# Welfare, pensions, salaries slashed if we quit bailout



## thedaras (9 May 2011)

http://www.independent.ie/national-...aries-slashed-if-we-quit-bailout-2641116.html

What next?


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## Shawady (9 May 2011)

This has been touched on in the Morgan Kelly thread. The old chestnut about slashing PS wages is thrown out but I dont think people realise that everything will be have to be slashed if there books are to be balanced in one year. You're probably looking at taking 4K a year off an old age pensioner.


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## Purple (9 May 2011)

and we'll all be paying much higher taxes.
If that what it takes then so be it.


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## thedaras (9 May 2011)

Are there any advantages to doing it this way?


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## Purple (9 May 2011)

Yes, when we default (and we will default) we will be in a better position to do so on our own terms.


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## Shawady (9 May 2011)

My understanding is that we don't have to balance the books but to get the deficit to 3% of GDP, which works out at about 5 billion. If we are currently taking in around 31 billion would it be possible to spend just 36 billion a year without having devestating affects on the country?
Maybe 13 billion for public sector and pension wages, 13 billion for social welfare and 10 billion for other (capital) spending?


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## Sunny (9 May 2011)

Shawady said:


> My understanding is that we don't have to balance the books but to get the deficit to 3% of GDP, which works out at about 5 billion. If we are currently taking in around 31 billion would it be possible to spend just 36 billion a year without having devestating affects on the country?
> Maybe 13 billion for public sector and pension wages, 13 billion for social welfare and 10 billion for other (capital) spending?


 
No, if you walk away from EU/IMF which is what Kelly is saying and don't have access to the markets, you can't run any deficit.


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## shanegl (9 May 2011)

They will have to be slashed anyway. It comes down to whether we want it to be a time of our choosing or not.

Funny article by the indo though. Almost like people needed to be reminded that we are still running a massive deficit despite the (tiny) amount of cuts that everyone's been getting so hot and bothered about.


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## thedaras (9 May 2011)

@Purple;Can you explain what you mean by "on our own terms"?
That sounds to me like terms that vested interests will negotiate?


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## Purple (9 May 2011)

A couple of points;
1)	Most public sector employees are not lazy work-shy scroungers on massive salaries who only have to show their face in work for a few hours a month because they are on flexi-time. The salary their earn is spent in the Irish economy and on extravagant things like mortgages and utilities. If their pay is cut by the same sort of percentages that it has already been cut (and yes, the pension levy is a pay cut) then it will cause a wave of mortgage defaults and an even bigger drop in consumer spending. In other words the knock-on effect for the private sector will be severe.
2)	Most people who receive welfare are not lazy work-shy scroungers who only leave the house to go to the bookies, the pub or the dole office. Indeed, most people who receive welfare payments work legally. By cutting their welfare payments (Family Income Support, Medical Cards, children’s allowance, carers allowance, disability allowance, widows/widowers pension, old age pension etc) it will have a massive negative impact on the domestic private sector economy. It will also mean that people will not receive necessary medical care, people will be plunged into poverty and everyone will suffer (with those at the bottom suffering most). 

Taking the above into account I’m still in favour of balancing our budget and defaulting on our banks debts (but not our original sovereign debt) as the alternative is worse. It will just take longer for us to feel it.


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## Howitzer (9 May 2011)

Sunny said:


> No, if you walk away from EU/IMF which is what Kelly is saying and don't have access to the markets, you can't run any deficit.


Yes you can, just at exorbitant rates. 10% is around the current asking. This figure assumes default, that if we were in the market now looking for money instead of using the EU/IMF deal this is what we'd be charged.

So from a practical point of view you could run a deficit of maybe 1 or 2 billion but no more.

So would that be achievable?

If not in year 0 (today) what about the UK/Swedish bilateral loans. Would they still be on the table? Could they plug the gap till year 1 or 2?

Would the IMF loans still be on the table?

