What Happens to an Economy When Credit Stops Flowing?

0:00David McWilliams: Coming up on today's podcast, credits, where credit is due or no credit or what is happening to credit in Ireland. There has been a collapse in domestic credit. The banks are simply not lending in the country. This has led to a jaundiced economy and we're going to talk you through the ramifications, the consequences and the causes all in a couple of minutes.

0:23Oh, could this vintage store be any cuter? Right? And the best part? They accept Discover. Except Discover? In a little place like this? I don't think so, Jennifer. Oh, yeah, huh. Discover's accepted where I like to shop. Come on, baby, get with the times. Right, so we shouldn't get the parachute pants? These are making a comeback. I think. Discover is accepted at 99 % of places that take credit cards nationwide. Based on the February 2025 Nielsen Report. Hi, this is Matt from P1 with Matt and Tommy, and this episode is sponsored by eBay. The cars you'll find on eBay are just different. They come with a story that you can't wait to share.

1:03Like this 1973 Dodge Charger on eBay that has been tucked away in an Arizona barn for over 40 years, only 55 ,000 miles, and somehow in great running order. It even has a rare sunroof. Suddenly, a car that was hidden for decades is being delivered in just a few clicks with eBay's secure purchase. All the paperwork handled. There are thousands of cars on eBay, from unique finds like the Pontiac Grand Prix SJ to daily drivers, and now with a new way to buy them. eBay. Things people love.

1:40To understand the economy, you have to understand human nature. This podcast is powered by Acast.

1:52David McWilliams: how you doing there it is time for the podcast the podcast today is going to be if you can imagine if you could just close your eyes and imagine a giant sucking sound okay imagine that that is credit john not what you think my friend that is credit leaving the Irish economy. Okay, we're going to talk about the disappearance of credit in Ireland. Right. And that is a massive, massive issue. At the peak of the Celtic Tiger, I'll just give you a figure, and the reason this is important is because credit lubricates the economy. At the peak of the Celtic Tiger, the ratio of deposits in the banks to loans given out was 160%.

2:39David McWilliams: Now, that means that for every 100 euros the banks had in deposits, they were lending out 160, right? Right. And this is how they blew their balance sheet. I'll explain how that happens, right? Yeah. Today, for - I mean, you talked about magic money before. That's kind of magic - That's exactly what happened to too much credit. Yeah. Today, for every 100 euros deposits the banks have on account, they are only lending out 40. So 60 euros in every 100 is getting stuck in the banking system. Right. And this is totally and utterly biasing, jaundicing and destroying the creative part of the economy.

3:16So that is what we're going to talk about, dear listener. And actually, why this is important, what is happening to the banking system, what is the central bank doing, and why we're not actually feeling it is because that money has been replaced by other money, but it's that other money has not been as productive in the economy.

3:34David McWilliams: The other money is coming from the multinationals. So it explains all that. So we've been doing two or three podcasts on the origin of money, the nature of money, the role of central banking. And this is the final podcast, which focuses on actually what is happening in this economy. Also, we're seeing this in other economies, but it's particularly bad in Ireland, which is the banking system has lost its mojo completely. And as a result of that, the economy is being totally jaundiced in a certain direction. We're not seeing that because the multinational money is here and that's obscuring all the aggregate numbers.

4:13But this is something very, very significant. Yeah, I mean, that's interesting because just talking about banking in general and central banks and how the whole system works. But I've just come to realise over the last few weeks doing these podcasts, like how fragile it can be and how mismanaged it is. Yes. But there is potential to fix this and create a vibrant European economy.

4:41David McWilliams: Well, the European, I mean, you're buying this Europe is dead. I've noticed in the last few weeks you were definitely down some sort of MAGA-esque websites because you were buying this idea, this J.D. Vance. Not quite. That Europe is in some way a dead economy. Well, we spoke about before that, you know, we have outsourced our defence, outsourced our consumers and outsourced our innovation. And what J.D. Vance and all the MAGA guys are talking about, yeah it's nasty the way they're going about it but there is a point there. I'm not sure I think we're on the receiving end sorry dear listener we're just going a little tangent here before we start John is waving his stars and stripes in front of us I am waving the Ursula von der Leyen flag for Europe.

