The country that is worse off than USA

Mar 3, 2011

Waterford, Ireland

"Ireland is broke," said our taxi driver.

We like to ask cab drivers about the economy. Not that they understand anything any better than the average central bank economist. But they talk to people. Without cameras or tape recorders in the background. And they have their own businesses too. When times are good, people take cabs. When they are bad, they take the bus.

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"My bloody income is down by 50%. Most of my fares are people coming or going on business...or just people going to work. But now, who's doing business? Who's working?

"The developers and the bankers ruined this country. They pushed up prices. And then, what was the government doing? They haven't a clue. The guy who is head of Ireland's financial affairs is a former school teacher. I've got nothing against school teachers, but what does he know of finance? And he's over there negotiating with the Germans.

"The Germans know what they're doing. They don't want to finance our mistakes. And who can blame them?"

In many ways, the Great Correction is hitting Ireland harder than the USA. If the US overbuilt, Ireland overbuilt even more. If the US over-borrowed, Ireland borrowed even more. And if the USA got lost in debt finance, Ireland got lost in dreamland.

"We are dreamers, I guess. And storytellers. It's a status thing in Ireland. You go into a bar. Look for the fellow who has the most people gathered around him. He's the big man locally. Not the doctor. Not the politician. Not the rich man.

"We're dreamers and storytellers...and then, we come to believe our own stories."

The Irish dream big. The republic is not big enough for them. So they go abroad. Only 4 million of them are left on the island. Some 60 million of their descendants - the Irish diaspora -- live in America, Canada, Australia, Argentina and elsewhere. Your editor is one of them.

For the first time in more than a decade, the Irish are emigrating again.

"If you're a smart young man or woman, what else can you do? It's sad for their families. But Ireland has nothing to offer them. They have to leave. And usually, they don't come back."

Yesterday, we went to open an account at the Bank of Ireland.

"They must have been glad to see you," said a colleague. "You must be the first person to open an account in years. The rest of us are taking our money out. Every bank in Ireland is insolvent, and everybody knows it."

"Well, there was no line," we replied.

Instead, we got to the bank door at 10AM. We rang the doorbell (the bank didn't open until 10:30, but we had an appointment). A dignified older man in a sweater and a tie opened the heavy oak door.

We stated our business.

"Oh...yes...she's waiting for you."

In front of us was an attractive woman of about 30. Well dressed. Well coifed.

"Will I lose my money if the bank goes broke," I asked.

"Ha ha...there's no chance of that," said the woman with a look of earnest intensity that you usually associate with time share salesmen and insane people. "I guess you would say that we're already broke, technically. But we have a deal with the European Central Bank. We have a line of credit. We won't default. And even if we did, your money is protected by an Irish government scheme that protects depositor up to 100,000 euros."

"Well, isn't the Irish government insolvent too?"

"Ha ha...well, I suppose that it is too. Technically. But so is your American government, isn't it? But this is just a technicality. The whole system is not going to go broke. We're supported by Europe. And Europe does not want to see Ireland default."

She was right about that. Europe does not want to see Ireland default. Because the debts of Ireland are the credits of French and German banks. If Ireland were allowed to default, the whole kit and caboodle could come apart.

Ireland can't borrow on the open market. Lenders are not idiots. So the Micks and Paddies borrow from the European financial authorities. The low rates keep Irish households above water. Most mortgages here are 'floating rate' loans. If the rates were allowed to float up to market levels, Irish households, banks, and the governent itself, would all sink.

For the moment, Europe lends at low interest rates to the Irish...who keep their banks and voters from going bust. The banks, in turn, keep their creditors from going bust. And so the whole system, in Europe as in America and Japan, depends on a continued flow of artificially cheap money

And everyone seems to think this flow of cheap money can continue indefinitely.

Welcome to modern political economy... Small, isolated problems are rolled up into bigger and bigger ones. Soon, the danger is not to a bank...or even to a nation...but to the entire system.

We don't know when it will stop. Nor do we know exactly what will make it stop. But we're sure there's money to be made betting on it.

*** The Dow was barely positive after a big drop on Tuesday. Gold hit a new high.

This could be important: the dollar has NOT gained from the unrest in the Arab nations. People no longer seem to see the dollar as a haven of safety. Instead, they turn to gold...

Watch this space. Because now, both good news and bad news send gold higher.

Smart central banks are buying gold. Smart investors are buying gold. Smart businesses and hedge fund managers are buying gold.

The smart money is buying gold. But the dumb money - which is most of it - is still against gold. It doesn't understand the monetary systems are temporary...that they ALL fall apart eventually...and that, when they do, people turn back to real money - gold.

Sooner or later, the dumb money will catch on too. We are probably still years away. (Though it is impossible to know for sure....)

*** The latest from the Wall Street Journal:

"Why the Dollar's Reign is Near an End"

Over the past 10 years, WSJ reports, the dollar's share of central bank reserves has fallen from 70% to 60%.

And over the next 10 years, the dollar will have to compete with other currencies for dominance.

What will that mean? A lower greenback. The WSJ explains:

"First, changes in technology are undermining the dollar's monopoly. Not so long ago, there may have been room in the world for only one true international currency. Given the difficulty of comparing prices in different currencies, it made sense for exporters, importers and bond issuers all to quote their prices and invoice their transactions in dollars, if only to avoid confusing their customers.

Now, however, nearly everyone carries hand-held devices that can be used to compare prices in different currencies in real time. Just as we have learned that in a world of open networks there is room for more than one operating system for personal computers, there is room in the global economic and financial system for more than one international currency.

Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China's yuan.

Americans especially tend to discount the staying power of the euro, but it isn't going anywhere. Contrary to some predictions, European governments have not abandoned it. Nor will they. They will proceed with long-term deficit reduction, something about which they have shown more resolve than the U.S. And they will issue "e-bonds"-bonds backed by the full faith and credit of euro-area governments as a group-as a step in solving their crisis. This will lay the groundwork for the kind of integrated European bond market needed to create an alternative to U.S. Treasurys as a form in which to hold central-bank reserves.

"In this new monetary world, moreover, the U.S. government will not be able to finance its budget deficits so cheaply, since there will no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks.

Nor will the U.S. be able to run such large trade and current-account deficits, since financing them will become more expensive. Narrowing the current-account deficit will require exporting more, which will mean making U.S. goods more competitive on foreign markets. That in turn means that the dollar will have to fall on foreign-exchange markets-helping U.S. exporters and hurting those companies that export to the U.S.

My calculations suggest that the dollar will have to fall by roughly 20%. Because the prices of imported goods will rise in the U.S., living standards will be reduced by about 1.5% of GDP-$225 billion in today's dollars. That is the equivalent to a half-year of normal economic growth. While this is not an economic disaster, Americans will definitely feel it in the wallet.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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