I think the establishment has buried it's head in the sands for too long. The "delay and pray" strategy isn't going to work. It's time to look at the practicalities of the situation.


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## Shawady (9 May 2011)

Sunny said:


> No, if you walk away from EU/IMF which is what Kelly is saying and don't have access to the markets, you can't run any deficit.


 
So if we default we would not have access to the markets because we are not paying back the money they have already given us?

What about if we just default on the bank element of the debt?


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## thedaras (9 May 2011)

Purple said:


> A couple of points;
> 1)	Most public sector employees are not lazy work-shy scroungers on massive salaries who only have to show their face in work for a few hours a month because they are on flexi-time. The salary their earn is spent in the Irish economy and on extravagant things like mortgages and utilities. If their pay is cut by the same sort of percentages that it has already been cut (and yes, the pension levy is a pay cut) then it will cause a wave of mortgage defaults and an even bigger drop in consumer spending. In other words the knock-on effect for the private sector will be severe.
> 2)	Most people who receive welfare are not lazy work-shy scroungers who only leave the house to go to the bookies, the pub or the dole office. Indeed, most people who receive welfare payments work legally. By cutting their welfare payments (Family Income Support, Medical Cards, children’s allowance, carers allowance, disability allowance, widows/widowers pension, old age pension etc) it will have a massive negative impact on the domestic private sector economy. It will also mean that people will not receive necessary medical care, people will be plunged into poverty and everyone will suffer (with those at the bottom suffering most).
> 
> Taking the above into account I’m still in favour of balancing our budget and defaulting on our banks debts (but not our original sovereign debt) as the alternative is worse. It will just take longer for us to feel it.



Is the alternative to just default on the bank debts or will it have the same effect?
Any one know if there  is a real alternative?


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## Purple (9 May 2011)

thedaras said:


> @Purple;Can you explain what you mean by "on our own terms"?
> That sounds to me like terms that vested interests will negotiate?



The whole thing has been a stitch-up by the EU from day one. Dr Merkel and Mr. Sarkozy have been telling lies about Ireland for months (Dr. Merkel’s most notable one was that Ireland s low corporation tax rate was a major cause of our current problems). This is all about making an example of us and nothing to do with European solidarity or the acceptance that the same EU that us punishing us now has been pushing for an open market in banking for the last 20 years.  When the dried up husk of what’s left of the Irish economy is pointed to in order to force the rest of the Euro-zone to play by the Franco-German rules it will be mission accomplished. We can wait to be bled dry slowly or we can act on our own initiative. When the IMF thinks you are getting screwed then you can be sure that you are definitely getting screwed.


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## Sunny (9 May 2011)

Purple said:


> A couple of points;
> Taking the above into account I’m still in favour of balancing our budget and defaulting on our banks debts (but not our original sovereign debt) as the alternative is worse. It will just take longer for us to feel it.


 
I think everyone wants to balance the budget Purple. The issue is how long you take to do it. Look at the effect that the gradual cuts are having on the economy. Growth prospects are very limited and that is by cutting about 5 billion from the economy each year. Now imagine cutting 20 billion in one go from the economy and imagine the impact on GDP. You would still have a deficit because the economy would be in the toilet and so revenues would have collapsed. You would also have social anarchy because you would have no functioning banking system, public services would probably grind to a halt and you would have huge social unrest. 

The EU/IMF programme buys us time and allows us get our budget in shape before going to creditors and seeing what we can do about debt levels. We probably need to take larger bolder steps but there are consequences to everything.


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## thedaras (9 May 2011)

@Sunny, I agree,but what "larger bolder steps" do you think are necessary?
And do people think its now time to strap the fiver we have left in the banks to our body's??


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## Sunny (9 May 2011)

Howitzer said:


> Yes you can, just at exorbitant rates. 10% is around the current asking. This figure assumes default, that if we were in the market now looking for money instead of using the EU/IMF deal this is what we'd be charged.
> 
> So from a practical point of view you could run a deficit of maybe 1 or 2 billion but no more.
> 
> ...