5:33David McWilliams: Your quiff. My quiff exactly but we will come back to it but there is an issue on crediting Europe and we will discuss that later on I just think that Europeans live longer, we live healthier, we have far less crime, we have far less social exclusion. Absolutely. So on every metric that matters, Europe does better. But there's a change happening. On every metric that doesn't matter, which is like, you know, GDP or wealth or whatever, you know. I go with that, yes. So in defence of the Europeans, in defence of our way of life, John. Anyway, I want to talk to you about credit, but I want to start the podcast, John.

6:10David McWilliams: speaking of Europe in Latin America. I want to explain to you and to the listener why credit is so important and why money is not neutral. I know this sounds like a very strange thing to say, but for so long, economics has, particularly GDP forecasting, has made the assumption that money is neutral. You'll hear that. People studying economics will hear that. It means that money doesn't have any intrinsic energy, right? That it doesn't change the world, right? I believe that's complete bullshit. I think that actual fact that the presence of money changes the way people are. You know this, having read the book and all that, right?

6:51But I want to talk to you about, I'll give you an example from history of how money changes the world, i.e. the money supply, if it expands, precipitates and generates trade, ideas, innovation, in what we call economic growth and economic liberalism.

7:11David McWilliams: And I'm going to start because... It fuels the fire of... Well, yeah, it changes people. The great promise of money is that you can change your social circumstances if you acquire it. That's why people want it. And in order to do that, you have to do something with money. So I'm going to give you an example, John. We're going to go back to a place called Potosi. Potosi? Potosi. Where is that? So what I want to do is I want to explain how money works in the economy, but by virtue of looking at the biggest silver mine ever in the world. Right. And that silver mine was in a place called Potosi in Bolivia, and it was high in the Andes.

7:54And it was a mine that was discovered by the Spaniards, and it was the source of global silver for 200 years. So much so. The sole source. Yeah, more or less. There was a source in a place called Jakobsthal. And Jakobsthal gave rise to the silver taler. The silver taler became the dollar.

8:21David McWilliams: So there you go, the origin. Now that you've asked me. So Jakobsthal is. Where is that? It's in what is now Czechoslovakia. Right. But it was then Sudetenland. And the Sudetenland is where the Germans lived in Czechoslovakia. They all got fucked out in 1945. for supporting the little man with the moustache, which is not a very good strategic move. But Jakobsthal was basically Jacob's valley. Thal is a valley in German. And the silver that was mined there created the Thaler. And fascinatingly, the Thaler, the Germans exported to Holland, to Germany. And when it arrived in America, it morphed into the word dollar, which is where the dollar comes from.

9:00So the dollar actually means valley.

9:02David McWilliams: It means valley, yes. It means valley, exactly. Exactly. And it comes from the Jakobs taler. But as you pointed out... Fun fact. Very good fun fact. Very, very good. But even though the taler was a European silver currency based, again, as I said, in that sort of Germanic speaking part of what is now the Czech Republic, the Potosi is the story of silver. And it's the story of silver in that period. So we're talking about the period between about 1500 and 1750, where the global economy begins to take shape in terms of the global capitalist economy, right? The one that we now begin to recognise.

9:45David McWilliams: And the question is, why did it begin to take shape? And was the finding of silver instrumental in this? And I believe it was, so that money is not passive, it's very, very active. So I'll give you some fun facts, right? So in 1600, a city that nobody has really heard of called Potosi had become the biggest city in the Americas and one of the largest cities in the world. A population more than London, Milan or Seville at the time. 160 ,000 Andean, African and European people laboured in these mines, okay? In fact, it was called... And these would have been really high up, the elevation. These were extraordinarily high up, right?

10:32So you can imagine how much slave labour was needed to change this. So the origins of slavery also comes from Potosi. And I'll explain all that to you as well. Or one of the main origins of slavery. Of more modern slavery or colonial...

10:48David McWilliams: Yeah, colonial slavery. Basically bringing black Africans to America to actually mine silver, right? So this is an extraordinary thing. The people of Potosi were so wealthy. They were buying diamonds from Sri Lanka, Ceylon. They were buying stockings from Neapolitan. I know you have a weakness for Neapolitan stockings. They were buying crystal from Venice. They were buying Chinese porcelain. And Potosi was named by Emperor Charles V, who was the Habsburg Emperor of Spain, as the treasury of the world. And again, nobody remembers it. But I'll give you another quote. 150 million pesos worth of silver was mined from 1556 to 1783.

