforward rise in the government’s. For you, in the real economy, deal with bank-account money while the government trades in central-bank money as the exchequer’s account is recorded at the central bank alongside the banks’ reserve accounts. If you clear your income tax obligations, your bank lowers your account with some extra steps happening in the background. They instruct the central bank to reduce their reserve account and gross up the government’s. This temporarily results in a reduction of bank-account money from the system but in general this is forever offset by government expenditure.

When a public euro is passed to the private sector the process is performed in reverse. If you work for any public department they’ll seek your bank details. In processing the payment the government will pass reserve-account money to your bank’s reserve account. At that point your bank would be in a position to increase your account thus returning bank-account money to the commercial realm. In the normal run of thing a tax receipt technically deletes bank-account money from the real economy while the government’s continuous spend reignites this back into the world.

But the process ends halfway during a bail-out. As taxes are collected our balances reduce while the government’s account at the central bank is fattened. To bail-out the banks the central bank is instructed to transfer reserve-account money from the government’s account to the relevant bad bank. The process is a two-fold win for the banks’ balance sheets. Through the lowering of people’s current accounts they lose liabilities and the raising of their reserves results in an augmentation of their assets. This restores the health of the banks’ books but the process does delete money because we use the banks’ liabilities to transact trade.

So under all three options money disappears from the economy at a time when it’s needed most. All of this is down to a poor system.

If the central bank was in charge of creating the entirety of the money supply things would be different. Money would be permanent, not temporary. Banks would just do banking. We could store all current account money off the banks’ balance sheets and so perfectly secured against a bank’s insolvency. We could have banks intermediate existing money only such that a failed investment affects only them and their creditors.

There would never be a bank run again. There would be no need for deposit insurance, bail outs, bail-ins and we would never need to stress test a bank.

Finally, the idea that banks create the money they lend has been described as ‘peculiar’ on this forum. I’m happy to say the Bank of England produced an excellent article in their latest quarterly bulletin which debunks many myths about banking.

Money in the modern economy:
an introduction
is well worth a read.

Some quotes from Money in the modern economy.

“Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.”

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

“And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they
could quickly ‘destroy’ money by using it to repay their existing debt, for instance.”

“Just as taking out a new loan creates money, the repayment of bank loans destroys money.”

“Deposit creation or destruction will also occur any time the banking sector (including the central bank) buys or sells existing assets”

MK is right to draw attention to the layers of deadening bureaucracy under which some university academics have been buried in recent years, but many manage to dodge administrative chores and go their merry way enjoying very light teaching loads. Not all of these have any worthwhile research to report.

Kelly was very good at casting a cold eye on the Irish banks and the delusion widespread in Ireland 7 or 8 years ago. He was less impressive in his analysis of international power politics, a cul de sac he is going down again. It also doesn’t make much sense to address the entirely separate issue of university administration in an article about the banks and SME lending.

“It also doesn’t make much sense to address the entirely separate issue of university administration in an article about the banks and SME lending.”

Why not? I thought he made his point pretty clearly on both topics. He probably figured the Times won’t give him the space to write a separate article on bureaucracy in academia so he shoehorned in in here.

As requested:

Irish Times Tuesday 15th March, 2011

A report by a group of 17 business, public and political figures originated with Angela Kerins, the chief executive of the Rehab Group, last autumn.Kerins wanted to gather a group of influential people to devise ideas to help economic recovery.The first person on her list was businessman Philip Lynch. The two are now co-chairing the group. The initiative started off with seven or eight people and grew from there.Meetings were held at Rehab’s offices in Dublin where members of the group attended in person or phoned to make contributions.They began to gather last October and November and discussions took place ahead of the general election. Ideas were finalised as election manifestos were being produced and a final draft of the report was drawn up after the election last month.The …

– See more at:

@MK, anyone

I must be loosing my touch. What is the source for this?

“The problem now is that the ECB is talking of doing a serious clean-up of the bad debts of Irish banks. Presumably this exercise is intended as a trial run to iron out any wrinkles before sorting out the banks in economies that people care enough about for screw-ups to have real consequences. Any clean-up of the Irish banks would mean a sudden, rude awakening for indebted households and small businesses.”

@JC don’t be upsetting our hosts again,Stephen had kindly opened a good tread on the “future” which unfortunately will include UORR until they burn off.
john at the PAC yesterday referred “something” and that’s all I’m gonna say on here bout it,but congrats to Fergal nice work.

The bit i like is the mud slinging at anyone who questions the validity of his predictions via rubbishing their lack of numbers,hard to hit a moving target.

Some sort of actual SME arrears data from the Central Bank would be nice (unless I am completely off here, all we know if what Fiona Muldoon said about 50% of the 58bn or so worth of SME loans being impaired).

What would be great to know is how many of said SMEs are viable without the debt as MK suggests?

@Morgan Kelly

The ECB(undesbanke) – both the problem and the solution with one hand tied behind its back.


Text from Mad Oul Jozie down_the-road: re me de_criminalized arthur_itis

Marijuana tax yield may prove the final blow to war on drugs
A dry 15-page document by the Colorado tax authorities indicates a possible route to widespread legalisation


Prob a leak from the NSA … you have a point. Yet Hibernia has certainly been used as a captured test-tube experiment …..

Returning to the academics ….

The available research on micro [1-10] and small [11-50] firms is amazingly sparse.

Why? Considering their centrality to employment noted by Kelly – Why?

It’s extraordinary how little information is available to measure the situation

After the meltdown you’d imagine there would be a drive to collect and disseminate data… but no sign of that

We are reduced to professors of medieval economics doing back of envelope calculations to signal possible icebergs in the foggy waters ahead

The article is just a rewrite of his presentation, innit.

