You may have heard this one before, but apparently some countries in the Eurozone are struggling to raise the necessary monies they need. Keep this one quiet, we certainly don’t want to create a panic, but it appears that when Portugal went to the bond markets this week in an attempt to raise some more readies, some feared it wouldn’t be successful.

Then yesterday, Spain and Italy were busy selling bonds, and once again (shhh) one or two investors had their doubts.

But fear not. Just as some feared Spain was on the verge of holding out the begging bowl and asking the IMF/EU/ECB to put their hands in their pockets and lend it money that they couldn’t comfortably afford, along came China and asked: “Can we help?”

Good old China. Out of the kindness of its politicians’ hearts it offered to save Spain from the abyss.

But now an EU politician has only come along and said China may have an ulterior motive.

The cynical politician was Herman Van Rompuy, no less; Europe’s president. He said: “When they buy euros, the euro becomes stronger and their currency a little bit weaker. That is not neutral in regard to their competitive position. But I go no further in this topic. It could be too delicate.”

Shock, scandal! China has a selfish reason for trying to help Spain. And there was silly old us thinking China was just a country of philanthropists.

Anyway, some are now suggesting the offer to Spain is just another attempt by China to prop up the yuan. You see, if the euro collapses, the yuan will look expensive.

Well, call us naive if you wish, but is it not the case that a collapse in the euro, leading to a possible European-wide debt default, will be bad news for a lot more countries besides China? In the long term such a collapse could be a good thing, but in the short term, well, just thinking about the ramifications brings back memories of the collapse of Lehman Brothers.

We kind of thought that China’s rationale for offering to assist Spain was precisely because she felt it was in her interests to avoid a new economic meltdown in what is perhaps her most important export market. Or are we being a tad indelicate? 

That strikes us as quite a lot of money.

Ireland has a double problem with this loan. At 5.8 per cent interest, the cost of repayment is simply huge. The yield on UK ten-year government bonds was 3.35 per cent last night. So presumably the UK government can make a healthy profit, borrowing at less than 3.5 per cent, and lending out at just under 6 per cent.

But is the debt really affordable at that level? To put the Irish bailout into perspective, Ireland’s GDP in 2009 was around $227bn. In other words, the loan is for around half of its GDP. When you consider that the Irish government’s total debt was around 65 per cent of GDP at the end of 2009, it just goes to show what happens when you let a housing market boom beyond any sense, and have a banking sector that dishes out money sure in the knowledge the money is safe because it is backed by property.

Meanwhile, the Eurozone crisis is pushing down on the euro. Well, let’s face it, one would be surprised if it didn’t. Last night there were 1.3242 euros to the dollar. Back in September the euro was more expensive than that. In other words, this is what has happened. The Fed has unleashed a massive bout of quantitative easing, and the dollar is now marginally more expensive today than it was three months ago.

It just goes to show that if there is one evil that is worse than printing money faster than Ben’s helicopters can drop it, then that has to be not printing money. Maybe if the European Central Bank had engaged in QE of its own, then the Greek contagion wouldn’t have spread even as far as the securitised Parthenon, let alone to the rest of Greece and beyond.

On the other hand, maybe QE disguises the truth.

Take average compensation for employees in the private sector since, say, 1993. Since then, compensation for Germany has risen by 28 per cent. In France compensation has risen by 50 per cent; Belgium by 57 per cent; Italy by 62 per cent; Spain by 85 per cent; the US by 85 per cent; Ireland by 86 per cent; the UK by 92 per cent; and Portugal by 204 per cent.

In fairness, Germany’s growth in productivity was quite low, whereas the US, the UK, Portugal and Ireland all enjoyed faster growth in productivity. Although, worryingly, Spain didn’t. But even allowing for productivity growth, the fact is, this differential was nowhere great enough to justify the higher wage inflation in any of the countries mentioned.

So what can we conclude?

Ireland, Spain and co. are now being forced to grapple with the horrendous problem of repaying debt, while letting wages fall so that their economies are competitive with Germany.

The UK and the US, thanks to the voodoo called quantitative easing, are not being forced to do this.

It is just that if it is that good a deal, why don’t the markets go out and do the same?