 
Without the EU/IMF money, we have defaulted. Ireland would not have access to bond markets at any yield. The reason we have 1 year yields at the moment of 10% is because the EU/IMF are providing the funds so investors know they will get their money back. Take away the 80 billion or whatever the IMF have given us and ask the same investors what they think.


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## Purple (9 May 2011)

The best case scenario is that our default takes the form of a Euro-bond that all Euro states have access to. The closer Spain gets to the vortex at the centre of the plug-hole the closer we get to the EU pulling up its trousers and allowing us up off the barrel.


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## Sunny (9 May 2011)

Purple said:


> The best case scenario is that our default takes the form of a Euro-bond that all Euro states have access to. The closer Spain gets to the vortex at the centre of the plug-hole the closer we get to the EU pulling up its trousers and allowing us up off the barrel.


 
I agree. Spain is the key. I think what happens in Greece is also crucial. There will have to be some sort of restructuring but I think Europe will drag it out until at least 2013 when European banks should have enough capital raised to cope with an Irish, Greek and Portuguese restructuring.


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## Howitzer (9 May 2011)

Sunny said:


> Without the EU/IMF money, we have defaulted. Ireland would not have access to bond markets at any yield. The reason we have 1 year yields at the moment of 10% is because the EU/IMF are providing the funds so investors know they will get their money back. Take away the 80 billion or whatever the IMF have given us and ask the same investors what they think.


Err, I don't think your points are factually correct.

I'm totally open to correct but ... the oft mentioned rate of 10% is on 10 year bonds. Shorter terms have lower rates.

The 80 Billion includes 17 billion that we are providing ourselves through borrowing we did last year which would have covered us till mid 2011 and the nation pension reserve fund. 

The 80 billion that may be drawn down has very little correlation with the price on offer in the bond market.


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## thedaras (9 May 2011)

Ok, so to sum up, according to what Ive read on here;

We default and the cuts to soc wel,PS and pensions are so harsh that everything grinds to a halt.

We dont default, and we end up in the same situation but just take longer to get there??

Is there any hope ??


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## Purple (9 May 2011)

Sunny said:


> I think everyone wants to balance the budget Purple. The issue is how long you take to do it. Look at the effect that the gradual cuts are having on the economy. Growth prospects are very limited and that is by cutting about 5 billion from the economy each year. Now imagine cutting 20 billion in one go from the economy and imagine the impact on GDP. You would still have a deficit because the economy would be in the toilet and so revenues would have collapsed. You would also have social anarchy because you would have no functioning banking system, public services would probably grind to a halt and you would have huge social unrest.
> 
> The EU/IMF programme buys us time and allows us get our budget in shape before going to creditors and seeing what we can do about debt levels. We probably need to take larger bolder steps but there are consequences to everything.



I don’t accept the “no functioning banking system” argument; foreign banks would buy up the carcasses of AIB and BOI. 
I do agree that we would have huge social unrest and many public services would grind to a halt but it is essential that we de-couple ourselves from debts run up by banking and if that means balancing the budget in 1-2 years then that’s what has to be done. While we are on a drip supplied by the guys we have to negotiate with they hold all the cards. As for the collapse in government revenue well as long our cuts in non-productive spending are chasing our shrinking economy we are in a downward spiral anyway.


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## thedaras (9 May 2011)

Purple,do you think that it will take just two years of severe cuts? If so, it would be worth it,if it means getting things back to some sort of normality..


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## Sunny (9 May 2011)

Purple said:


> I don’t accept the “no functioning banking system” argument; foreign banks would buy up the carcasses of AIB and BOI.
> I do agree that we would have huge social unrest and many public services would grind to a halt but it is essential that we de-couple ourselves from debts run up by banking and if that means balancing the budget in 1-2 years then that’s what has to be done. While we are on a drip supplied by the guys we have to negotiate with they hold all the cards. As for the collapse in government revenue well as long our cuts in non-productive spending are chasing our shrinking economy we are in a downward spiral anyway.