-The point that the economic situation is improving is a façade is well made.

-Also that the catholic church didn’t bring much to the table other than a sense of duty.

-Sooner or later the banks are going to run out of can kicking road.

-And handing over money to them in good faith is nuts.

– if you cut off the credit you’ll lose your bank deposits

I thought it was good. Not so different to what Colm McCarthy writes in the Sindo regularly.

He doesn’t do green jerseys. He isn’t right all of the time but he is a truth teller rather than a bullshit merchant. And that is one benefit of having universities.

In the earlier thread on Morgan Kelly’s presentation, I said that the Central Bank should take more responsibility for providing information on the SME debt crisis.

Simply, after about 8,000 insolvencies, the small firms that survived boom to bust and bad debts in between, have durable core businesses.

So banks shouldn’t be allowed collapse such sustainable businesses – – with the examinership process, maybe that’s out of their control.
As for University administration and the quest to be a ‘world class’ university via requests for public funding for research, I don’t recall that one insider academic has publicly dissented from a delusional policy that spans 3 governments.

In this sphere, Ireland lacks the likes of Bart Clarysse, who holds the chair in entrepreneurship at Imperial College London Business School, who doesn’t tailor his views to please vested interests. See here:

Richard Bruton said today: “Our ambition is to make Ireland as global leader for ICT talent and skills.”

How long will ministers produce this bullshit without feeling stupid?

Free education could have been a good thing.

@ fergaloh

I fairness as we say, the Central Bank is producing some economic research related to contemporary themes.

In the Department of Finance the intake of economists are being used to serve the politicians.

Staff are working on a planned report on corporate tax, which will be a propaganda document.

Spin/lies dominates public communication and the conflation of foreign firm data with indigenous activity, gives great opportunities for spoof.

For example decisions on most exports from Ireland to China are made by multinational units outside Ireland but ten95% is conflated with the 5% and so on.

Directly opposite to what DOCM says, the most obvious weak point in Morgan Kelly’s argument is that Draghi and his cohorts might plausibly be concerned about the future trajectory of the Irish economy. If they are unconcerned, and I presume our spokesperson for the interest of the ECB is well informed on this, then there must after all be a significant possibility of the props being pulled out from under our precariously financed banks and SMEs.

Morgan Kelly’s point seem to be that we are relying on the kindness of strangers (ECB) and where we can do something ourselves (universities) we are failing. UCD rating demonstrates this.

In fairness to Morgan Kelly he spotted the property bubble 7 years after David McWilliams told him;

@Michael Hennigan

I was expecting a comment from you on Minister’s Bruton’s Fairy Tale today [a 40% increase in employment in 4 yrs when ICT firms cannot hire sufficient locally as not enough students take such courses at 3rd level!!!!]


David McWilliams does have the incredible distinction of seeing the property bubble when it didnt exist

Two facts are undeniable (i) there is a lack of any real data with regard to SMEs (including the definition of same) and their level of indebtedness and (ii) the debate – both general and academic – in Ireland is remarkable for its insularity (nothing new there!).

Whoever is going to wield the supposed threatening sword, it is not going to be the ECB (N.B. embedded video link).

The ECB speech linked to above has the following interesting comment on the subject of cleaning up the balance sheets of dodgy banks aka deleveraging.

“Three types of deleveraging and their effects

Broadly speaking, there are three different types of bank deleveraging. These are the good, the bad and the ugly, as The Economist itself stated in a blog a couple of years ago. [2]

“Good deleveraging” involves banks raising capital and getting rid of impaired assets in a targeted and rapid manner. This approach recognises and corrects the flaws in legacy business models and allows for a relatively swift reallocation of credit to more competitive sectors. This eventually translates into a more dynamic recovery.

“Bad deleveraging” entails an indiscriminate reduction in balance sheet size, regardless of the quality of assets. The main motivation for such adjustments is to reduce indebtedness. And in order to “balance the books”, this process is accompanied by asset shedding. The upshot is a potentially prolonged, across-the-board reduction of credit to the real economy.

Finally, “ugly deleveraging” comprises banks specifically discarding good assets while keeping distressed assets in the banking book and recording them at close to nominal values. This method can rapidly turn a bank into a “bad bank” that does little to support credit creation.”

These last two types of deleveraging can have significant real economy effects. Financially weak banks tend to roll over unprofitable loans that do not support growth – which is why they have sometimes been dubbed “zombie banks”. [3] There is in fact some evidence that such evergreening practices have appeared in the euro area as well in the last few years. [4]

The wrong type of deleveraging also has a further effect, which I want to concentrate on today: it harms the transmission of monetary policy.

Given the bank-based nature of our financial system, the main channel through which the ECB’s monetary policy impulse reaches the real economy is through bank lending rates. And this is particularly important for smaller borrowers, as they cannot easily substitute bank financing for capital market financing such as corporate bond issuance, as larger borrowers have been able to.”

Ireland seems to have had a combination of all three types of deleveraging.

An example of the insularity afflicting the debate is the entry into common parlance, again courtesy Morgan Kelly, that the country is dependent on the “kindness of strangers”. Kindness has nothing to do with it (self-interest definitely) and those parties advancing the loans to keep the administration of the country afloat are not strangers. They are parties, for the main part, to what may have been a rather foolhardy but irreversible endeavour, the creation of a single currency without thinking through the project sufficiently rigourously. The others – the IMF, the UK and Sweden – must have calculated that the euro going down would have dragged the world economy with it, at least for a period of indefinite duration.