So, George Osborne says: “Don’t worry, we will get our money back.” But if making money was that easy, we would all be doing it. Those of us with a good enough credit status could trundle down to the bank, top up our mortgage at one or two per cent interest, and lend the money to Ireland at five per cent. We don’t do that, for the same reason the markets don’t do that, or at least do something similar. Unlike Goodtime George, we have a gut instinct which is telling us that we can by no means be sure Ireland will indeed be able to repay its loan.

But Georgy Boy, along with his fellow finance ministers, can do one thing we can’t do. If Ireland gets into trouble again, and horror of horror struggles once again to repay its debts, then the UK government, along with the rest of the motley crew, can lend it more money.

Of course, it is a technique that a certain late Charles Ponzi, or indeed a certain Mr Bernard Madoff, would be all too familiar with, but what are the alternatives?

If they let Ireland go, many of our banks will follow, including no doubt RBS, and for that matter so perhaps will go one of our biggest export markets. Go down the drain, that is.

So, don’t be fooled into thinking the latest money being handed out to Ireland is a prudent safe bet. It’s a desperate act, implemented only because George and Christine (Lagarde) and Wolfgang (Schauble) are terrified of the alternative.

They see the bailout as the lesser of two evils.

But are they really right?

The big fear of course is not so much that the contagion will spread to Portugal; the EU can just about cope ad infinitum with lending money to Ireland, Greece and Portugal to pay off the money it lent previously. But if Spain gets caught up in it all, well now, that would be a different matter entirely.

So, how likely is this?

Today we are peeking beneath the surface, to try and work out exactly how serious the problems with the euro are. So we are taking a look at debt levels, that’s both government and household; house prices; and indeed unit labour costs; across the Eurozone’s more troubled countries and comparing with the UK and Germany.

So how bad is it? And might the UK go the way of Ireland too, eventually?

First off, let’s look at government debt.

According to the latest data from Eurostat, total government debt and the annual deficit at the end of 2009 in the Eurozone and for the UK, as a percentage of respective GDP, can be summarised as follows:

 In other words, by the end of last year, both Germany and France had higher government debt than Spain, Portugal, Ireland and indeed the UK. Greece, on the other hand, was a basket case even then.

The worry of course relates to the level of borrowing that occurred in 2009, and any ongoing borrowing. But earlier this year Ireland slammed on the brakes, and was making good progress. But Ireland’s problem is its banks, and the government’s problems can be dated back to when it agreed to provide a 100 per cent guarantee for Irish bank debts.

So this begs the question, why are its banks in so much debt?

And this takes us into new territory. Now we need to look beyond government debt, to household and company debt.

According to PwC, UK public and private debt combined will hit £10 trillion, or 540 per cent of GDP, by 2015. But that estimate includes our pension liabilities, which in some cases won’t actually be due for a very long time, and in any case, changes in the retirement age or stock market performance could completely transform pension liabilities.

According to a piece in The Economist back in April, Portugal’s household debt is around 100 per cent of GDP. Ireland’s households are thought to be indebted to the tune of about 176 per cent. Spanish household indebtedness is around 90 per cent of GDP, and yet in Greece, households are a frugal lot, apparently, and Greek household debt is around 61 per cent. Household debt in Belgium is lower still, and in fact is less than half Germany’s.

According to the OECD, household debt in 2007 across the G7 was as follows:

 According to the OECD, indebtedness of enterprises across the G7 in 2007, as a percentage of GDP, was:

 It’s all very well looking at household and corporate debt, but a more pertinent question relates to the nature of debt. Most would agree that lending in the form of a mortgage is not necessarily a bad thing. You would expect mortgages to be higher in countries where a high percentage of households own their home. And it just so happens that home ownership is especially popular in Spain and the UK, and not at all popular in Germany.

So it’s all very well saying shock horror, UK households are in debt relative to Germany, but if this is explained by the fact that more UK households have mortgages and own their home, this may be a ‘so what’ statistic.

In fact, according to OECD figures, if you remove mortgage debt from the data, then UK households have less debt than those in Canada, Italy and Japan, and only marginally more debt than in households across the other three G7 countries.

So it all seems to boil down to how secure mortgage debt is, and this in turn relates to house prices.

The OECD has produced some good data here.