 
Nobody would buy bankrupt banks in a bankrupt Country.


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## Purple (9 May 2011)

My view on this is simple; we need to get to the bottom before we can start moving up again. The bottom is the bottom and no amount of borrowing or spin will change where it is. This is no different to the housing crash; we have to find the point at which the Irish economy will function without the stimulus of excessive private credit or state borrowing (which are in essence the same thing). Once we find that point we need to get our government spending at a level that our economy can sustain and only  increase it as our economy grows. 
What we are doing now is akin to building a wall of sand to stop the tide coming in.


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## Purple (9 May 2011)

Sunny said:


> Nobody would buy bankrupt banks in a bankrupt Country.



They wouldn’t be buying bankrupt banks, they’d be buying building s and employing the people who used to work in them. They’d then open up and sell their own products and services (since there would still be a demand for those products and services.


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## Sunny (9 May 2011)

Purple said:


> They wouldn’t be buying bankrupt banks, they’d be buying building s and employing the people who used to work in them. They’d then open up and sell their own products and services (since there would still be a demand for those products and services.


 
And they would also be buying huge economic problems so would have no interest in lending into a bankrupt economy. They will buy deposit books no problem but they would not just come in and lend billions into a bankrupt economy. There would be no business loans, overdrafts, personal loans, credit cards etc etc.... I would love to meet the bank executive of one of Europe's largest banks who fancied explaining to their shareholders how they were expanding into Ireland. The Celtic Tiger story atttracted foreign banks. A bankrupt country doesn't.


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## Shawady (9 May 2011)

David Mc Williams on RTE radio this morning suggested that the government should issue 2 or 3 new banking licences.


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## Sunny (9 May 2011)

Shawady said:


> David Mc Williams on RTE radio this morning suggested that the government should issue 2 or 3 new banking licences.


 
To who? There are loads of foreign banks (some of largest in Europe and Canada and US) in the IFSC who hold bank licences and in theory could do a full banking business in Ireland. They aren't exactly rushing to do business.


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## Purple (9 May 2011)

Much of the scare-mongering about a collapse of the banking system is that we’d have no clearing banks; no way to process payments, transfer funds, access capital etc. No money in the ATM’s, no facility to pay staff etc. I don’t accept that. I agree that there wouldn’t be any credit flowing but if all the credit is borrowed money then it’s not much good to us anyway unless the net yield when invested is over 5 or 6%.


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## Chris (9 May 2011)

Purple said:


> I don’t accept the “no functioning banking system” argument; foreign banks would buy up the carcasses of AIB and BOI.
> I do agree that we would have huge social unrest and many public services would grind to a halt but it is essential that we de-couple ourselves from debts run up by banking and if that means balancing the budget in 1-2 years then that’s what has to be done. While we are on a drip supplied by the guys we have to negotiate with they hold all the cards. As for the collapse in government revenue well as long our cuts in non-productive spending are chasing our shrinking economy we are in a downward spiral anyway.



I agree on the "no functioning banking" point. As you mention in another post there would still be demand for banking services and such demands will be filled by some banks. Sunny points out that there would be no lending at all, which I do not buy into. While lending will still be restricted, this would be a good thing for a country that is so heavily indebted at public and private level. But viable businesses would be able to find credit, as there is always someone willing to lend at a certain rate. 
What I do not buy into is the whole doomsday social unrest. There certainly would be unrest but I simply do not buy that this would amount to anything more serious than Iceland recently encountered. 



thedaras said:


> Purple,do you think that it will take just two years of severe cuts? If so, it would be worth it,if it means getting things back to some sort of normality..