Fiona Muldoon tried to highlight the areas of SME exposures and in many respects Morgan is just reiterating what she said with the added caveat that if Draghi decides to experiment on Irish banks it will have severe implications for the economy. In reality, Ukraine poses more of a threat to the Irish economy right now.

She also linked possible threats to the SME sector to the Basel III capital requirements. Though Kelly seems to knock this on the head by saying the ECB will provide fresh capital to meet any short falls.

11th April 2013

Address by Director Credit Institutions & Insurance Supervision, Fiona Muldoon to Cantillon Economy & Entrepreneurship Forum

“The importance of the SME group cannot be underestimated to the Irish economy and to the wider Irish recovery narrative. This group represents more than 99% of enterprises by number in the private sector and employs more than 70% of all people who are employed in the private sector. It is dominated by four sectors, hotel & restaurants, wholesale & retail, agriculture and manufacturing. Like all other parts of the Irish economy, the sector has undergone significant challenges. It is also heavily indebted. SME arrears throw up complex issues and there is a high-level of property related borrowing. In effect, in Ireland, literally and figuratively, all roads lead to property.

Given 70% of people in private sector employment are employed by SMEs there is a further direct knock-on for these employees (& past employees) into the whole area of household debt and mortgage arrears in particular.

When it comes to SME arrears within the banks, there are complex issues and high levels of inter-connectedness. In many cases family businesses borrowed to expand the business, invest in their premises and maybe a buy-to-let property for their pension. Some cases include personal guarantees or drawdowns on the family home. That same SME is now the only source of cash flow in servicing both direct and indirect debt. Where that SME is consumer facing, they are facing restricted demand brought about by unemployment, reduced consumer confidence and the resultant increased savings levels we have seen over the last several years. In effect households are de-leveraging alongside the banks.”

It looks like the voice of Lorenzo Bini Smaghi is still heard on the ECB board, through that of Benoit Coueré.

“Deleveraging is not a process that policy-makers should seek to avoid” summarises his position.

These of course are the same policy makers (with a different board) that allowed leveraging to climb to such heights. Now the prescription to get to lower levels, aka deleveraging, is to jump off the top floor.

The jumping technique is discussed in the guise of ‘good, bad and ugly’ jumping (deleveraging). But make no mistake, there is no avoiding broken bones, but no broken bones for those urging people to jump.

Morgan Kelly is right to be fearful, while such ideas of deleveraging hold prominence at ECB level, despite the best efforts of Draghi.

None of the SME bad debt is coming back. Given minimal growth, the firms that are left standing will be lucky to generate enough cash to survive medium term. That SME €57 billion (of which, I understand, €30 is property) is not coming back. To attempt to bleed it out of SMEs over a period will certainly lead to failures and destructive job losses, just as MK says.

The Examinership process, which can be destructive enough in itself, may save some jobs by forcing banks to the negotiating table. But even in the circuit court it will still be expensive and probably beyond the resources of most SMEs.

Kelly may also have in mind the recent review on Ireland, that drew special attention to the continuing losses on €69 billion of trackers.
[Box 3.1]

One point that MK may not have considered, is that the companies with 1-10 employees would tend to be in the service sector, where failure may not lead to net job losses to the country, as other domestic business may pick up the shortfall, maybe.

The more likely scenario from Bank stress tests, will be a shortfall in capital, leading to pressure for ESM recap with complete wipe-out of any State equity. Or alternatively for EZ bank consolidation (bigger banks throughout the EZ), an outcome that no doubt is being planned for in Big Bank Land.

As to the MK view of an experiment in Ireland first, the whole bloody thing is one gigantic experiment, with a completely unknown and possibly very destructive outcome.
But it is apparently more sensible that confronting a ‘German poltergeist’.

Fiona Muldoon: “The importance of the SME group cannot be underestimated to the Irish economy and to the wider Irish recovery narrative.”

This sentence is barely literate. For starters, the word should be “overestimated” not “underestimated”: it obviously can be underestimated for, if it couldn’t, there’d be no need for her to issue warnings about the dangers of doing so. What she means is something like: no matter how high you estimate the value to be, you won’t be overestimating it. Of course, the word she was probably really flailing about looking for was “overstated.”

But you cannot “underestimate” or “overestimate” or “overstate” something to the Irish economy. Well, you can, but only if you’re talking to the Irish economy.

Allow me to rewrite: “The importance of SMEs to the Irish economy and to its prospects for recovery cannot be overstated.”

I could go on: you don’t “undergo” “challenges”; SME arrears do not “throw up” anything; there is no such thing as a “knock-on” and why should it be a “knock-on into?

I cannot have any confidence in the intelligence or knowledge of anyone who expresses herself so poorly in a public address. Details matter and if she can’t get any of these details right, why should anyone think she can get details right about anything else.

Sorry to rant: semi-literate prose is a pet peeve of mine.

@ Ernie Ball

‘As economists and regulators, we cannot afford to underestimate the importance of the SME group to the Irish economy.’ However, we did, her warning was ignored.

I believe it is most unwise to shoot the messenger, just because the prose in which they have delivered their message was not up to your pedantic standards. This is especially the case, when the message delivered was, and still is, so important. That is why MK had to reiterate it. The message was deliberately lost on the group thinkers, green jersey economists and cheer leading journalists.