11:34David McWilliams: 150 million pesos, right? Spanish pesos, right? Right. What would that be? What's the equivalent of that now? Equivalent to about$13 billion in today's money of silver came out of that neck of the woods. So, you know, the river plate. The river plate is in Argentina. But why is it called the river plate? Because plate is plato. Plato is silver in Spanish, right? So it was exported out of Latin America through Argentina, down the river plate, transporting silver out of Latin America, right? It produced 60 % of the world's silver. Now, the question is, what did it do to the world economy? This is the interesting thing, right?

12:22So then it was being shipped out of there. From Argentina to Spain. Back to Spain, okay. And this is why Spain were such a wealthy country for so long. This is exactly. And then they kind of forgot how to do stuff.

12:36David McWilliams: This is the whole point. This is where we're going. This is where we're going. So this is why when you go to Spain and you go to Madrid or you go to Seville and you see these monumental buildings, these huge plazas, all this. This was all financed. by silver that came out of this one mine, Pitosa, it was called the Mountain of Money, right? In the 17th and 18th century. Now, of course, the vast majority of writing about it focuses on the destruction of Indian culture, indigenous culture, right? Because these people were slaves. And the process by which the silver was extracted from the ore, from the rock, is a process using mercury.

13:22Yeah. And of course, mercury kills you, poisons you, right? So these people were dying in their hundreds of thousands. And then, of course, when they started to die, the Spaniards said, well, where do we get more labor? Where do we get more people? Yeah. So they started to export people from Africa, right? The slave trade. Do you know that of all the Africans who were enslaved, the vast, vast, vast majority of them went to Latin America. The vast majority, not to North America. The vast majority went to the Caribbean and Brazil in particular. Brazil, yeah. Brazil in particular. So, of course, this created two things.

14:00So imagine what's going on for the global economy. So imagine the global economy starts at zero, nothing happening. Spaniards discover silver. The silver generates this huge, huge transfer of resources to Spain. The Spaniards are sitting on their hoop doing nothing. Suddenly they've got all this silver. It also generates an extraordinary demand for labour, for slaves. So it kickstarts the Atlantic slave trade, number one. Number two, it kickstarts the extraordinary Spanish consumption of other stuff. because when the Spaniards got silver, they said, well, we're going to have to spend it. And so what you see then is a shift in the European economy where the Spaniards, because spending money is much easier than working as a general rule in life, right?

14:52David McWilliams: As we all know. Yeah, I kind of dig that, yeah. Right, okay. And spending other people's money, which you get for free, isn't better, right? So the Spaniards are sitting around. Suddenly they get all these other people's money. They get it for free. Yeah. And they say, ooh, what would I like? I'd like manufacturing goods. So this kickstarts an extraordinary increase in manufacturing in Northern Europe, particularly the Netherlands, right? So what I want to explain to you is this apparently unique and independent event precipitated an extraordinary chain reaction around the world, which proves the point that money is not neutral, that it's actually a catalyst for everything.

15:32So I'll just explain to you what's happening, right? The American silver became the sort of lingua franca of capitalism. European trade was transformed. The European countryside was transformed. The manufacturing sector was transformed because the Spaniards used the silver to buy wool, tin, hemp, linen, woolens, all sorts of stuff, manufacturing goods from Netherlands. Right, yeah, yeah. So the Dutch were the people who manufactured. So what you have is this strange story where the money comes into Spain, the Spaniards decide to spend it all. This is why the Spanish economy peaked the 17th century and went into decline after that, because they lost, amazingly, the ability to manufacture, because they decided to just spend all the foreign money.

16:20But the 17th and 18th century was the time that the Dutch, the Netherlands economy peaked as well.

16:27David McWilliams: But that was just purely based on the Spanish money? Purely based on the Spanish money. And then they used the Spanish money to finance the largest merchant navy fleet. So the Flying Dutchman, you remember the Flying Dutchman? That was a merchant navy fleet. And that merchant navy fleet was used to protect Dutch merchants who went all around Asia trading. Now, what did they... The fascinating thing is when the Dutch arrived in Asia, so you're talking about Borneo, you're talking about Malacca, you're talking about India, the Asians were miles ahead of the Europeans in terms of manufacturing. So the only thing the Dutch could offer the Asians was silver.

