Budget Deficit - When is it going to reduce?

[Chris]

Fractional reserve banking isn't about lending out "excess cash".

It allows a bank to lend a multiple of its cash reserves, previously circa maintaing a 10% reserve of the total lending.

Money was created out of nothing using the relevant reserve formula.

The system trades on the fact that depositors are unlikely to require all their monies at one time.

You are misunderstanding the point and the problem that banks are facing. Let's say Bank A takes deposits of €1000 and is required to hold 10% reserves. It can then lend out €900, which effectively increases the money supply from €1000 to €1900. That's the magic/fraud/fault of fractional reserve banking.
Now let's say that Bank A gets into trouble and it's reserves fall to €50 and it is recapitalised back to €100. This is effectively what has happened with Irish banks. That bank can now not lend out more money unless it takes in more deposits, i.e. cash in excess of its reserve requirements. If the bank manages to attract deposits worth €100, it can make another loan for €90. The problem is that Irish banks cannot even convince Irish people to deposit their money with them. Therefore it is not possible to expand credit without either (a) increasing deposits or (b) reducing reserve requirements.

 

[onq]

I don't think we're arguing here Chris.
The issue is Irish banks not lending, not that Ireland is over-borrowed.

You've already read of Purple's happy position of being cash rich and not over-borrowed.
Is his company the only one in Ireland in that happy position? I don't think so.

People may be personally indebted in relation to mortgages and credit cards.
(we're not over-borrowed BTW, we could just do with a bit more work)
This doesn't automatically imply that businesses are over-indebted.

At a recent B2B we were informed by an AIB representative that money was available for new business ventures, so what's that about in the context of your comments?
Contrary to your assertion that there is not enough money to lend in the banks there seems to be money available to invest in one of the riskiest market sectors!

I'm not suggesting your dissembling - we are working from different sources - but there is a disagreement in the facts available.

 

[Firefly]

People may be personally indebted in relation to mortgages and credit cards.
(we're not over-borrowed BTW, we could just do with a bit more work)
This doesn't automatically imply that businesses are over-indebted.

That may be true, but unless the business in question is export-related, then it's customers are here and they're indebted...

 

[T McGibney]

At a recent B2B we were informed by an AIB representative that money was available for new business ventures, so what's that about in the context of your comments?
Contrary to your assertion that there is not enough money to lend in the banks there seems to be money available to invest in one of the riskiest market sectors!

But they always say that. Doesn't necessarily mean its 100% true.

 

[Purple]

That may be true, but unless the business in question is export-related, then it's customers are here and they're indebted...

I would add, though this is off topic, that many businesses in both the domestic and export sectors have burned through their cash reserves over the last 2-3 years in order to stay in business and maintain employment/capacity during the world-wide recession. Because of this their ability to self fund investment/expansion/modernisation is severely restricted. In a very high labour cost economy such as this one it is essential that wages as a proportion of overall unit cost are minimised. This can only be achieved by continuous investment in plant, IT, Training etc. Without cash reserves banks are the only source available to most businesses to fund this. Therefore we may see a slippage in our competitiveness over the next few years, despite the downward pressure on wage level. This of course could cause further downward wage pressure thus dampening domestic demand.

 

[onq]

+1 what purple has written about the difficulties facing Irish business who have relied on their cash reserves to help them through the last three years of the doldrums.

Without cash reserves banks are the only source available to most businesses to fund this.

This is the whole point, and where our government has failed us - not WILL fail us - HAS failed us!

I don't accept the excuses being offered why Banks cannot lend.

Either the Banks we have must start to lend again into this economy, where as Purple suggests, a demand will arise following the burning through of cash reserves, or else, what I have been saying for months must occur -

WE NEED A NEW COMMERCIAL LENDING BANK!

End of.

This is not off topic - unless liquidity is provided to business and unless the economy recovers, we will not see our deficit reduce.
This is not brain science, its is axiomatic, and I fail to see why we are trying all the other measures and not this obvious one.

It seems that our government and Europe are together trying to pressure us all into a higher tax regime in Ireland.
We know from the 'Eighties that high tax regimes funding high public wage bills are a huge drag on the economy.

Yet the current crop of "leaders" seem quite happy to accept platitudes about our banks inability to lend.
We seem on a race to the bottom led by inept people who couldn't start a drinks party in a wine shop.

So either we have a functioning commercial lending sector or we won't see the deficit reduce.

 

[onq]

But they always say that. Doesn't necessarily mean its 100% true.

No argument there T McGibney!

Just reporting what the man said.