Ms. Muldoon is widely recognised as being one of the first people to bring the seriousness of these impaired loans into the public domain. I clearly remember her saying, that, there was 54bn of these loans, 40% of them were impaired and that 70% of private sector workers worked for these firms. For that, she should be given her due credit. If the message was delivered in Swahili and was barely decipherable, I think she should still be give her credit. Instead, I believe that she was actually victimised for doing so. I knew she would not be appointed as regulator because she did not play the game. They all clapped loudly when she brought it into the public domain but in the corridors of power they cursed her. It cost her dearly, she was not appointed regulator. Then again, perhaps I have missed something and it was because of her bad grammar?

You must have been very upset by Bertie and his poor grasp of the subtleties of the English language? However, did it ever occur to you that he used it as a foil, a diversionary tactic to cover his nefarious political intent? The ‘most cunning most devious’ etc. The media loved reporting Bertism’s and often failed to decipher the message and Bertie knew that. When Bertie Ahern made a grammatical mistake it was never by accident.

Thanks for that ECB Coeure link. Very succinct clearly written.

‘From the start of that expansion in 2005 to its peak in 2012, the total assets of monetary financial institutions rose by more than 60 percentage points of GDP to €33.7 trillion, i.e. 3.55 times euro area GDP. But as the crisis highlighted, this expansion was not necessarily backed by rising productive capacity in the euro area economy. Instead, it was, at least partly, channelled to low-productivity activity, as manifest for instance in the overinvestment in the construction sector in some Member States.’

Not a word about he the billions that EZ banks poured into US NINJA loans, CDOs and or other financial assets. The big black construction hole is easier to see, but the diagnosis is ‘unregulated credit inflation’ with a ‘watch my hands’ public focus on low CPI. Central bankers kept mum about the banks’ business model’ , because the loot going to their sponsors and cronies.

All that is left to do now is to allocate the losses, so we suddenly ‘discover’ that the business model was unsustainable. Notwithstanding their gross dereliction of responsibility above, central bankers are to be accepted as honest brokers in tis inevitably painful process. Po faced high priests of wealth extraction.

‘Additionally, it is clear that the ingredients of “good deleveraging” cannot be provided by monetary policy alone. Good deleveraging involves, on the liability side, equity being built up through outright issuance or as last resort through public interventions. And on the asset side, it involves writing down and carving out non-performing assets.’

We have had the public interventions, but they were not nearly enough. The Irish state rapidly reached the limits of its capacity to rescue its banking system without destabilising its political order or its own credit standing. The existing structure was preserved for the moment, but it is fatally damaged in economic terms.

AIB is now joined at the hip to the Irish state. Ugly deleveraging is proceeding, with the taxpayer skewered for the recapitalisation. The best assets were sold, so that the best placed creditors can be made whole. In business terms, these were the core assets, but were cunningly labelled non-core, ‘watch my hands’, so they could be smuggled out the back door. Our loss is a vulture fund’s gain.

Left on the books of the state bank are the underwater home and BTL mortgages, the troubled SME loans, and that whole debt-deflating mess which is provincial and suburban Ireland. As long as the public pay, pensions and welfare holds up, the bank/state complex will limp on but at a slower and slower pace, as credit conditions steadily deteriorate. Zombie banks and a zombie economy, where the depositors and the debtors are left to struggle over a shrinking pool of illiquid assets.

‘The main point I want to make today is that how this (deleveraging) process is managed has important implications for monetary policy’

It has even more important implications for citizens, and the jobs and businesses which we hope will give us a decent living. Ugly deleveraging is not ugly for everyone, because it lets major creditors and supposed risk takers evade their proper losses. Power, including political power, has trumped the market once again. That is crony capitalism, without the brown paper bags..

@ David O’Donnell

Behind the spin on ICT, the actual number over 5 years is 23,000 not the one for the headlines: 44,500.

@ Robert Browne

Claims, data, and the people associated with them, that are outside the consensus of ministers/senior civil servants/mainstream media and commercial economists, are suspect.

Those of you who think my last post was irrelevant to the preoccupations of this blog ought to have a (re)read of this.

Slovenly thought will get us nowhere. But I gather that some of those who think this doesn’t matter are the same ones who think education itself doesn’t matter and should be replaced by training of various kinds.

@ Paul Quigley

Your comment really cheered me up!

The ECB was not responsible and is not yet responsible for the supervision of banks. The Executive Board also seems to have a very clear idea of where its future responsibilities in this area will start and finish, unlike with regard to how it should respond to the continuing crisis, notably the threat of deflation.

It is also worth noting that there is an almost identity of views on the role of central banks and the issue of money creation as between the paper from the Bank of England linked to by Paul Ferguson above and the speech by Coeure.

My general conclusion is that central banks are like a Wild West coach driver who has dropped the reins just as the Indians attack and is scrambling around to try and pick up at least one before disaster strikes. But they are only responsible for keeping the euro stagecoach rolling, not for defending it; that is a job for governments. The latter are making heavy weather of it.

In the meantime, the responsibility for bank supervision remains with national central banks as was recently pointed out by the MOF.

By the way, I wonder how accurate is the view expressed by MK that only public servants are now being considered as acceptable loan risks by banks for mortgages. If this is the case, crony capitalism takes on a new meaning.

@DOCM the only people that should be in any way be “worried” with your prior credit history are future creditors hence “credit scores”.So long as the banks are preserving the integrity off the credit reporting process no reason to publize anyone’s name and credit info.In the states a bill/law was passed exempting principal forgiveness by lenders on your PPR,as far as I know it’s taxable in IRL but hopefully that will change if it already has not.

