The Bond Markets are like a virus. They profit off high interest rates on loans given to dodgy countries, but at the risk that those countries' economies will collapse, which would mean that the bond holders would lose their money.
That is what is happening in the world economy. The markets are circling the weakest economies, pumping up the cost of their debt, which makes them weaker still. Desperate, the countries cut their spending, which puts more out of work, lowering the tax take, weakening the economy yet further. Confidence fails, and confidence is the life force of economics.
The vast majority of countries are in debt of various kinds. Take a look at this list of counties' external debt. External debt includes public and private borrowing. Play with it, clicking the various headings to list countries by absolute debt, debt as a ratio of GDP, and see how people are doing. Luxembourg is worst, with external debt at 3854% of GDP. Then Ireland, at 1004% of GDP. We're at 416%. Mighty Germany is a mere 155%.
That's external debt. Now take a look at countries listed by public debt here. Public debt is Government borrowing, leaving out private borrowing. We are not so bad on this one, 22nd from the bottom, at 68% of GDP, as opposed to Germany who is 19th from bottom, with 72% of GDP.
The point is that nearly everyone is in debt, which ought to be no surprise, because money is created through debt. If you need money, you go to the bank, and the bank manager glances at you to make sure your shoes are shiny and your tie is straight, then creates your money for you. He writes the figure in your account, which is his liability, and an equal figure in his account, which is his asset. The figures exactly match. If you perform properly, you pay back first the interest, and then the capital sum. At the end of the term, asset and liability cancel each other out, and the bank is better off by the amount of interest you paid over the years. If you do not perform properly, and default on your loan, the bank manager is fucked. And this is what has happened.
I suspect that is what Osborne is doing with this loan for Ireland. Everyone is rightly puzzled about where the £7, no £8, no £10 billion that we are lending to Ireland is coming from, given that we have no money to pay the police &c. Since it is a loan, it comes from exactly the same place that a bank manager creates a loan - out of thin air, or to be more exact, out of the UK's confidence that Ireland will pay us back in time, with 5% interest.
It is all bloody mystical, or religious even. You believe in Father Christmas, and Father Christmas it is who fills your stocking. You believe the financial system is doing good, then debt it no problem, it's just LEVERAGE, that's OK, it's the way the system works. But if you lose faith in the system, then debt is DEBT, a slavering monster that will eat you up. As you believe, so it happens.
Which is why we need to keep reminding ourselves that real (green) economics is founded on in reality.
Imagine you are on a desert island, alone. You need to provide water, food, shelter, warmth, and keep your shit away from the water source. That is your economy. It is all founded on ecology - your relationship with the environment.
Obviously it gets more complex in a modern society, and exchange (trade), transport, services, administration and even finance necessarily enters into it.
The fact is that modern economics has lost sight of its ecological foundations, and has fallen into a very dodgy bramble patch of debt-created money.
OK, the present round of bailouts for Greece, Ireland &c may resolve the issue, and it may all settle down again. Wise, firm government action may calm the markets, and the world economy will take up business as usual, growing merrily away. The present loans to Greece and Ireland, which after all only put off the day of reckoning, may get repaid in 2013 or 2015 or whenever. Governments may wake up to what work really is, stop attacking the people, and start sewing up the tax avoidance holes that are haemorrhaging public wealth into the tax havens. Governments may wake up to the reality of the Green New Deal, and use the Green Wage Subsidy to get people into work while at the same time making a transition to a green economy.
We live in hope.
Except the economy cannot keep growing merrily away. That is impossible. Specifically, we face up to Peak Oil. in the next decade or so. Oil is the lifeblood of the world economy. I cannot see the present financial system surviving a collision with Peak Oil.
The only way to mitigate peak oil is through energy conservation and a massive investment in renewable energy and an HVDC super-grid. This is achievable physically. The problem is that politicians have not got their heads round it.
Whatever happens, we have to move towards a sustainable economy. It is do-able, at a pinch, if all factors are addressed. We could make a smooth transition, using what we have now in the way of a financial system. On the other hand, the politicians, corporations and financiers in power are so knuckle-headed, we may have to go through a period of financial collapse and build a Green economy out of the ruins of the old, irrational, debt based "economy". In short, the virus of the money markets may kill the irrational economic system that they have parasitised so effectively.
PS: The debate over how money is created is endlessly confused. I like to take it in easy steps to try to bypass the confusion. Fist step is to show that the money supply is indeed increasing, and here is the evidence:
OK? Money supply is increasing. So someone or something must be creating it. The vast majority (97% in the case of the UK) is created by the banking system - the only bit Govrenments get to create is the notes and coins.
I will stop at this stage of the argument in order to mreaake sure we are all aboard so far.
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