My opinion on this is that we need to cut spending by 40% over an 18 to 24 month period in order to balance the budget. The general objections to such a move have already been touched on in this and other threads, i.e. that it would damage the economy even more. But such a theory does not stand up to economic history. I have posted on several occasions about what happened in the US depression of 1920/21. President Harding did the following:
1) reduction in taxation especially the marginal rate
2) cut the federal budget in half in 2 years
The depression that started worse than the Great Depression was over in 18 months and some of the most prosperous years in US history followed.

Quite the opposite to the doom and gloom effect of cutting government spending happened. What this country needs is less spending and less taxation in order to make it a more attractive business environment. Do I believe this is going to happen? No.


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## Chris (9 May 2011)

Sunny said:


> To who? There are loads of foreign banks (some of largest in Europe and Canada and US) in the IFSC who hold bank licences and in theory could do a full banking business in Ireland. They aren't exactly rushing to do business.



The reason they are not rushing into business is because the cost of setting up a new branch banking network is prohibitive at present. This would be a totally different scenario if our bankrupt banks were liquidated offering a fast way for foreign banks to establish a branch network. Instead bankrupt organisations are being kept artificially alive making entry by new competition artificially more difficult that it should be.
It is government actions, once again, that are having a detrimental affect on the Irish banking system.


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## DerKaiser (9 May 2011)

Shawady said:


> So if we default we would not have access to the markets because we are not paying back the money they have already given us?
> 
> What about if we just default on the bank element of the debt?


 
This is the most important point for me.

We can just cut the banks loose and balance the books of the current account but then we have serious amounts of existing national debt repayments as well.

Say we generate €36bn in tax revenues and spend €54bn, we might need €10bn p.a. for the next 10 years to repay sovereign debt. So we'd actually be closer to halving social welfare, public sector wages and health and eductaion spending.

Now if we take this road, in my opinion, we're immediately going to face a draconian situation. We'll have 60 kids to a class with no decent eductaion in unheated buildings, people will die in their thousands of what were previously easily preventable deaths due to slashed health budgets, tens of thousands of people will be left homeless, practically every industry that is dependent on domestic spending will fail, unemployment will probably treble, we'll simply push ourselves into a vicious circle, need I go on?

By continuing on the road we're on, we're not really improving our lot but we can't be making it any worse.

The US and UK would have a similar problem if they faced up to their debts immediately. Even the Germans would be completely up the swanny if they were to face up to the fact that their pensions timebomb is imminently approaching.

All I'm saying is that on paper the whole western world appears screwed. My own theory is that the solution to this will come through inflating away debt or widespread defaults in the medium term.

You can't tax your way out of a recession, spend your way out of a recession or cut your way out of a recession. We do have to continue to borrow to give us time to balance the books without destroying the economy. Right now the EU/IMF is the only sensible choice. 

There is nothing to be gained or salvaged by imposing immediate penury upon ourselves. Obviously we can't take the mick, we have to accept reductions in living standards, but we shouldn't force ourselves into 3rd world conditions while most of those around us are realistically in as bad a position


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## Sunny (9 May 2011)

Chris said:


> My opinion on this is that we need to cut spending by 40% over an 18 to 24 month period in order to balance the budget. The general objections to such a move have already been touched on in this and other threads, i.e. that it would damage the economy even more. But such a theory does not stand up to economic history. I have posted on several occasions about what happened in the US depression of 1920/21. President Harding did the following:
> 1) reduction in taxation especially the marginal rate
> 2) cut the federal budget in half in 2 years
> The depression that started worse than the Great Depression was over in 18 months and some of the most prosperous years in US history followed.
> ...


 
President Harding (not sure why we are going there) slashed military spending. He did not slash the general spending in one year to the extent that you are suggesting.


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## thedaras (9 May 2011)

Chris;1165548)
Quite the opposite to the doom and gloom effect of cutting government spending happened. What this country needs is less spending and less taxation in order to make it a more attractive business environment. Do I believe this is going to happen? No.[/QUOTE said:
			
		

> Why do you believe it will not happen?
> And can I ask you what you think will happen?