During the ten-year period from 1996 to 2006, average house price inflation across key countries was as follows:

Data on Greece and Portugal is not available from the OECD, but according to data from Bank of Greece, Greek house price inflation during 2005, 2006 and 2007 was marginally higher than in the UK. Portuguese house price inflation (according to Instituto Nacional de Estatistica de Portugal), on the other hand, was very modest.

Of course, right now, house prices are falling rapidly. From Q1 2008 to Q2 this year, house prices have fallen in Ireland by around 38 per cent; in Spain by about 12 per cent; by 11 per cent in the US; and by just over 8 per cent in the UK and Greece.

So put that together, and what do we get?

Ireland‘s problems relate to falling house prices. For Spain and the US, falling house prices also are a big problem, just not quite as crippling as in Ireland. For Greece, yes, falling house prices is an issue, but it’s the combination of falling house prices and crippling government debt which is proving such a nasty cocktail. Given that Greek household debt is so low, however, one assumes falling house prices is not quite such a serious problem.

This begs the question, how much further have prices to fall?

The OECD has produced data comparing average house prices to average income. And that data shows up a quite scary fact: assuming a long-run average of 100 for each country, this is how it pans out as at the end of 2008:

 In Ireland, house prices have fallen quite a bit since then, suggesting they are approaching a sustainable level. In the US, the ratio of price to income should be below the long-run average by now, but it would seem Spain, the UK and Belgium are suffering from a market that is still way too expensive.

And finally, moving away from house prices, there is another factor – competitiveness.

According to data from the ECB, average labour unit costs between 1996 and Q1 2010, across Germany, Ireland, Greece, Spain, Portugal and the UK, have risen as follows:

So what can we conclude? Well, it’s especially sad for countries with large household debt, but which are not called Germany. So, for Portugal, Spain and Ireland, households are in debt, but it appears labour is overpaid. So at once wages must fall, while households repay debt. Not a pleasant combination.

For the UK, we are similarly cursed. But there is one difference. The UK is not in the euro. The UK can regain competitiveness via a falling currency.

For more information see:

German Households Owe More Than Greece’s Do

The economist: Portugal’s economy The importance of not being Greece

Square Metre Prices – Portugal Compared to Continent

OECD Economic Outlook No.

HOUSE PRICES WORLDWIDE

PwC projects total UK public and private debt to hit £10 trillion by 2015

If watching the Eurozone crisis is like watching a slow-motion car crash, then maybe someone has taken their hand off the remote, or even put it on fast forward, for the crisis seems to have gathered a new momentum. And markets have even noticed, something this column has hinted at many times, that Belgium could follow suit, too.

And they are blaming the German answer to the Iron Lady. How dare she say these things. The markets are punishing her.

There is one snag with this argument, and the innocent faces that adorn investment banks. Ms Merkel is right. She wants to see the markets punished for their misdemeanours, and sorry, if the truth hurts, well, so be it.

Yesterday, Angela said to the German parliament: “Do politicians have the courage to place the risk burden on those who make money? Or is trading in sovereign debt the only business in the world in which there is no need to take risk?” And then she added: “This is about the primacy of politics, this is about the limits of the markets.”

Well, with those words, the markets’ rage knew no limits.

The yield on bonds relating to Ireland, Portugal, Spain, and also poor old Belgium, soared. In effect, Ms Merkel told the markets she thinks they should share some of the burden in rescuing Europe, and take a haircut: make a loss. And so, if markets are going to lose money, or so it was reasoned, investors had better get a better return on their investment. So up went yields.

Central bankers were none too chuffed. Take Ewald Nowotny. He is Austria’s answer to Mervyn King, and one of the top men at the European Central Bank. He described Ms Merkel’s comments as “irritating” and “reckless”.

But traders across the world seemed to share those sentiments.

Actually, the German leader is not calling for an imminent haircut. Rather, she is thinking about the years ahead, and is trying to prepare the way.

But markets don’t like rumour, or half-baked ideas. Neither do they like hints that they may be forced to cut their losses.

