Dear brethren of the ECB, debt deflation is alive and kicking down (Irish edition, 3 graphs)
Let’s rant. The fundamentalist quasi-monetarists of the European system of central banks (ESCB) do not want
The Irish Government the irish government to monetize its debts to the senior bondholders of the flim-flam banks which… used monetary financing to create these debts in the first place and are still receiving massive amounts of seigniorage profits in the shape of interest payments on this debt. Wow. Talk about a rigged game… Maybe there is some truth, after all, in the mythical stories which tell us that the species which at this moment inhabits the caves along the Main, part of the city of Frankfurt, originally lived in a charming nearby gorge, where a small river called the ‘Düssel’ originates but which is probably named after an old hill, called ‘Neanderhöhe”. Oh, did I tell you already that it was the European system of central banks (ESCB) which forced the Irish government to take public responsibility for these very private debts enabled by private monetary lending and borrowing?
1. Banks were (according to the ESCB statistics) allowed to create about 150 billion of Euro’s to fuel an unprecedented real estate bubble in Ireland. To give an idea of the extent of this bubble: house building is at present back to 7% of the peak level – if anything the Great financial Crisis has tought me to expect the unimaginable. All this money did not lead to consumer price inflation but it did lead to house and land price inflation, larger deposits and deficits on the current account. This massive amount of money was of course not created ‘out of thin air’ but created with massive amounts of new debts of the Irish private sector and houses as collateral. Oh, did I tell you already that massive monetary financing of house sales contributed to massive increases in the house price level?
2. When the bubble burst, unemployment went through the roof, house prices went down the drains (at this moment the total decline is about 46%) and many people could not pay back the inflated debts anymore and went of out their houses. Oh, did I tell you already that is was the ECB which forced the Irish government to act as the ‘borrower of last resort’ and to take responsibility for the assets of the senior bond holders of the private banks which had been allowed to misuse their legal tender creation privilege?
3. When the bubble burst the amount of money declined (graph 1, implicitly defined as M-3 money plus longer term savings (financial capital, in the parlance of the Bundesbank)) of the Irish private sector. Longer term savings are included as debts are ‘longer term’ too and kudo’s to the Central Bank of Ireland for their absolutely fabulous monetary statistics. Maximum level: 187 billions, august 2009, minimum 162 billions, January 2012 (remember: there are 4 million Irish).
4. This was accompanied by outright price level deflation (graph 2). This did not show up in the consumer price level but it did show up in massive decreases in the price of land, which is included in the price level of new investments and clearly shows in the GDP deflator. Maximum level: 105 in the fourth quarter of 2007; minimum 92.2 in the fourth quarter of 2010. Hey, Tyler, do you consider this sudden 13% decline to be ‘real’ deflation?
5. As the ‘real’ economy contracted too (house building went to 7% of the peak level, the Great Financial Crisis has tought me to expect the unimaginable), nominal GDP contracted even more. Maximum quarterly level: 48 billions in the fourth quarter of 2007, minimum 38 billions in the fourth quarter of 2010 (-21%). But debts did not decrease… Remember: debt is a nominal variable which means that nominal income is more important than real income, contrary to employment and the like, which shows when you use estimated instead of ‘calibrated’ economic models.
If you want a flexible economy, you need flexible debts, too!