It’s really no one else’s business whether you lost your house,could not or simply did pay your bills for one reason or another.His suggestion off some kind of name and shame registery for people who negotiate a deal with banks,plays into the parochial and provincial view Irish people often have off finance.Who gives a f**k maybe you hit a rough patch,lashed into the gargle a bit,messy breakup,how does a list for all and sundry to browse,sneer and gawk at help you rebuild your credit and perhaps life.

The unsubstantiated but populist suggestion that their is a correlation between debt deals and the school attended distracts from the bigger picture,what metrics are in fact AIB utilizing in negotiating debt deals if any.

@ Ernie Ball,

I think your analysis of the words of Ms Muldoon is much harder to make any sense of than her wording. I, for one was very clear as to what she was saying. I think you chose to ignore the word “afford” in the sentence in your analysis preferring to engage in pedantry.
@ Robert Browne +1


The Chicago Manual of Style:

“Quotation marks are often used to alert readers that a term is used in a nonstandard, ironic, or other special sense … [T]hey imply ‘This is not my term,’ or ‘This is not how the term is usually applied.’ Like any such device, scare quotes lose their force and irritate readers if overused.”


I ignored no such word. I don’t doubt that a great many people would find her prose a model of clarity. More’s the worse for them.

@ jg

That was not the point that I was referring to but now that you bring it up!

I would say that in normal circumstances your observations would be correct. Not, however, when the taxpayer is also – unwillingly – aboard the stagecoach and has bailed out the bank in question. It is his/her money that is allowing the write-downs and it is legitimate for him or her to know the criteria being used. Indeed, it is hard to know what these could possibly be.
If someone cannot afford the loan on their house, they cannot afford the house.

Even the proponents of the thesis that the family home must be retained whatever the circumstances are alive to the danger of both the moral hazard involved and the negative reaction of those struggling to continue paying their mortgages.

The same holds true of other categories of debt. It’s going to be messy!


I could not fail to disagree with you less. On the other thread your German Nemesis implies numerical literacy is what is required. How’s your multivariate curve fitting in comparison to Muldoon’s?


What you call “numerical literacy” is normally referred to as “numeracy.” I consider myself numerate. Does that mean I can do highly-specialised maths? No, but I also can’t write poetry.

@DOCM oh I know that was just responding to your posts which are always very well written,great links and you are very polite and avoid scraps unlike me!
None the AIB borrowers had the faintest idea there loans/loses would get socialized by an inept govt.In lots cases this decision was the mortgages brokers so people who get deals from non nationalized banks are afforded privacy and those unfortunates with AIB are not ?
As the father of two kids with learning difficulties including dyslexia,i think Ernie is an a**hole who should not be allowed teach.
I’d much prefer more transparency from deadbeat borrowers of clearly state run and funded agencies….

“A state-of-the-art hub of innovation to hothouse start-ups and create tech clusters was the intention: a big white elephant was the reality.
“Webworks Galway is for sale for circa €4m by receivers – a fraction of the €35m Exchequer-backed cost to build it.

Worse still, the taxpayer has seen minimal return on millions invested in this and a similar centre in Cork.

“It’s money that has basically been squandered,” said one well-known technology industry figure. “It was a badly needed city-centre tech hub. The funding involved could have paid the rent for hundreds of start-ups for 10 years. It’s a disgrace.”

Completed in 2007, the impressive high-spec glass and steel building is all but dormant now, with as few as two paying tenants in its 42 offices. It has never been more than 20 per cent occupied.

The Cork Webworks is less than half occupied, and most tenants aren’t start-ups or tech companies. One is a solicitor’s office, one is the architect that designed the building and another is telecoms software giant Huawei.

The Cork Webworks facility was opened in July 2006 by then Enterprise Minister Micheal Martin, who said the project would create clusters of knowledge-driven companies and would act as “a catalyst in the development of a regional hub for technology and innovation”.”

@ David O’Donnell and post re little research at 3rd. Level on sme’s..

Disinterest..not sexy…little or no expertise or understanding of sme’s…no research money easily accessed…etc

Massive restructuring and downsizing of 3 rd. level provision badly needed…

Or lack of data Vinny. Speaking as someone who has done some. But its easier to assume fecklessness and sloth.


Centre for Family Business launched in DCU last year is working in this area, big progress so far. Brian Lucey has done loads in the area of Irish SMEs with DCU’s Ciaran Mac an Bhaird. In general there’s loads of research in Irish unis on Irish SMEs. And actually I’d say there’s more funding for SME research than most other mainstream economics and finance areas.

The Italian banks are convinced that the “stress tests” are going to be quite severe (or realistic).Unicredit took a 14 billion Euros write-down and several smaller banks are in the process of doing the same .Either they are poorly informed ,and their management is incompetent,or they know .In the second case ,it is difficult to imagine that the Irish banks are not going to be held by the same standards.


Nowhere is Draghi’s wizardry plainer than in our exit from the bailout. The sale in December of €500 million of government bonds at rates slightly above German ones was trumpeted here as national resurrection and in Berlin as vindication of the view that European peripherals can only recover when they start to admit the error of their spendthrift ways. However, behind the narratives of redemption and a triumphant return to the markets, with international financiers vying to lend to a newly creditworthy Ireland, the dismal reality is that these bonds were bought entirely by the State-controlled (or effectively controlled) banks AIB and Bank of Ireland with money slipped into their pockets by the ECB.

Does any of the financially literate crowd here know of such a bond sale in December or of evidence that AIB and B of I bought it? There’s no indication of such on the NTMA website.

Noonan tells the CBI to take MK seriously. The most significant speculation of MK was that AIB, being state owned, was forgiving loans on the basis of whether you went to the same rugby school as the bank manager. This political patronage is firmly on the watch of the DoF and Noonan.

