Home > Uncategorized > Dear brethren of the ECB, debt deflation is alive and kicking down (Irish edition, 3 graphs)

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?

What happened?

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!

  1. Bruce E. Woych
    January 27, 2013 at 5:54 pm

    Wow…This is real economics on the ground running with traction! Nice piece of work. Can we get a cross cultural grid of this type of graphic depiction? This is reality therapy! Put enough of this type of work together…and we might just find a universal field to work out the answers for an ‘economic’ science and a soulution based methodology! Count me in!

  2. charlie
    January 27, 2013 at 9:55 pm

    wow is right … the banks will never allow it … they have always become rich on the control they have over interest in hard times for real people.

    • January 27, 2013 at 10:28 pm

      Banks will never allow it ?????
      W. Churchill, “Never say never”
      2013, we may have already fired a shot or two:
      The Platinum Coin and “QE”. Both issue DEBT FREE money.
      WE the people have only to make them hit the right target.
      The Way To Eliminate Poverty and Secure Prosperity For All. by justaluckyfool Summary :To lower taxes,you must raise revenue somewhere.How does a government ” form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”” at the same time reduce personal income taxes to zero , while maintaining control of the quality and quantity of its currency?
      Please,please read: http://bit.ly/MlQWNs Read what Steve Keen has to say about “credit expansion, von Mises as to what the result of credit expansion could be, William Black has to say about banks and Michael Hudson about compound interest (excerpts are in the article). An explanation of where we went wrong with a solution to how we can fix it. Challenge it. Improve it. ” ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism.

    • Bruce E. Woych
      January 27, 2013 at 11:52 pm

      “Talk about a rigged game…” Monetary Capture is facilitated by political control fraud and policies that are amendable to accommodate “efficient” market-based [class] structured status quo expediency. Liquidity must be retained and sustained for the stratified rank and file…but not for the working class that produce the asset base (austerity is the new program title for them). However, while lack of liquidity can be monetized for the financial sector, they can not withstand insolvency. Privatization of the asset base, meanwhile, will restructure both the interest and the rent controlling exploit of “real” people in the new ownership society under construction. Meanwhile, the so-called “post-industrial service economy” is being turned on its head. Service sectors are now looking to be serviced by poverty stricken jobless people desperate for a living wage!

  3. Bruce E. Woych
    January 28, 2013 at 12:16 am

    There’s no question that political capture and finance are in bed together…but it tends to be an untouchable subject. If an empirical realism for economic analysis is possible, it would have to enter into these questions of duplicity and accommodation at levels of power marketing and privatizing the future of capture and control fraud. The foundation for such work must be based on a clear understanding of how things ‘really” happen; and why certain precepts are deceptive as explanations. If this is called a ranting process; than I agree with the author 100%…LET’S RANT!
    The question of “capture” as a cultural, political and economic manipulation process is being discussed here; with an open offer to review the Tobin Project Book: highly recommended opportunity to preview a full download of this work: here:
    Tobin Project Book on Regulatory Capture
    Posted on January 25, 2013 by James Kwak | 8 Comments

    By James Kwak

  4. Bruce E. Woych
    January 29, 2013 at 1:18 am


    The Irish Times – Tuesday, January 31, 2012
    Incoherent privatisation policy a cause for concern
    “OPINION: Can the Government be trusted to make decisions that are in the long-term interests of the State, ask DONAL PALCIC and EOIN REEVES

    THE LATEST visit by the EU-ECB-IMF troika has brought the question of privatisation to the fore once again. Unfortunately, the information that emerged two weeks ago raises more questions about future privatisation decisions than answers.

    The Irish and international experience with privatisation demonstrates clearly that changing ownership does not necessarily lead to improved efficiency and lower costs in many sectors, particularly in the case of utilities. Making markets more competitive and ensuring effective regulation is in place are the key determinants of improved efficiency in such sectors.”

  5. February 2, 2013 at 12:41 am

    As an Irish economics student, I have found it very easy to learn about heterodox economics like Fisher’s debt deflation or Minsky’s Financial Instability Hypothesis. I simply have to open a newspaper to find real world examples.

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