17:10So suddenly you see the discovery of silver in Bolivia, in Latin America, precipitates a massive increase in the slave trade from Africa. it generates this income for the Spaniards. The Spaniards then stop, in effect, making stuff. Yeah. And they started buying stuff. They buy that stuff largely from the Dutch. And the reason they bought it from the Dutch was that Spain occupied Netherlands. Okay, the Habsburg Spanish crown occupied the Netherlands in the late 15th century. The Dutch then, this is the circular flow of money around the world. The Dutch used that silver to pay for their trade with the Asians.

17:53The reason they used the silvers, the Asians didn't want anything from the Europeans because they were much more sophisticated than us. But there's a question, Frank, it's a little aside, but how did they value the silver, the Asians, since they didn't use it? They didn't want anything.

18:06David McWilliams: They used it, but there was never any silver mines in Asia. So silver was incredibly valuable because it was always scarce in Asia. Right, okay. So it was incredibly valuable as ornaments, but it was also the silver, for example, backed the Chinese paper currency. Right, gotcha, gotcha, gotcha. So they had absolutely no silver. So there's never really been big silver finds in Asia. So therefore, what happened, the Latin American silver goes via Europe to Asia, totally transforms the Asian economy as well. And what you see is the money moving around. So the silver allowed European merchants to intensify trade with Asia, Because the Asians had no interest in European-made products.

18:47David McWilliams: They just thought we were second-rate, right? Same shit as today. Chinese aren't buying any stuff from us. They're making all this stuff, right? Spanish crown became completely dependent on this precious metal. Yeah. So the Spaniards become hostage to silver. But the Germans and the Italian bankers are using Spain as a source of money lending. So they're lending money to the Spaniards, safe in the knowledge that the Spaniards have enormous amounts of silver. But you know what happened in Spain? Spain, the richest country in the world, defaulted on all its debts three times in the 17th century.

19:26David McWilliams: Why? How come? Because they couldn't, when the silver ran out, and it did run out, right, after they'd killed all the natives and all the Africans, they had no industry. So they defaulted. So the richest country in the world is a lesson for America now. Well, I'm just about to say. The richest country in the world defaulted three times because they overextended themselves. The Spaniards were always the Spanish Armada. They were fighting. The reason the Spanish Armada existed was because of the silver. Yeah, yeah, yeah. Because they could finance everything. Yeah. The black Irish in Connemara, those Irish people with brown eyes that we claim are from, the Spanish Armada, existed because of the silver.

20:00David McWilliams: So what I'm saying to you, John... Interesting. Yeah, and you know, what I'm saying, the impact of the silver in Asia was extraordinary because more than one third of all the silver mined in Latin America ended up in Asia. Because Asia was then, as it is now, the manufacturing capital of the world because the Asian economies were so much more sophisticated. Why were they so much more sophisticated? Because they had much larger populations. So Asia has always had a much larger population, right? And we forget that. That, for example, for most of world history, GDP history, India was the largest economy in the world.

20:42It was one third all global GDP. Right?

20:45David McWilliams: There's a very strange, John, statistical series called the Addison Statistical Series, which does... Come on, fascinate me. ...GDP going back to, believe it or not, the time of Jesus. Oh, yes. Yeah, yeah, yeah. We've spoken about this before. It's an amazing series. It's an amazing series. Right? So what I want to tell you is that when you get credit... Yeah. In this case, in the guise of silver, it changes the world. It changes the economy because it precipitates trade. People who never traded with each other before trade with each other because they're using it as money. And once this begins to happen, the process of innovation, the shumptarian process of innovation, accelerates dramatically.

21:32And this, I want you to keep in the back of your head as the way in which the economy works. And if you have an economy where credit is contracting, like we've had in Ireland in the last 10 years, that very process of innovation slows down. The very process of company formation slows down. the very process of independent wealth creation slows down. And this is incredibly deleterious to an economy. And this is happening in Ireland right now. But we don't feel this. Why? Because the money in the aggregate is being replaced by tax money from the American multinationals. Okay. So it's like a soothing balm, but actually deep down the process of innovation.