Regarding the unavailability of SME financial data. As all directors know, the CRO gathers balance sheet data from Irish companies annually including mortgages and other long term debt and balancing asset values. This data is publicly accessible in bulk for a fee.

A simple analysis should show aggregate levels of net SME debt. Although I don’t know how accurately, accountants measure property asset values on company annual returns.

I have to admit I am a little disappointed that Morgan Kelly’s opinion piece (which has already been covered here) has had six times as many posts as Kevin O’Rourke lonely attempt to provoke some debate about Irish GDP figures not only failing to meet growth projections but actually falling and all this means for debt sustainability, economic policy and international politics.

To jog peoples memories the projection for GDP growth in 2013 was 1.5% in the 2013 budge and -0.3 in reality. If the growth projections for 2014 show the same degree of Kosticity we will be looking at 0.3% growth in 2014.

Morgan Kelly has good instincts (and his lecture was entertaining) but surely the GDP figures are a bigger deal. Why is nobody talking about them?

@ Shay

from my perspective a lot of people talk the headline numbers like GDP all the time and in volume. It is so easy to talk in the abstract, and we all know that especially for Ireland these numbers are heavily distorted by the accounting of multinationals and the fincance sector.

The NIIP example in the thread “International Financial Flows and the Irish Crisis” was especially brutal.

But new sustainable, homegrown activity and employment is grown in the SME sector, and their should be a lot more focus on this.

I had also said it here before (“humpf garble murmph, it is the best thing for everybody to kick that down the road, until everybody has forgotten about it.

There was a recent interview with Lautenschläger, our new German lady at the ECB, who also voiced, that things depend a lot on the circumstances.

Maybe worth to mention that after a US Supreme Court was asked for his definition of porn: “I know it when I see it”.

I think it was in the land mark case “the people vs Larry Flynn”

@ Ernie

One thing we have on common, I also dont do poetry : – )

I consider the fit I mentioned actually not as “highly specialized”, but wrote also that I am keenly aware that nearly nobody is doing such things ( my estimate: 1 in 1e-4 – 5e-4, just to introduce this way of writing 1 to 5 in ten thousands)

Since I use “quotes” a lot, and certainly not with the intent to scare, but to point to somebody using the phrase above, or that the quoted phrase is a kind of glued expression, I would like to hear some feedback how my wording comes across here.

From my perspective the real problem in this world is not, that people dont do advanced fitting, but that the very most dont do sanity checks with math all should have learned in 8th grade either.

@ Frank Galton

The last €500m bill sale was in Sept 2013.

@ Shay Begorrah

It is interesting that a topic supported by very little data can get over 100 responses in two threads while key national accounts data evokes a yawn.

How much of the debt relates to the recovered UK property market?
Besides national account distortions, I could cite several other important issues where ministers get a pass when the boredom threshold TDs, journalists and the public is so low.

On the other hand, sceptic tanks, penalty points and the rare chance of a minister resigning, is very exciting. 😕

@ shay

Apparently the discovery of Higgs’ Boson solves the mystery of the universe and yet it is quite friendless in blogsphere. That’s life.

@ michael dowling

Failte romhat.Ni neart go cur le cheile.

Much appreciated if you can you find the time to link and/or summarise, in a paragraph or two, the scope of the SME economics work which is going on currently.

@ all

A thread on this board is a bit like the tune in a bebop jazz session. Just a launch pad for some exploration. Kevin won’t mind as long as the joint is jumping 🙂

Seamus Coffey also has an article in today’s Sunday Business Post (March 16th) on this topic, but I do not think it is available online.

There seems to be a much greater amount of data available than one might expect e.g. this DKM study for the IBF.

There is nothing, however, in the published data above that cannot be assessed empirically in any town in Ireland. Excessive reliance on bank financing, punts on property (driven by tax incentives for the discussion of which there seems to be no appetite) and trade credit drove the small business boom. All three elements have come unstuck and putting something else in their place seems to be no easy task. The only glimmer of light is the stabilisation – and revival in Dublin – of property values, the “collateral” weighing down the entire SME sector.

The “conversation” to take place between MK and the CB should be interesting!


Table 2 of the CBI document, indicates the extent to which small SMEs are ‘relying’ on trade credit to prop them up. This is up from 22% in 2005 to 33.6% in 2012, whereas bank funding is down from 48.3% to 25.4%.
In other words the bank risk has been transferred to unsecured trade creditors. The reality is that much of this ‘trade credit’ is not actually ‘trade credit’ in any true sense. It is simply bad debt waiting to happen.

But in my experience, when faced with a choice of folding a customer and losing all their ‘business’, companies will invariably park the existing and move to COD with the failing customer. That way all is not lost for both parties.

Increase in ‘trade credit’, from the CBI report, should be interpreted with some caution.

[Also note that trade credit, of course is a domino like structure, whereby the collapse, forced or voluntary, of one firm can start a domino effect. This is an important factor in the continued and continuing squeezing by banks of SMEs]


“The only glimmer of light is the stabilisation – and revival in Dublin – of property values”

That seems to be the only asset bubble that works right now – and not just in Dublin – check out the FT House and Home section . I wonder what will happen if prices continue to rise and productivity doesn’t.

@ DOCM: “The “conversation” to take place between MK and the CB should be interesting!”

Interesting my ar*e. Kelly is thoroughly ill-advised to have anything to do with the CB folk – except perhaps in a very public forum. Now, if MK had Frank Flannery advising him – that would be something!