So that’s what happened. We have three observations to make: firstly, default of some sort seems inevitable. Secondly, it seems that in a funny kind of way, Angela Merkel and arch-Keynesian Paul Krugman agree. Both seem to think that markets need to be encouraged to throw their money at business, and stop wasting it on buying assets they think are safe but in the process do little for the economy, which in turn makes these assets far from safe. And finally, we are concerned  about interest rates. To find out more see The Eurozone’s three Ds: default, default, and default in the Eurozone

Firstly, default of some sort seems inevitable. Secondly, it seems that in a funny kind of way, Angela Merkel and arch-Keynesian Paul Krugman agree. Both seem to think that markets need to be encouraged to throw their money at business, and stop wasting it on buying assets they think are safe but in the process do little for the economy, which in turn makes these assets far from safe. And finally, we are concerned about interest rates.

First of all, it really does seem hard to believe that we can avoid some kind of sovereign default and either an exit from the euro, or maybe even the emergence of two euro currencies. Countries such as Ireland, Portugal, Spain and Greece have seen such a loss in competitiveness over the last few years, that it would take very severe wage deflation to put that right. But as wages fall, house prices will look even more expensive, household debt relative to income will surge (this is especially a problem in Ireland, Portugal and Spain, less so in Belgium and Greece), and as wages fall, demand will fall, leading to slower growth, less tax receipts, and maybe as a result debt will get worse.

For more on Belgium’s problems click here: Is Belgium like Greece, or Germany?

Secondly, in an odd kind of way Ms Merkel and arch-Keynesian Paul Krugman are saying something similar. Nobel Laureate Krugman is a fan of governments spending more to get us out of crisis. So on the surface, his views and Ms Merkel’s are polar opposites.

But what Mr Krugman has said, on numerous occasions, is that if investors stopped buying government bonds, and threw their money at business, GDP would rise and government borrowing would fall. So, he is suggesting that while a flight from bonds would be bad news for governments trying to raise money, such a development would be good for the economy as a whole, and that in any case, under these cicumstances, governments would not need to borrow so much.

He is right, although whether he is right to conclude that the solution, then, is for governments to borrow more, is another matter.

Ms Merkel, on the other hand, wants to punish bond investors for pouring their money into the wrong assets.

The real error the markets made was to see house prices, and more recently bonds, as low risk, and investment into innovation and enterprise as high risk. Initially their error led to a housing boom, which as we all know ended in tears. Now it has created a boom in bond prices.

But growth depends on creating new products, and services that serve consumers. And markets seem to be allergic to providing money to businesses that do this. And until they do, the economy will limp forward.

And if markets are going to get bailed out every time their strategy becomes unstuck, they aren’t going to change their strategy.

The third point is a more philosophical one.

If markets are forced to take losses, the long-term consequence will be higher interest rates.

It is easy to forget that we live in an age of absurdly low interest rates. It’s these low rates which are keeping debt affordable. The yield on Irish ten-year bonds moved over 9 per cent this week. Yields on Spanish bonds rose over 5 per cent. On the BBC business news this morning, the one that is broadcast at 5.30, one of the presenters talked about yields hitting an all-time high. Then she realised what she said and corrected herself. Yields are not that high at all, they are just at post-recession highs.

We are panicking about the prospect of interest rates returning to levels that were once considered normal.

The truth is, the global economy is incredibly vulnerable. If rates return to anything like the levels we once thought were quite good, then a new debt crisis will emerge. And yet even at low rates it seems some debts are close to default anyway. Such a default will push interest rates up, more loans will be written off, and the queue at the economic hairdressers, full of bond investors accepting losses, will be inversely proportional to the queue at the real-world hairdressers, where a new age of frugality may see us opt for the kind of hairdos the Normans had. (That’s a bowl over our head, with the barber cutting around the outside.)

Default is the inevitable consequence of the mistakes that were made in the past, when investment in assets that did nothing was seen as less risky than investment in business.

First things first: the UK’s contribution to the Irish bailout is justified because if Ireland defaulted and its banks went bust, the UK would suffer. Ireland is, after all, one of the UK’s main trading partners. (It’s ridiculous, of course, but Britain sells more to Ireland, than it does to China and India combined). So if the Irish economic crisis became worse, the effect on UK exports would be pretty worrisome. Some UK banks, in particular RBS which is primarily owned by British taxpayers, hold an awful lot of assets pertaining to Irish banks on their books. If Irish banks went the way of Lehman, we would have another major banking crisis on our hands.

But the worry lies in part in how Ireland must pay its way, in the conditions to be imposed on the country.