22:24It's festering. A, it's festering, but the process of innovation is just slowing down because the banks are not creating any credit. That's where I want to take this podcast. Okay, let's talk about the Ireland situation and the lack of credit and the lack of innovation as a result. Let's talk about that after a bit of this.

22:52My son loves to fly kites, but my active psoriatic arthritis can sometimes hold me back. Now with SkyRizzy to treat my skin and joints, I'm ready to go. SkyRizzy, Rizinkizumab RZA, a prescription-only 150 milligram injection for adults, helps with less joint pain, stiffness, swelling, and fatigue. For those who also have plaque psoriasis, 90 % clearer skin is possible with just four doses a year after two starter doses. Nothing is everything. Don't use if allergic to SkyRizzy. Serious allergic reactions and an increased risk of infections or a lower ability to fight them may occur. Before treatment, your doctor should check for infection and tuberculosis.

23:30Tell your doctor if you have an infection or symptoms, such as fever, sweats, chills, muscle aches, or cough, or if you plan to or recently received a vaccine. With SkyRizzy, there's nothing like clearer skin and better movement, and that means everything. Nothing is everything. Ask your doctor about SkyRizzy today and visit SkyRizzy.com or call 1-866-SKYRizzy to learn more. When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays.

24:06That's why Grainger offers millions of products and fast, dependable delivery. so you can keep your facility stocked, safe and running smoothly. Call 1-800-GRANGER, click grainger.com or just stop by. Grainger, for the ones who get it done.

24:24We're in on the ground in 100 countries. Sadly, not on holiday. But we've got a sunscreen on anyway because whether it's Tokyo or Toronto, We're monitoring markets, tracking trends and decoding consumer behaviour so you don't have to. Euromonitor International gives you global market intelligence with local nuance. Visit euromonitor.com, where everywhere you need to be.

24:57So, Mike, what we've been talking about is how silver created the modern economy as such. Yes, yeah. And through credit, and it gave rise to lots of innovation, etc., etc. But what happens when that credit stops? You saw that, you mentioned that Spain defaulted. But what's happening now, particularly in Ireland?

25:18David McWilliams: No, it's fascinating. So I want to reiterate for the listeners. Global capitalism that we know now, where we're trading Latin America, Europe, Asia, right, kind of started in the 17th century and was kicked off by this silver fight, right? But if a society and an economy is creating credit, you get these positive upswings, right? In Ireland, this is what I fear. As I'm walking around, John, these are the things that strike me in the head, is that credit creation has collapsed in this economy since the 2008 crisis. How come? Because the banks are not lending at all. Number one, there are only two banks in Ireland now.

26:00There used to be about 17. so there's no competition number two surely that's the time to actually make money

26:07David McWilliams: yeah I think you're absolutely right number two we have possibly the world's most dysfunctional institution which is the Irish Central Bank which is maybe the worst public institution I have ever observed not least because I worked there myself but it's you contributed I contributed in the main to the uselessness It's the absolute abject nature of the central bank. I actually kicked the whole thing off. No, but I'm really worried about this, the way the economy works, right? I'll give you a statistic, right? At the top of the Celtic tiger, and this is not right. This is when we blew the balance sheet.

26:44Right.

26:44David McWilliams: Quick recap of banking last week. Yes. Basically, the banks get deposits in, and then they lend those out. Yeah. And that's the general theory. My idea is that in actual fact, the banks can create money, not necessarily absolutely linked to deposits, right? But we'll explain that in a second, right? But the deposits are the foundational asset of the banking system. And how banks make money is they lend out money to you at a higher rate of interest than they pay you as a depositor. That's the spread. And of course, then it is a huge, huge incentive for the bank to lend a huge amount of money if they want to generate share price appreciation and wealth for the bank.

27:29David McWilliams: And this is all linked to the fractional reserve banking. Fractional reserve banking. And maybe I'll explain that, John. So what the bank does, right, is that the bank lends you money. You give the money to the person who owns the house. that money then typically goes back into the bank. So suddenly it's doubled, right? Then that can be lent out again and again and again. So what you have is a situation where the underlying mechanism within the banking system reinforces itself to create credit. And that's where you get credit expansion. So it's like a multiplier effect. So basically it is like a multiplier effect.