Revival of residential property in Dublin? Well, its in parts of Dublin only. Lets just wait until the SOLD prices are posted. What’s the median income in South East and S Dublin and in the leafy sub-urbs? No evidence of any downturn around these parts – though Dun Laoghaire town centre is looking a bit peckish.

The 1995-1999 and 2002-2006 irish residential property bubble was close to a +350% increase on the 1994 prices. And that was on the back of similar increases in wages and salaries? Eh? No! Zero-risk lending.

Well, a bubble of that dimension takes about half-as-long again, to revert to mean – based on the idea that a ‘normal’ rate of residential property price increase would be +3% per annum, compounding. So, from 1995-2021 is 26 years, which approximates out at just about one-and-one quarter doubling-time (at 3% compounding). The question now, is whether we are in a period of ‘inflation’ or ‘deflation’.

My estimations suggest that S-Dublin res property prices have decreased by approx 50% since beginning of 2007, and would have to show a similar percentage decrease, on current posted valuations, to get to the ‘bottom’ of the reversion.

What we are witnessing is a heroic attempt to ‘goose’ a small, un-representative sample, of Irish residential property prices in the hope (or is that the expectation) of a Lazarus-style economic recovery – caused by the aforementioned increasing property values. Hmmmm.

@ grumpy: Sure? Ye gotta be kidding me! I’ve been polishing this here crystal ball all day long!

That was the ‘historical’ norm. I think that got chucked out the window, with baby, bath and all! But its all I got! 🙂

Ireland 2014; 8 years later. Morgan Kelly again warns of trouble ahread for the Irish economy. He is widely ignored, contracdicted and dismissed. Plus ça change, plus c’est la même chose.

Morgan criticises the waste on administration. Fair enough. His own speciality is cited as “the economics of Medieval England”. It occurs to me that we may also have too many academics at least in the economics sphere. I do not begrudge Morgan his share of the taxpayers’ purse but we may as well be paying for his golf hobby as indulging this sort of arcane trivia.

yeah, sure a deep knowledge of economic history, ptttfff… what use is THAT eh?

The penny has just dropped. Morgan would love us all to be plunged back into the economic Middle Ages. He would then be Master of the Universe. The disappointment in his talk that Super Mario has managed to thwart his ambition so far was palpable.

Economic history has turned out to be very important to understanding financial crises. Since there are so few of reallin interesting financial crises reliable analysis requires enormously long sample periods to get adequate sample observations.

Someone in physics is now tipped to win the Nobel Prize for empirical/theoretical work regarding nothing but the first few milliseconds of the universe 14 billion years ago. It makes medieval Europe seem like just yesterday.


I had expected a defence on the grounds of a higher aesthetic standard rather than a utilitarian justification. Shows what I know. I suppose Morgan’s medieval perspective made him see the ghost estates for what they were whilst the highly paid geniuses couldn’t see past their credit migration matrixes.

Right BWII and also, highly educated people have this thing about not allowing decisions about what’s worthy of study to be made by those who know (next to) nothing… One reason among many that the only universities worthy of the name are autonomous from government and insulated from popular (and populist) pressures to turn them into pure credential factories, corporate training mills and company incubators.

@ GC: Gregory, I take your point about history. It should, and does, provide a terrace upon which to perch the facts of prior financial crises and the analysis of the current one. But this crisis is different, both in nature and magnitude, to all previous crises: its global. Hence, any analysis has to real careful.

Our ‘current crisis’ – for want of a better term, is more in the nature of a continuum, a sort of a roller-coaster. It has been extant since the late 1960s – early 1970s, gathering momentum, then stalling, then gathering momentum again. The 1930s experience was only halted by the advent of WWII. So, we should simply ‘park’ that one. There are parallels to the 1922 – 1929 credit binge, and how it ended. Ours is still ‘running’.

Some useful pointers:-

– the steady financialization of western developed economies with the parallel mobilization and industrialization of the massive populations in the underdeveloped Asian economies. Both of these processes are unique – though there are partial echos to the mobilization and industrialization of north-western Europe and US from 1700 – 1900.

– coal and oil: coal was king until early 1900s, oil after that. Modern, developed economies are ‘energy’ economies. The greater the surplus energy available, the more powerful the economy. However, we have entered an era of a declining surplus energy: energy has become more difficult to find, extract and generate. Greater efforts are needed to find and extract the energy: increasing amounts of financial resources are being diverted from discretionary consumption and investment in production.

– credit: this is the complement of energy. Financialized economies need lots of credit, and its possible to create credit at very little cost. The problem with credit, is that if it is used, it produces a very nasty product: debt. Debt is real, but it has to be paid back from a probabilistic (future) income stream. If this future income stream should falter you have a major political problem: devalue your currency and/or default may provide some temporary respite. Now, our debt levels (state, corporate and personal) are at levels and scales, never before encountered.

I have formed the opinion that we need a new Political Economy narrative.

@ namesake

I really don’t understand a word you are saying but since seafood obviously does I conclude that the fault is with me.

“Mark Carney unveiled a radical shake-up of the Bank of England on Tuesday, introducing sweeping changes to senior management and operations as he warned risks were building up in housing markets and the international financial system. ”

This is also interesting

That squirrel thing might be a better model than a lot of MBA stuff

Hi Brian. No worries. Modern, financialized [FIRE] economies have need of two vital nutrients – Free Energy and Virtual Credit.