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## csirl (9 May 2011)

We have to think about what weapon we have at our disposal in forcing the EU to give us a better deal.

For example, what do you think would happen if we announced that we dont like Sarkozy/Merkel and blame them for us getting a bad deal, so we will default if either or both ever get reelected? Impact is unpredictable - could go for or against them in terms of support in their upcoming elections, but you can guarantee that it WILL have a huge impact on the outcome. Do the French and Germans want us to be the biggest influence in their election results? Would guarantee a reaction and a swift political solution.


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## Purple (9 May 2011)

csirl said:


> For example, what do you think would happen if we announced that we dont like Sarkozy/Merkel and blame them for us getting a bad deal, so we will default if either or both ever get reelected?


I got a good laugh at that! and I agree with your general point.


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## michaelm (9 May 2011)

Joining the euro was a misadventure for Ireland.  And the guarantee was the worst decision in the history of the State. We were shafted, by both our Government and the EU, in the EU/IMF deal.  We should now be quietly printing Punts but denying such; the EU will then drastically improve the bailout terms and sanction a haircut on unsecured debt.  

I can't help thinking that the ECB should just write off what it is owed by piigs countries and simply print that figure in new euros (in the USA & UK do they not call printing money 'quantitative easing'?), the problem would be fixed at a key stroke.

I much preferred the EEC, which was about ease of travel and trade, over the EU project which is about a United States of Europe by stealth.


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## Purple (9 May 2011)

As long as US treasury secretary Timothy Geithner can make a phone call which forces private banking debt on the Irish tax payer then we are not masters of our own destiny.

We need to be in a position to make our own decisions because our masters are not acting in our interest.


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## Chris (10 May 2011)

Sunny said:


> President Harding (not sure why we are going there) slashed military spending. He did not slash the general spending in one year to the extent that you are suggesting.


No he didn't. WWI and its related military spending ended 14 months before the depression of 1920 began. Military spending was still included in the 1919 Federal budget which was $18.9b. The 1920 budget shows that military spending had already been cut out when the federal budget was a mere $6.8b (source: http://www.usgovernmentspending.com/year1918_0.html#usgs302).
Harding further cut spending in March 1921 (2 1/2 years after the war had ended) ultimately reducing the federal budget by 50% in two years. These were cuts in general government spending, not war spending.



thedaras said:


> Why do you believe it will not happen?
> And can I ask you what you think will happen?


Let me rephrase, I do not believe any politician will have the guts to stand up to the public and introduce the severe cuts in the short time frame needed, as this will guarantee not being elected again. The public always wants something for nothing and that is what politicians promise. 
I think that eventually we will face a chaotic default with government accounts running dry and that cuts will then be forced in a disorderly way. Rather than send a positive signal of proactively getting the budget balanced, this scenario will send a really bad message to any international investors.



michaelm said:


> I can't help thinking that the ECB should just write off what it is owed by piigs countries and simply print that figure in new euros (in the USA & UK do they not call printing money 'quantitative easing'?), the problem would be fixed at a key stroke.


Problems don't get fixed by monetary inflation they end up kicked down the road and exaggerated. 



michaelm said:


> I much preferred the EEC, which was about ease of travel and trade, over the EU project which is about a United States of Europe by stealth.


I fully agree with you, the EU project has morphed into a disgusting bureaucratic glob of waste, but I think that is probably a topic for another thread.


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## Sunny (10 May 2011)

Chris said:


> No he didn't. WWI and its related military spending ended 14 months before the depression of 1920 began. Military spending was still included in the 1919 Federal budget which was $18.9b. The 1920 budget shows that military spending had already been cut out when the federal budget was a mere $6.8b (source: http://www.usgovernmentspending.com/year1918_0.html#usgs302).
> Harding further cut spending in March 1921 (2 1/2 years after the war had ended) ultimately reducing the federal budget by 50% in two years. These were cuts in general government spending, not war spending.