28:07So what you have, therefore, is the banking system creates this new credit, and the new credit cascades into the economy. Yeah. At the top of the boom, there were loads of banks operating in Ireland. The worst thing about the banks in Ireland was that they ran out of deposits in the Celtic Tiger. What I mean by that is they didn't have sufficient deposits within their banking system to back as collateral the amount of loans they were making. So they borrowed from other people. Right.

28:44David McWilliams: This is the idea of borrowing from German savers that I was going on about years and years ago. So basically, Irish banks ran out of Irish deposits at the top of the cycle. They said, where are we going to get the money? Why don't we just issue paper, IOUs, to other banks? And we'll borrow from the rest of the banking system in Europe, which is what they did. And so at the peak, the Irish banks were lending out 160 % of their deposits, right? And that is why the whole thing crashed. But also their margins, they would have reduced their margins. No, but... Because they would be paying interest on the money they've borrowed as well.

29:22David McWilliams: But the thing is that they were actually making money because although they were paying interest on the money they were borrowing, they were charging more interest to the poor fuckers in Ireland who were actually buying apartments in Bulgaria, right? Yes, they were. And then the whole thing crashes. Yeah. The Central Bank of Ireland missed that entire credit expansion. Although they were supposed to be in charge, they were looking the other way. They were having lunch in Guybo's with other bankers, going playing golf with these people, and they missed the whole thing. So the entire top brass of the Central Bank disappears after the crash.

30:01David McWilliams: They're replaced by a new bunch who said, we will never, ever, ever make the mistakes of those last bunch. Yeah. But then they over-tightened conditions. Yeah. And precisely when they should have been lending money, which is when the economy was contracting, they lent less and the economy contracted more. Right. Because they didn't have the courage or the confidence to actually do a bit of economics. So all through the... But they could see this happening. This is the bit I don't get. They can say it's happening right now. But the central bank doesn't seem to have twig that it has a responsibility for monetary policy in Ireland.

30:41And the responsibility of monetary policy is to get credit flowing in the economy. And they're just leaving it to the government fiscal policy.

30:49David McWilliams: Yeah, which we're going to come back to as well. That's exactly the point, John. That's exactly the point. So what we have then is today, credit as a percentage of deposits in Ireland has fallen to 40%, which means that for every 100 euros deposited in the Irish banking system, only 40 euros has been let out and 60 euros is stuck in the banks, which should be used productively for the economy, but isn't. Now, what does that do? It means small, for example, house builders. Yeah. So in Ireland, for example, over decades, you had big house builders and then small operations, usually down the country, they'd be building five houses, six houses, ten houses.

31:33And they wanted to do renovations. All that sort of stuff. Yeah, yeah.

31:35David McWilliams: Those people aren't getting any. So why do we have a housing crisis? Many reasons. One of which, small businesses cannot get money. Right. So those small builders are gone. Yeah. So small builders who used to provide, as you said, 20 houses here, 10 houses there, never big estates, not apartment blocks, but they're all gone. Because the banking system will not lend them money because the central bank has told the banking system don't lend them money because they're dangerous inherently. And so what has happened is the bankers who used to be adept at lending money have become now adept at not lending money.

32:12Right. Now, why is this allowed? Because the central bank is obsessed by not repeating the mistakes of 2008.

32:20David McWilliams: So much so that it's overcorrecting and there is not enough credit here. I have a question for you. We spoke last week briefly about the independence of the central bank. And is this a function of the independence of the central bank, insofar as that the Minister for Finance can turn around to Magaluf and say, sort this out? Is Magaluf being the head of the Irish Central Bank? Yes, Mr. Magaluf. He goes after the leaving search on Skype. Exactly. To Odbifa. No, it's not beefish, it's mejoka. Now, so what is happening here? There is a massive disconnection at the top of the central bank and the Department of Finance, and they don't seem to have either analysed this or having analysed this, they're not telling anybody what's happening.

33:14David McWilliams: Right. Right? Okay. So basically, you're absolutely right. Economics, imagine a boxer. Yeah. I've always thought this is the best way to look at the economy, right? A boxer, two punches, right? Left, right hook, okay? The economy's the same. The left hook is your fiscal policy. Your right hook is your monetary policy. They work in tandem. So you should expand monetary policy at a certain stage. You should contract fiscal policy. Fiscal policy is taxing and government spending. Monetary policy is bank lending. Both of those sides should be working in harmony. What is happening in Ireland is that the bank lending has collapsed completely.