Corporate tax is not going up. The Germans and the French don’t like it, but this was why the Irish government played hardball and said it didn’t want bailing out. If Ireland went bust it would be just as big a catastrophe for the eurozone as it would be for Ireland. So her governments says, Thanks, we will have your money, but not at the price of upping corporate tax.

But one condition that does seem likely to be imposed on Ireland is a new property tax.

Now, under normal circumstances property taxes might be quite a good idea. The economist Fred Harrison has argued that most economic bubbles are caused by housing bubbles, and the way to stop them occurring is to introduce property taxes.

But Ireland’s fundamental problem right now is crashing house prices. If Irish house prices were higher, its banks would not be so vulnerable. It’s the same in Portugal and Spain, and to a lesser extent the UK.

A property tax before the crisis would have been a good idea.

But right now, such a tax could be very bad news indeed.

An Irish property tax would not merely be akin to locking the stable door after the horse has bolted; it would be the equivalent of locking the door so tight that once the horse has been recovered, no one can work out how to get it back in.

<hr />Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

What’s the Irish economy’s unique selling point? Well, there are lots of contenders, but this one seems like a good’un: a corporation tax rate of 12.5 per cent. And if your name is Mr Corporate and you are pondering on ideas for a good place to set up an HQ, then a corporation tax rate that low may seem rather appealing.

But then again, none of us like paying taxes – well, none of us with the exception of masochists and Warren Buffett, but frankly, Mr B can afford his rather strange hobby. All of us want our governments to charge rock bottom tax rates. The snag is, we also want the benefits that come with government spending. And alas, low taxes and all the good stuff that comes with government spending are not all that compatible.

So it is all very well Ireland having this business-friendly tax regime, but this begs the question, is it affordable?

Germany doesn’t like it. Elmar Brok, who is a German Christian Democrat Member of the European Parliament, was recently quoted by Reuters as saying: “Ireland has two options to consolidate its budget - cut expenses even further or increase taxes like the corporate tax rate.”

The truth is, Germany doesn’t like it when one of its Eurozone neighbours has this one big advantage. Maybe it sees Irish low taxes as a form of protectionism, an affront to the German way of doing things, which is to export more while the rest of the world imports more. So it’s a tad annoying when one of its fellow Eurozone countries has the effrontery to have a more effective model for attracting overseas companies, which can in turn export their wares across Europe.

But what Germany really doesn’t like is the idea of using its money to bail out a country whose low tax regime affords it a competitive advantage. So Germany will bail out Ireland if necessary, but only if the smaller country accepts changes to the way she balances her government budget, and ups taxes. At least one assumes this is how it will turn out. The day German money is used to rescue a trade rival, without exacting something in return, is the day that Johnny Depp, so flushed with his success in Tim Burton’s musical based on a certain Victorian barber, chooses to enter the X-Factor.

It is just that up to now, Ireland has not helped itself to EU money. No begging bowl from the Emerald Isle. More to the point, it doesn’t need to avail itself of more money until next spring. Who knows what will happen then. Maybe the markets will refuse Ireland, but, frankly, that is just a guess.

So Ireland is fine, thank you very much – well, fine if we ignore the fact she is in the midst of a very deep recession, and the more she does what the credit rating agencies want, and cuts spending, the worse her credit rating seems to be.

And before you say: “But surely it is very well Ireland having this business-friendly tax regime – but it ain’t affordable, tax has got to go,” bear in mind that in 2007 the Irish government’s debt was just 25 per cent of GDP, compared to 64.9 per cent in Germany. Look at Irish debt before the credit crisis, then the argument that Irish taxes are not affordable looks questionable.

On the surface, Ireland’s problems are its banks. If the Irish government has to engage in more bank bail outs, then it could become insolvent.

But maybe Ireland’s problem is deeper than that. Maybe its real problem is the euro. During the boom, when Eurozone interest rates fell too low for the overheating Irish economy, we saw the emergence of an Irish property bubble that made the British property market look positively restrained by comparison.

And right now, maybe what Ireland really needs is a cheaper currency, and to accept that in the event that bank debts surge and become unaffordable, it will have to turn to bondholders and say it’s very sorry, but they are not going to get all their money back.

This all begs the question: will the euro survive intact? The last few days have seen a welter of evidence that says No.

Of course, the end of the euro would also mean the end of certain political careers, including the likes of Mr Sarkozy and Mrs Merkel. For too many political heavyweights, even contemplating the end of the euro, or some form of break-up, is unthinkable.

