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Should Ireland Copy Iceland?

Ireland's tragedy shows the wisdom of Austrian economics...

MY TRIP to Ireland four years ago saw the country still in the throes of boom times. My trip there just weeks ago was a far different story, says Chris Weber, editor of The Weber Global Opportunities Report, in the Daily Wealth email.

Ireland "benefited" from low interest rates that came from joining the Euro. But while those rates were perfect for Germany, they were much too low for Ireland. Cheap money made everyone feel rich: They borrowed and put a lot of money into property. Four years ago, the overbuilding had reached what felt to me was a peak.

In fact, it's been downhill since then. The biggest banks went bankrupt since their property loans went bad. But instead of letting them fail, which happened in Iceland, Irish taxpayers have been bailing them out. This has caused a severe economic downturn. The more wealth that is taxed and taken out of the economy, the less there is for it to grow.

So far, the Irish have suffered mostly silently. Few talk about it, but there has been a severe upsurge in suicides, mostly younger men made hopeless by their debts. 

Tourism is down: you can say that this makes it nicer for travelers who get huge amounts of extras not seen before. Added to this is the large amount of money that went into infrastructure, like better roads. They often got finished just in time for the recession to hit, so they are often nearly empty. One out of seven jobs that existed four years ago is gone today. Many newly built homes stand empty, and sometimes not even finished.

It's all dramatic proof of the validity of the "Austrian" school of economics. If the interest rate is pushed artificially down, people will react by putting money into projects that are not economic, but feel great at the time. At some point, these "mal-investments" become obvious, but by then it is too late.

The best remedy for this is to do what Iceland did: allow the "mal-investments" to be flushed out. This is very painful, and the banks that were foolish are allowed to go under. But at least the taxpayer does not have to bail them out. After a period of severe pain when the bad investments are "purged," the economy can get a new start.

But bring up the Iceland example to the ruling class in Ireland and they'll point to statements from the Iceland president who says he wouldn't recommend the Iceland example to anyone because it is just too painful. 

Such statements are played up in the Irish press. However, I think this is the innate modesty of the Icelandic people, who don't like to preach to others. Of course there is short-term pain, but when it passes, there is a new and sustainable strength.

Just recently, Iceland's government was able to borrow money in the international market for the first time in years. A five-year bond had an interest rate of only 3%. To me, this is the sign of a real success. If anyone still wants to lend Ireland money, the Irish would have to pay 14% or more.

These high interest rates have to be paid for out of the pockets of the Irish people. It would be one thing if this money was actually doing some good, but it is only going to pay off the big banks who lent Ireland money years ago.

I thought about how Ireland emerged from serfdom later than most of Europe. It was only recently that it stopped being a poor country. But now, it looks like it could be sliding back into serfdom. If nothing is done, the burden on the Irish to pay off banks for debts long since gone bad will turn the country into a poor place for years to come. Maybe there'll be riots in the streets and people will urge default on debts.

But in the meantime, there is a deep lack of confidence in Ireland. One person told me that it would be extremely popular there if the US wanted Ireland as the 51st state. They've already given up their sovereignty to Europe, and would regard giving it to the US as a step up. 

Of course, it's not going to happen: the US has enough indebted states to bail out already. The feeling is that Ireland cannot solve its own problems and needs someone to take over. They only fairly recently got independence (less than 100 years ago), and now not only feel like they've failed, but that there is no great hope for the future.

Yes, property prices have fallen. In one case, a house that sold for €9.5 million five years ago just went on the market for €1.95 million. But many outsiders there looking around still believe most asking prices are much too high and must fall for the market to start clearing the huge backlog of unsold homes.

My trip to Ireland was my first exposure to a European casualty of the debt crisis. The other Euro-zone nations I've seen, Germany and France, are thankfully strong economies that are riding out the storm successfully. 

But Ireland is not.

Making it worse is the lack of imagination and courage in the Irish leaders. They are simply sticking to the same ways of doing things and hoping for the best. They are afraid to say goodbye to the European Union, take their own currency back, and stop bailing out the bankrupt. They continue to throw good money after bad, even though they are making their own people poorer by doing so. It's all very sad.

After witnessing the pessimism in Ireland up close...and considering the dangerous financial situation we are in here in the US, I have to remind myself not to dwell on the negatives...and remember the best thing each of us can do is to be sure we don't make the same mistakes that entire nations have made. We can't change them, but we can change ourselves.

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Starting with $650 saved from his newspaper round, Chris Weber began buying and trading gold at age 16. A millionaire by 20, he switched into foreign currencies and debt investments as the US Fed finally started to tackle inflation in the early '80s. Now he shares his trades and insights with private investors through the Weber Global Opportunities Report.

See full archive of Chris Weber articles

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