The two external shocks of the summer were China, which historically has had second half slowdowns due to State lending front loaded to the first half, and the euro zone which became a ward of the ECB. China’s growth has slowed some, but not collapsed, and the ECB has continued its support of euro member solvency and funding capability in the short term markets.

There was no credible deposit insurance for the euro zone banks until the ECB ‘wrote the check’ by buying national govt debt in the secondary markets. It’s not the most efficient way to do things, but it does work to facilitate national govts being able to fund themselves, though mainly in the very short term markets (I still see my per capita distribution proposal as the better policy response). And that ability of the member nations to fund themselves means they can write the check for deposit insurance as needed.

The ECB also imposed ‘terms and conditions’ along with funding assistance, and as long as Ireland is in compliance, the ECB is for the most part responsible for the outcomes, so it seems logical the ECB will continue its support, perhaps changing its terms and conditions if not pleased with the outcomes. Additionally, the ECB will continue to supply liquidity directly to the banks, again, as with Ireland complying with the terms and conditions the ECB is now responsible for the outcomes.

But there is no question it is all a precarious brew, and there is no telling what might result in the ECB withdrawing support, so at this time steep yield curves for euro member nations due to credit risk make perfect sense.

Also, Europe and the rest of the world would like nothing more than to increase net exports to the US.

It’s all a golden opportunity for a decade or more of unparalleled US prosperity if we knew enough to again become the ‘engine of growth’ and implement the likes of a full payroll tax (FICA) holiday to provide Americans working for a living enough spending power to buy both everything we could produce at full employment and all the rest of the world wants to net sell us.

Unfortunately the deficit myths continue to cast a wet blanket over domestic demand as our leaders continue to let us down.

And with maybe 100 new Congressmen on the way, with most supporting a balanced budget and a balanced budget amendment which already has maybe 125 votes, there’s more than enough fiscal responsibility looming to create a true depression.

Hopefully their tax cutting agenda outweighs their balanced budget agenda.

And hopefully we get some kind of energy policy to decouple GDP growth from a spike in energy consumption.

Fears Grow over the Fate of Irish Economy, Banks

By Patrick Allen

September 8(CNBC) — The fate of the Irish economy is back in focus for investors across the world, after the former Celtic Tiger extended guarantees to its banking industry and depositors and with the spread on Irish bonds hitting record highs.

The country is also waiting for a decision from the European Commission on the fate of Anglo Irish, the troubled bank that was nationalized two years ago; uncertainty on whether Anglo Irish will be wound down or allowed to survive has weighed on sentiment towards the country.

Ireland is an example of a Western economy adjusting to both the banking crisis and, crucially, the emergence of Asia, Amit Kara, an economist at Morgan Stanley, said.

“Ireland has taken steps to overcome the hangover from the credit boom, but a successful outcome requires the economy to become more competitive and also, and more crucially, a global economic recovery,” Kara said.

He is confident the Irish economy will be able to roll over debt in the coming weeks and sees the chance for Irish debt to outperform the likes of Spain.

“Though Ireland faces serious long-term challenges, its liquidity position is healthy and its banks should have sufficient ECB-eligible collateral to significantly offset the funding impact of upcoming debt redemptions,” Kara explained.

“Given the underperformance of recent weeks, we see scope for Irish bonds to regain some ground against Portugal and Spain in particular, once the initial round of government-guaranteed bond redemptions has taken place over the first two weeks of September,” he added.

What is on Ireland’s Books?

The Irish banking system remains hooked on European Central Bank funding and investors are also worried about the risks posed by the scale of liabilities following Ireland’s decision to guarantee the country’s lenders.

5 Responses

  1. I like the expression “precarious brew”. It is indeed. Non elected officials at the ECB are in a position to dictate what fiscal policies should look like for peripheral EURO countries (PIG). It goes like this: “you better implement austerity measures or we will stop buying your bonds”.

    “No taxation without representation” is thrown in the garbage bin in the EU as a non elected body -the ECB- is in a position to force or strongly push for the imposition of a net tax on EU countries through austerity measures.

  2. Hi, I initially found out about MMT because of my concerns about financialization. I was struck at how the investment banking system could spring straight back into action straight after the global 2008 crash. By contrast after the 1929 crash all the debt defaults shredded the financial system. I thought that the only way this could have been achieved would be if the state just spent money, taxes were used not to fund spending but rather limited to the role of moderating consumer price inflation and the difference accumulated as private wealth deftly collected by the investment banks who set up the system. My feeling was that this was a disaster and was leading to a total takeover by the banks. I then searched to see if anyone else had got that impression too. I was left scratching my head because it did seem to be an accepted view that that was how governments spent money but the people saying so were progressives totally opposed to financialization. I posted comments about this on billyblog and other posters there told me financialization could not at all be blamed on the monetary system. I still believe that if there is too much capital chasing too few constructive investment opportunities then financialization ensues. A comment on billyblog told me that excessive money in investments and savings was totally innocuous like carbon dioxide in carboniferous rock. To me it is more like pools of gasoline in the streets. I agree with the MMT idea that if customers have money to spend, then that will allow the economy to function. My only disagreement is that I believe the total amount of money needs to be fixed. My idea is that units of currency should be born and die as people do. For this, the BIS (or some such international institution) would create 1,000,000 units of currency and a bank account to hold it whenever someone was born. The currency would be purely electronic. Whenever someone died, everyone’s holding of currency would decrease in proportion such that the global holding of currency was always 1,000,000 x the world population. Thus horded money would slowly erode away in nominal value. If a nation decided to be socialist, everyone could at birth transfer their money to their government who could then pay it back to them to direct their activity. If a nation was anarchist, then the money would be left with the child. Anything intermediate could also be done depending on the politics of that nation. At the inception of such a scheme everyone could be given the 1,000,000 whatever their age. Such a scheme would also solve Triffin’s dilemma as it would provide an equitable international currency. Its probably a stupid idea, but it seems OK to me at the moment!

  3. From the MMT perspective, the US needs to run massive deficits for the foreseeable future in order to fund demand both domestically and externally. What is happening is that the global economy is struggle in a fledgling stage for “food,” that is, effective demand, which requires funding. US GDP is ~14T. The runner up’s (China) GDP is less than 2T. This puts the world in the back of the US as Atlas, i.e., the consumer of last resort.

    There is no question of “affording” this in a fiat monetary system. All that is lacking is the financial “grease” to get the wheels of world commerce rolling in a way that increases global demand in a distributed fashion. The real resources are available, and management knowledge is already available, too, waiting to be scaled up. As long as the world continues to think in terms of limiting principles, problems will only mount. Out of the box thinking is required.

    What also needs to happen is that reforms must be instituted that prevent capital sequestration through financialization, corruption, etc. There is actually a huge amount of potential funding already out there. It needs to be freed up or clawed back.

    If a ton of funding is available, US consumers will be happy to consume what others export. This would only be temporary (probably a decade or two), until other nations can increase domestic demand through increasing employment and incomes enough to build domestic economies.

    Simultaneously, the world needs a Manhattan project to develop sustainable energy alternatives. this would need to be funded by government, and ideally it would be a global endeavor. Instead of a world war over scarce resources, it would be a global peace project to make necessary resources available to all.

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