And yet last week, Mrs Merkel said: “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

European ministers are up in arms. The Portuguese Finance Minister Fernando Teixeira dos Santos referred to the Merkel comment, saying: “We were like the soccer player running to the goal and ready to kick for the goal, and then someone fouls us, but this time there was no penalty.”

Greece’s Premier George Papandreou said of Mrs Merkel’s comments: “It is like saying to someone, ‘since you have a difficulty, I will put an even higher burden on your back.’ This could force economies towards bankruptcy.”

And yet, lurking within the rhetoric and the accusations and the counter accusations, one comment makes truly interesting reading. This is what the Portuguese finance minister told the FT: “The risk is high because we are not only facing a national or country problem. It is the problems of Greece, Portugal, and Ireland. Markets look at these economies because we are all in this together in the eurozone. Suppose we were not in the Eurozone, the risk of contagion could be lower.”

In other words, the problem is the euro.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

Zombies are in the news again. That’s zombie banks, zombie households, and now maybe zombie countries.

“Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system,” or so said Andrew Mellon, US Secretary of Treasury, just as the US economy hurtled into the 1930s depression. Actually, these days, Mr Mellon is vilified. When economists list the blunders that are thought to have made the depression of the 1930s so nasty, they place the actions of Mr Mellon somewhere near the top.

And when Lehman Brothers went under, the US finance minister at the time, Hank Paulson, seemed to take on the persona of a latter-day Andrew Mellon. He was slated for his action, or rather inaction, and economists across the world queued up to explain why letting the bank go under was an error of gigantic proportions. Many economic forecasters even tried to explain away their abject failure to predict the recession by saying: “Well, how was I to know the US treasury secretary was going to prove to be so inept.”

Two years on, the picture looks different.

All of a sudden, default is becoming the new way forward. A growing chorus of voices is saying let banks fail, let corporates go under, let risk related to mortgage debt be fully realised, and let countries default.

But in the vanguard of the calls for letting countries default, and indeed banks, are the Germans. This is what Angela Merkel said earlier this week: “Let me put it quite simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world … We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

She makes a good point. It’s not fair. If a bank gets into trouble, it is rescued and its top executives get a massive pension pay off. If it’s an individual, then a life of misery beckons. At least that’s how it feels.

And so the Germans have had enough. Not for them, rescuing the foolish and the greedy while its own citizens are the paragons of frugality. Let Ireland default, and if necessary Greece and Portugal too. Investors, those wealthy men and women at investment banks who take massive risks which we have to underwrite via our taxes, have got to change. Moral hazard has got to be given more recognition. Banks must pay the price for their foolishness, and when their reckless activities in the past unwind, it is they who must pay the penalty at the financial barbers, and see their hair shaved right down to the economic skull.

All this talk about letting countries fail, and making investors feel the pain, may or may not be right. But it’s the view that is being expressed with more and more force.

Maybe the problem is zombies. Maybe we are in the midst of seeing the economic equivalent of the night of the living dead. There’s zombie banks that can’t move forward with anything like their old gusto, so weighed down are they by the potentially risky assets they hold.

Then there’s zombie mortgage holders. Last week, Fathom Consulting warned about these particular types of un-dead. “Put simply,” said Danny Gabay from the consultancy, “banks have lent too much money against assets that have fallen in value, and those losses have to be fully recognised. Until they are, the economy will not be free to move forward.” Mr Gabay added: “Compare Britain today to Japan in 1997 and there’s not much difference. They had zombie companies, we’re in danger of creating zombie households.”

Fathom reckons the UK’s central banks should use quantitative easing to buy up dodgy mortgage assets from banks, thereby creating one mother of all bad banks, and in the process cleaning up the balance sheets of the UK’s commercial banks.

And finally, there’s zombie countries.

This is what Japan experienced 20 years ago. In Japan, bad banks and bad business were supported, failure was not an option. And some say that’s why Japan’s ills have lingered on for so long. Sometimes, they say, you just have to do what Andrew Mellon said, and “purge the rottenness out of the system.”

And maybe investors don’t take enough responsibility for their errors. Which is why it is time they were made to suffer the consequences of their mistakes.