 

[Chris]

ONQ, you are still failing to understand how it is that banks can lend out money. Irish banks have had to increase their reserves significantly in last years, this means that all the money that has been pumped into the banks has gone into the reserves. If you want the banks to lend out more money then either (a) more money has to go into the banks through bonds or deposits, or (b) you reduce the reserve requirements. It is as simple as that. And the problem is that Irish banks cannot attract more deposits that they could use to lend out. Those are the facts, there simply is no untouched pot of loanable funds.

As for Irish businesses not being able to borrow I agree with Purple's comments. There are businesses that do not have problems getting credit; these are export companies that have no or very little debts. Companies that are not getting credit are the ones that already have large amounts of debts or those that have depleted cash reserves. Why would a bank lend to a company that has depleted its cash reserves over several years and still needs more? It is a very good indication that the business may not be viable.

What this country needs more than anything is to reduce debt and save money. But unfortunately the political consensus is that we need to repay all debt in full and discourage savings by taxing interest. It is totally paradoxical.

 

[Purple]

I agree with Chris’s point about why banks cannot lend. Them’s the facts and no amount of talking or wanting or wishful thinking will change that.
I agree with ONQ that lack of credit is causing and will continue to cause a reduction in economic activity. It will also kill off businesses that have survived the last few years and are still viable or at least would be if they had cash.

I don’ know enough about banks and banking to offer an opinion on what the solution is.

 

[Firefly]

WE NEED A NEW COMMERCIAL LENDING BANK!

End of.

If the Irish banks cannot lend due to deposit ratio restrictions then the market is wide open for foreign banks to enter and provide as much lending as they wish. The fact that they're not here (and more significantly that those that were have pulled out) speaks volumes. Our debt is simply to high at all levels...personal, business and government. The more I think about it I cannot see any other way out except a default of government debt....this will allow tax rates to be dropped and will encourage job growth.

 

[onq]

If you want the banks to lend out more money then either (a) more money has to go into the banks through bonds or deposits, or (b) you reduce the reserve requirements. It is as simple as that. And the problem is that Irish banks cannot attract more deposits that they could use to lend out. Those are the facts, there simply is no untouched pot of loanable funds.

So you're confirming that the past and present government have lied to us about the reasons why we the taxpayers put BILLIONS of EUROS into the banks?
Hint: it WASN'T so they could sit there like well-fed turkeys clucking at each other - it was so they could LEND MONEY!
All your assertions are doing is getting me angry at these serial liars we have running the country.

As for your comments that businesses seeking money may not be viable, this is the same self-perpetuating stuff the banks were spouting when we first spotted they weren't lending.
Irish businesses are going to have to reinvent themselves to become exporters to replace local demand.

This will cost money and they only place this can be got is the banks.
There is no reason they cannot return to profitability following this.

There is every chance they will fail if this doesn't happen.
This is a TRANSFORMATIONAL process that needs funding.
Saying they're not viable NOW is not a useful assessment.

As for your comments that Banks have no surplus money, could you post some proof - figures, commentaries etc?
There is a big difference between them choosing to hoard their wealth and them not being able to lend.


ONQ.

 

[Chris]

So you're confirming that the past and present government have lied to us about the reasons why we the taxpayers put BILLIONS of EUROS into the banks?
Hint: it WASN'T so they could sit there like well-fed turkeys clucking at each other - it was so they could LEND MONEY!
All your assertions are doing is getting me angry at these serial liars we have running the country.

Technically yes, but ultimately the recapitalisation was to bail out the creditors, the "get banks lending again" mantra was total and utter nonsense.

As for your comments that businesses seeking money may not be viable, this is the same self-perpetuating stuff the banks were spouting when we first spotted they weren't lending.
Irish businesses are going to have to reinvent themselves to become exporters to replace local demand.

I absolutely agree with this.

This will cost money and they only place this can be got is the banks.
There is no reason they cannot return to profitability following this.

There is every chance they will fail if this doesn't happen.
This is a TRANSFORMATIONAL process that needs funding.
Saying they're not viable NOW is not a useful assessment.

This is true. However, there is no simple solution, and especially not one that uses government intervention. Government can only reallocate money, i.e. take money from one part of the economy to give to another. At the very best this would result in no net gain, and ultimately someone is losing out.
Above that government is the single worst institution to adequately assess the viability of potential investments. When you use other people's money, that you can appropriate at will, then you have no skin in the game, and thus don't care about the level of risk. The other problem is that lobbying results in very skewed decisions being made.
Look up two of the most disastrous "investments" made by the US government in the companies Solyndra and EnerDel. Both companies could not get loans, so the US government stepped in to fund what was termed a no-brain investment in the green energy industry. $700m have been wasted as Solyndra has declared bankruptcy and EnerDel is scaling back operations to avoid bankruptcy.
Burt Folsom has some quick commentary about this:

As for your comments that Banks have no surplus money, could you post some proof - figures, commentaries etc?
There is a big difference between them choosing to hoard their wealth and them not being able to lend.