33:52David McWilliams: Now, typically what would happen is if government spending were to expand dramatically to replace that, you would run into debt crises because the government would be spending too much money. But we have this added weird thing called the American multinational money. Right. So the American multinational money is flowing into the coffers of the state, 28 billion of it. This is totally and utterly jaundicing economic policy because it means there's no real budget constraint for the government. So rather than the economy contracting because credit is contracting, the economy is motoring, but it's been financed by American multinational money, which is the Dutch disease we spoke about.

34:35So what is happening in Ireland is that although the aggregate demand in the economy is rising, it's been driven and fuelled by American multinational money, which is coming through the state. So what we're seeing is that every euro being spent, a higher percentage of those euros has been spent by the state. Yes, yeah. And it's where the public sector bill has increased by 50 % since the pandemic. So during the pandemic, it cost about 75 billion to run this country.

35:06David McWilliams: Yeah. Now it costs about 120 billion. So this is the state using the American money to drive the economy. but it means that the private sector is being contracted all the time. So small businesses don't have money, people can't get money for housing, people can't get money to build houses. So the essential dynamism of the economy has been strangled, but we're not seeing it yet. This is my fear. Okay, and you're saying then that the fear then is that if or when the American multinationals leave, then you know the tide will go out as it were i'm mixing all my metaphors but you know tides there's lees but but but then we will see just how big a problem this is exactly so what you're having is lipstick on a pig john you heard that expression yes if you put lipstick on a pig it's still a pig right yeah okay what we are having is we are applying cameron knows all about that doesn't he oh yes david cameron yes he does he stuck his mickey in a pig he did apparently yeah It was part of a thing, you know, an Eaton thing.

36:15David McWilliams: It was an Eaton cult. Yeah. We're going off tangent. Come back, right? So basically what is happening is the headline figures for Ireland look great. GDP is rising. Incomes are rising. Employment is rising, leading to what we call the problems of success, right? Everywhere. The greatest example of that is Dublin's traffic. That is a classic example of a country that is over-trading, right? There's far too many cars for the amount of infrastructure we have. That all looks fine. But then if you look, why is this happening? This should normally, in a normal economy, be driven by a combination of credit and government spending, one fueling the other.

36:58Because the more credit you have, the more tax revenue you have, the more tax revenue you have, the more you can redistribute. But that's not happening in Ireland. What is happening is the local economy has been strangled because the local banking system is happy to sit on the deposits of the punters, which have been rising. And in a normal situation, that would cause the economy to contract. But because we have this weird thing, which is American multinationals, those American multinationals are throwing off sufficient tax revenue to allow the state to buy up everything. The state is buying one in every three euros of everything bought in this economy.

37:41Think about that. Wow. One in every three, yeah, is state spending, right? So the state is about 35 % of GDP. So that's what that means in reality, right? What that is doing is that is causing, take, for example, the housing market. Yeah. That is causing the state to be the biggest buyer

38:00David McWilliams: of new homes or one of the biggest singular buyers. Yeah, we talked about this a few podcasts ago. Which is L being out first-time buyers, which is, as I said, we are creating the most expensive council houses in the world here. Yeah. That's what we're effectively doing. The state is in competition with the people. With the people. Exactly. Exactly. And that's why young people are leaving in their droves. Yeah. Because they're like, fuck this. Right. We can't live here. But all the while, nobody is focusing on what we are focusing today, which is the lamentable performance of the Irish banking sector, because it's the Irish banking sector that is not lending.

38:37And it's the central bank that is overseeing this total and utter emaciation of the Irish financial sector.

38:48David McWilliams: There are now only two banks in Ireland, maybe three. There's a British bank called Monzo, I think, coming in, which is a good thing quite soon, right? We need competition, but we also need a central bank that steps up to the plate and says, loosen up your credit conditions now and has confidence that they will be able to actually implement and oversee the system. What we're looking at now is a central bank that is so incompetent that rather than do its job, which is to manage the system, it is closing down the system so it doesn't have to do its job. But is this, and I'll go back to the independence of the central bank, because is this a problem with the independence of the central bank?