 
This is completely off topic and I don't really want to go down this road. Even using the figures on that site, Harding chopped the federal budget from USD 6.8 billion to USD 3.8 billion by 1922. Out of this, USD 1.3 or nearly 44% of the cut came from a drop in military spending. The other big change is under the balance heading which I have no idea what it relates to. But you can see yourself that the spending on the other headline areas did not change to any great extent.

You also credit him with chopping income tax rates but what you are leaving out is that tax rates were at extremly high levels to pay for WWI. As far as I can remember people were paying nearly 60% rates on income over USD 100,000 by 1920. By 1925, Harding and then Coolridge had brought these down to more respectable levels (about 20-25% I think). However these rates were still a lot higher the rates that were seen in the US before WWI.

Like I say, completely off topic!


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## csirl (10 May 2011)

> I can't help thinking that the ECB should just write off what it is owed by piigs countries and simply print that figure in new euros (in the USA & UK do they not call printing money 'quantitative easing'?), the problem would be fixed at a key stroke.


 
Agree with this - ECB needs to take some responsibility for its wreckless lending.

Pre-Euro, both fiscal policy (currency & interest rates etc) and banking regulation were dealt with by the same organisation, in our case the Central Bank of Ireland. This made sense - the fiscal policy could be adjusted to deal with banking problems. However, the Euro has seen the ECB take away the fiscal policy without taking the responsibility for the banks. If we have a single currency and a single central bank (ECB), then this single central bank needs to be fully responsible for banking across the eurozone and prepared to clean up any problems it's policies/actions create. The current situation means the ECB are not responsible for their mistakes and our Central Bank cannot adjust fiscal policy to fix the mistakes. There is a huge moral argument for saying to the ECB 'you created the monster that is the Irish banking crisis, so you deal with it and cover the cost'.


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## Firefly (10 May 2011)

michaelm said:


> I can't help thinking that the ECB should just write off what it is owed by piigs countries and simply print that figure in new euros (in the USA & UK do they not call printing money 'quantitative easing'?), the problem would be fixed at a key stroke.



It would certainly help those indebted here but it would also mean that those who have savings would see a reduction in their purchasing power through inflation. Not sure the Germans would be too happy....neither people here who have saved a lot of money by not indulging in recent years.


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## DerKaiser (10 May 2011)

Sunny said:


> Like I say, completely off topic!


 
But very worthwhile

Health, Education & Social Welfare make up almost 75% of our current expediture.

It doesn't apear that this applied to the US situation 90 years ago.

Have we ever had a situation where a first world country has slashed its health, education and social welfare budgets by almost 50%?


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## Chris (10 May 2011)

Sunny said:


> This is completely off topic and I don't really want to go down this road. Even using the figures on that site, Harding chopped the federal budget from USD 6.8 billion to USD 3.8 billion by 1922. Out of this, USD 1.3 or nearly 44% of the cut came from a drop in military spending. The other big change is under the balance heading which I have no idea what it relates to. But you can see yourself that the spending on the other headline areas did not change to any great extent.
> 
> You also credit him with chopping income tax rates but what you are leaving out is that tax rates were at extremly high levels to pay for WWI. As far as I can remember people were paying nearly 60% rates on income over USD 100,000 by 1920. By 1925, Harding and then Coolridge had brought these down to more respectable levels (about 20-25% I think). However these rates were still a lot higher the rates that were seen in the US before WWI.
> 
> Like I say, completely off topic!



Yes, a bit off topic to go into the details of that era. However, my main reason for posting on this time period is that it is continuously falsely stated that a reduction in government spending would create a worse economic environment when the exact opposite is the case.
I think your 60% marginal tax rate is about right, and not much above our own marginal rate which of course kicks in at a much lower income level.
Ultimately it doesn't matter where the government spending cuts come from, they just simply have to be made in order to balance the budget without destroying the last remnants of a viable economy through taxation. It will mean hardship in the short term but will ensure that the economy will survive in some meaningful way in the medium and long term.


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