Tuesday, November 16, 2010

Ireland: exactly who are the bond holders being bailed out?

There is a list here produced by Guido Fawkes. And wouldn’t you know it – Goldman Sachs is one of the institutions whose skin is being saved via the Irish bail out. Yes, when it comes to robbing the poor and stuffing the pockets of the rich, Goldman Sachs usually has something to do with it.

I suspect that the root cause of this farce is that the Euro is what is sometimes called a “debt based system”. I’ll explain (and I’m not 100% sure I’ve got this right).

Where a country issues its own currency (e.g. U.S., U.K., Japan, etc) monetary base is owned or held, free of debt, by a selection of people and institutions (possibly including you). Put another way, there is no debt corresponding to the £Xbn of monetary base in the U.K., for example.

Or to put it a third way, over the last fifty or hundred years, a portion of public spending in these “own currency issuer” countries has consisted of the relevant government / central bank machine spending money which it has simply printed, rather than obtained from tax or borrowing.

That is to be contrasted with the money produced (out of thin air) by the commercial banking system. To illustrate, when a commercial bank grants you a mortgage, it credits £X to your account for you to spend on your new house, but at the same time registers you as a debtor to the bank.

The Euro is similar to the latter commercial bank arrangement rather than the above “own currency issuer” arrangement. That is, the ECB offers Euros to commercial banks, who in turn lend the money to whatever European countries want said money. That explains why Germany, the most solvent country in Europe, is nevertheless heavily in debt.

The commercial banks involved in the above “debt based Euro system” obviously take a cut of the money they shift around. And that is fair enough as long as they are exposed to genuine risk: the risk that some country might go belly up. Problem is, that Europe is not prepared to allow sovereign default.

This effectively means (far as I can see) that the whole Euro system involves a free gift of billions to commercial banks. Europe needs to decide between on the one hand a debt based system combined with the genuine possibility of sovereign default and on the other hand, a “U.S. / U.K.” debt free monetary base system. The latter would not preclude sovereign defaults, but at least it would cut down on the donation of billions to taxpayers’ money to the super rich.

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