39:36Yeah. That they need to be directed to do that. They need to be directed. I think you're absolutely right. But who actually can direct the central bank and encourage them? Does that come from the European Central Bank? Does that come from the Irish government? How does that work? How do you change this, in other words? The European Central Bank has all sorts of rules and regulations, which are called tier one, tier two, tier three ratios, capital adequacy ratios, right?

40:04David McWilliams: And they are supposed to be the guardrails against over lending, right? Right. So this is the money. But not under lending. Exactly. Right. So basically what you have here is an entire central banking system, totally scarred by 2008, and driven by excessive caution against the problem or the potential of overlending. What they have, and it's like the generals fighting the last war. Yeah, yeah, yeah. What we have now in Ireland is the problems associated with underlending. And because the central bankers are just looking back on the moment they lent too much as their defining point or their starting off point, what they are quite happy is to ignore the problems of underlending.

40:52But underlending is much more mendacious and duplicitous because as I go back, lending in itself, if done appropriately, is the elixir of economic growth, of innovation, of new companies. The shunterian dynamism of creative destruction is driven by credit. Yeah. Right? Yeah, yeah, yeah.

41:10David McWilliams: So what we have in Ireland is an economy that's looking good because the American multinationals are actually generating the income. But they're not generating innovation in Ireland. They are basically, in effect, employers in Ireland, right? They're employers of people, but all the social capital, all the real capital is going back to America. So it's not being generated here. So what we have now in Ireland is, because of the central banks underlending and unwillingness to see underlending as a problem, and we'll conclude here, John, we have an economy that looks great on the outside, But that is in danger of becoming three sectors, right?

41:54A massive multinational sector, a massive public sector, and a tiny, tiny private sector. And if that happens, to go back to your point that you said, you become unbelievably dependent on one sector alone. And we'll conclude with the warnings from Spain. So the Spaniards became over-dependent on Potosi's silver. They stopped working. They misdiagnosed their own consumption with wealth. So they bought all the products of the Dutch with the ill-gotten gains of the silver. And once the silver ran out, Spain became a backwater, which it was all the way up until 1975 when Franco died. So from 1775 to 1975 for 200 years, the once the world's richest country, Spain, became Europe's backwater.

42:57That is exactly what Ireland is risking now. Because rather than lend to our people to generate economic vibrancy, we are simply depending on the American money. And as a result of that, the governance in Ireland is lamentable because the central bank doesn't have to govern because its role, its responsibility is being shouldered by the American money. Yeah. So we will leave it there, Johnny Boy. Talk to you on Thursday.

43:51Hey, this is Adam Grant, host of TED's podcast, Rethinking with Adam Grant. Have you heard of Bill? It's the intelligent finance platform that uses AI to help you avoid costly errors and optimize cash flow. In fact, Bill reports that over 90 of the top 100 US accounting firms trust them to manage, move, and maximize money proven by over a trillion dollars in secure transactions. Eliminate the friction and start scaling with the proven choice. Visit bill.com slash proven to talk with an expert about automating your business finances and get a$250 gift card as a thank you. That's bill.com slash proven.

44:24Terms and conditions apply. See offer page for details. Taking care of your eyes shouldn't be a hassle. That's why Warby Parker is a one-stop shop for all your vision needs. Our prescription glasses and sunglasses are expertly crafted and unexpectedly affordable. Stop by a nearby store or use our app to virtually try on frames and get personalized recommendations. Did we mention we offer eye exams and take vision insurance too? For everything you need to see, head to your nearest Warby Parker store or visit warbyparker.com today. That's WarbyParker.com.

45:01Over 90 of the top 100 U.S. accounting firms trust Bill to handle BillPay processes. Why? Because our tools are built on over a trillion dollars of secure payments. We're not just moving money. We're powering financial workflows for half a million customers. That's a level of expertise you just can't fake. Ready to talk with an expert? Visit Bill.com slash proven to get started and grab a$250 gift card as a thank you. Terms and conditions apply. See offer page for details. A password manager should be the first security purchase you make for your team. Why? Because compromised passwords are the number one way bad actors attack companies and small businesses are their favorite targets.

45:43But unlike a lot of security challenges, passwords actually have a pretty simple solution. One password lets you manage all your business's credentials so you can feel confident that your data stays secure as your company grows. Find out more at 1password.com slash special offer and start securing every login.