Free Energy is a biochemical concept. Its a form of chemical energy (like oil or coal or gas) which the cell (the economy) is ‘free’ to use to its best advantage (to replicate and maintain itself). In other words, Free Energy is the gross chemical energy extracted from the ground nett of the energy needed to conduct that extraction. Humans have developed really ingenious technologies to harness this surplus chemical energy to drive our economies. Any blip in this supply of chemical energy and we have a major political economy problem.

The discovery, extraction and production of our chemical energy needs finance – lots of long-term stuff. We call this credit. The expectation is that the sale of the surplus energy to consumers will return both the cost of extraction and production, together with a profit for reinvestment (exploration and production consume vast amounts of investments).

Unfortunately, both our current chemical energy and credit supplies seem to be having a bad-hair day. That spells trouble for our economies. How is it expected that the massive debts that we have piled up will be repaid, absent a vibrant, exponentially expanding economy?


– the rates of new discoveries of oil are less than the decline rates of existing oil reserves, and its critical to consider ‘rates’ and not ‘amounts’. Few folk appreciate the difference.

– the current extraction of oil, coal and gas are occurring in difficult geological conditions

– the difficult geological conditions encountered by the Majors is consuming more and more credit – and the financial returns are declining

– there is a developing squeeze on the available credit – does it go to the production of the chemical energy needed, or to expanding industrial infrastructure (and maintaining and repairing the existing) or to increase consumer demand?

– the major oil producers are consuming (domestically) more and more of their own outputs and thus have less and less for export to the major industrial consumers

Folk can join those dots themselves. And please do not be fooled into believing that new, advanced technologies will increase the amount of chemical energy at the rate needed. And so-called re-usable energy technologies will not fill the supply gap either.

The paradox is that aggregate economic demand has declined in western developed economies – hence we use less chemical energy. But the slack has been taken up by the developing economies. Now it appears (though this is somewhat arguable) that the latter are also faltering. These declines will lead to a decrease in chemical energy prices – hence, less profits for the Majors. Who will, in turn, hold off on expensive exploration and production. Energy supply prognosis: poor.

Hope this is of some use. If not, let me know, Thanks.

Thanks for that Brian. Your shout of FIRE initially had me alarmed but when I find your closing prognosis is for a period of declining energy prices I came away much relieved.

The theory that our finite oil supply will eventually run out is of course not new but the potentially new twist you introduce is this Virtual Credit thing. Clearly a dependence on anything virtual must be dodgy. It wasn’t clear though were the virtualness kicked in. Perhaps seafood can help me there.

Hi, Brian. Thanks for that reply. Appreciated.

Virtual Credit = fiat credit (aka. all electronic forms). God actually worked overtime! Created fiat money (all forms) and then Compound Interest.

You can create credit using a physical balance sheet – but that’s tedious. Much more fun to use an electronic spreadsheet, or derivatives, or whatever. Magic!

What’s not so funny is the compounding interest pile on borrowed credit. Augean Stables stuff.

We are not going to exhaust our global crude oil supplies. What will happen (actually is happening) is that the reserves in place, which can be extracted, become increasingly costly (in both energy and money terms) to extract. So some sector/s of the economy will be ‘austerified’ of energy to compensate. It may be known as ‘offshoring’. Creating Virtual Credit is almost costless – except that income constrained folk may not wish to borrow the stuff. They correctly calculate that they will be unable to pay back the principle + interest. This applies to a traditional Production/Consumption economy, which is why we are experiencing a global crises of sorts.

The Finance, Insurance and Real Estate economy is somewhat different. Its a parasite on the PC economy. It needs a continual supply of virtual money – and governments seem happy to oblige – for now. The virtual money is ‘churned’ into specific asset classes (real estate, financial products). The money then percolates upwards toward a smaller and smaller cohort. The whole messy business presupposes a continual upward-only revision (John C, will love this!) of asset prices, with a parallel upward-only revision in salaries and wages. Magical!

Ahhh Brian! The Paul Ferguson school of money, unless you can bite it don’t trust it!

Compound Interest is my area of expertise (IMHO). It is not a devilish plot, it is the natural order of things. The interest rate has no memory, it accrues on today’s assets and liabilities irrespective of their historic origins.

Of course compound interest gets very big pretty quickly but it is perfectly valid to conceive of a stable financial model of the economy where the levels of compound interest accruing each year remains constant. Compounding of itself does not necessarily imply a time bomb. I am sure I am over simplifying yours and Paul’s theory on compound interest, apologies for that.

Hi, Brian! I penned a reply – seems to have been ‘lost-in-transmission’. Yes, the denture test is the one!

MK’s assertion is, if credit is curtailed or withdrawn, then lots of bad stuff may happen. Probably correct – as far as it goes.

Compounding interest might be sustainable if the rate of fiat credit creation was very strictly limited to productive investment only, and not to bid up the prices of real and virtual assets. The assumption being that the productive investment must produce the appropriate surplus returns. This used to be the case when we sold our goods abroad and repatriated the surplus. But now production has to be outsources to low-cost locations and we substitute service provision in its place.

Service incomes tend to be lowish – hence the need for more and more credit to sustain lifestyles. And here we are – with a massive heap of debt which is unpayable. When consumer demand falters – how will governments afford the welfare promises, etc., etc.? Borrow? Mindboggling!

Brian, let’s go for the ton!

It is of course perfectly plausible to argue that we have too little oil and/or we have too much debt. What is less convincing to me is that we have a dangerous admixture of the two syndromes occasioned by the electronic nature of modern financial transactions.

Oil still over $100 a barrel is noteworthy. For all the guff about tar sands the price hasn’t come down. It has to be holding back growth.

I bet Putin told the EU to back off over Crimea or he’d shut off the gas.

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