This statement is based on the latest round of recapitalisations that were required after the stress tests in order to meet the new reserve requirements. If there was excess reserves then there would not have been the same need for funds. If there were excess reserves then there would not be the requirement for the amount of overnight funding from the ECB either.
You would have to probably delve into the annual statements of the banks, but maybe Sunny has a better idea where to get this info.

 

[DerKaiser]

http://www.independent.ie/national-...ake-comes-in-lower-than-expected-2953050.html

The massive €8bn increase was mainly due to the €10.6bn pumped into the banking sector in various rescue measures.

Excluding those banking-related payments and a €1bn bonus to the State after the sale of some Bank of Ireland shares, the Exchequer deficit fell by about €1.6bn year-on-year.

The total amount of tax collected in the first 11 months of the year stood at €31.8bn, which is 7.9pc more than in the same period last year.

The main reason for the increase was the introduction of the Universal Social Charge.

Stamp duties surged 52pc following the Government's controversial levy on pension funds to pay for job measures in a mini Budget following the general election.

 

[DerKaiser]

http://www.finance.gov.ie/documents/exchequerstatements/2011/enddecexcheqstat.pdf

The year end figures are in. Compared to 2010, we basically we spent €1.5bn more on health and collected €2.5bn more in taxes (due to the USC) knocking over €1bn off the current budget deficit. In addition, a further €1.5bn was saved on capital expenses.

With the banking recapitalisations complete (hopefully) and capital expenditure cut to realistic levels, the challenge is to reduce the €11.5bn current budget deficit to zero by 2015. That looks pretty tough at the moment.

 

[caliban]

With the banking recapitalisations complete (hopefully) and capital expenditure cut to realistic levels, the challenge is to reduce the €11.5bn current budget deficit to zero by 2015. That looks pretty tough at the moment.[/QUOTE]

Bank recapitalisations are not complete...the government have to pay 3.1billion every 31 March in relation to IBRC i.e. Anglo up until 2023. Some commentators are saying that the net 9.7billion paid in 2011 in relation to banks is a "one-off". Not true - 3.1billion of it is recurring expenditure.

 

[velosolex]

Give it to me straight.

Massive figures! but could one of you breakdown the financial state of the nation as a figure which relates to the person on the average industrial wage? whatever that is.
ie: Debt, deflect, debt repayments, GDP, export figures, unemployment & social welfare cost, health and all other department spend individually.
Basically I would like to know a breakdown of where my tax (Paye Prsi VAT etc.) and what percentage of my income is being used.

 

[mainasia]

If the Irish banks cannot lend due to deposit ratio restrictions then the market is wide open for foreign banks to enter and provide as much lending as they wish. The fact that they're not here (and more significantly that those that were have pulled out) speaks volumes. Our debt is simply to high at all levels...personal, business and government. The more I think about it I cannot see any other way out except a default of government debt....this will allow tax rates to be dropped and will encourage job growth.

I don't know, I think moneylending will occur as long as there is a sufficient return. With a high enough interest rate Ireland would be an attractive market for NEW entrants. I can only surmise that most of the banks in Europe are already overleveraged otherwise Ireland should be a good market to lend into given the lack of lending but relatively high incomes here.

 

[DerKaiser]

Massive figures! but could one of you breakdown the financial state of the nation as a figure which relates to the person on the average industrial wage? whatever that is.
ie: Debt, deflect, debt repayments, GDP, export figures, unemployment & social welfare cost, health and all other department spend individually.
Basically I would like to know a breakdown of where my tax (Paye Prsi VAT etc.) and what percentage of my income is being used.

Good question

Of the taxes paid by the average person, the big ticket items are

36% on health spending
36% on social welfare
22% on Education
11% on interest repayments on past borrowings
8% on law and order
5% on transport
4% on environmental protection/local government

Not exhaustive, but you can see that it adds up to well over 100% as we are borrowing so much for these day to day costs

 

[Chris]

I don't know, I think moneylending will occur as long as there is a sufficient return. With a high enough interest rate Ireland would be an attractive market for NEW entrants. I can only surmise that most of the banks in Europe are already overleveraged otherwise Ireland should be a good market to lend into given the lack of lending but relatively high incomes here.

The reason there is very little lending is because Ireland as a whole is way too deep in debt. Per capita Ireland is the second most ideated nation on earth, and the only reason Luxembourg is ahead is because of their financial services.
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

 

[Firefly]

The reason there is very little lending is because Ireland as a whole is way too deep in debt. Per capita Ireland is the second most ideated nation on earth, and the only reason Luxembourg is ahead is because of their financial services.
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Hi Chris,

I hope this applies to the UK also, as their external debt is half that of the US!!!

Aren't New Zealand in a good position?!