Back in the noughties, the problem perhaps was that money flooded into property instead of business. Property speculation was seen as safe, investment in wealth-creating business as risky. On a case by case basis that view may be right. When applied on a macro scale, it is not like that at all.

But now we won’t recognise the error of our ways. Instead, we try to prop up failing assets. Prop up failing banks, and prop up insolvent countries.

It is just that on closer examination, the picture looks different.

For one thing, the solution to the zombie households that Fathom has recommended is the polar opposite to the policy the Germans want to enforce. Fathom wants to see banks bailed out and the risky assets taken on by governments or central banks. Germany wants to see investors, and indeed banks, pay the price for their past folly.

Liquidating bad banks, companies failing, and letting countries default, may be the correct approaching for sorting out longer-term underlying problems, but the immediate pain that will result will be awful.

And right now, Ireland is feeling the pain. The yield on its bonds is shooting up. The good news: the government is adequately financed for the time being, and won’t need to ask the markets for more money for a while. The bad news: if market conditions carry on as they are, then come next spring, Ireland really will be up the economic creek without a fiscal paddle.

PS Returning to Mr Mellon, he may now be cast as the villain of 1930s disaster, but before the crash of 1929 he was held up as a hero. He had in fact held the position of US treasury secretary for just shy of 11 years. He was a heavyweight in the US financial scene, held up as one of the greats. One can’t help recall a certain G Brown who was chancellor in the UK for ten years, and celebrated as one of the all-time greatest UK finance ministers, until he was promoted to the job next door and financial crisis struck again. For that matter, Alan Greenspan served as top man at the Fed for even longer, and yet has now become a figure of near ridicule. Maybe it does show the worst mistake you can make if you are in a position of authority in the financial world, is to hold on to your job for too long.

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The OECD was looking at efforts in the developed world to slash debt, and their conclusion: “The developed world must try harder to slash debt.2 But on this occasion, their criticism wasn’t all one way. Teachers don’t only pour their derision on the noisy kids; they don’t tend to like the shy, retiring types, either, and will say of such a pupil: “must contribute more.” And so it was yesterday, with the OECD telling emerging countries they must try harder to spend more.

Okay, we will come clean, the report didn’t really have lots of red ink, or “see me” and “must try harder” comments. Our opening para was a touch metaphorical, and for that matter yours truly’s reports were not quite as they were painted above. But the gist of the OECD’s comments was along those lines.

This is what the report said about the developed world debt. “The crisis has pushed public deficits and debt to unsustainable levels.” And then its Secretary-General Angel Gurría said: “Simply stabilizing debt relative to GDP in most countries will require a historical consolidation effort of anywhere from 6 to 9 per cent of GDP, but in fact even more is needed to bring debt back to sustainable levels.”

And then the OECD stated the words that could just as easily have come out of the respective mouths of Messrs Cameron and Osborne, saying: “Specific budgetary rules and the creation of independent fiscal watchdogs can help ensure that essential consolidation measures are also credible. Governments should also seek to strengthen the cost-effectiveness of expenditures that enhance growth, in areas such as health care, education, innovation and infrastructure development.”

The OECD doesn’t seem much impressed with quantitative easing either, saying: “Continued monetary ease in many advanced economies prompts capital flows to emerging economies where they risk creating asset bubbles while putting upward pressure on their exchange rates. The recent unilateral interventions in foreign exchange markets and the resulting volatility could prompt protectionist responses. Better,” says the OECD, “is to reach a common understanding on how global imbalances are to be reduced.”

But the OECD also turned its attention on the emerging world, saying: “Exchange rate adjustment cannot do the whole job of rebalancing. Structural reforms, such as the strengthening of social safety nets and the development of financial markets in emerging economies, should be employed to reduce their savings and dependence on financial markets in advanced economies. The OECD sees structural reforms, such as the liberalisation of product markets, also as crucial to recover the output losses associated with the crisis and to help put public finances back on a sustainable path.”

In other words, the OECD says that while the developed world must cut back, the emerging world must spend more and buy less Western debt.

It is probably right.

Actually, QE is looking increasingly like the Fed’s weapon to try and force China and the rest of the gang to do things its way. China hates QE; the US hates China’s policy of keeping the yuan down. And in the currency war, QE is the only weapon of mass destruction.

But these things take time. China is changing, consumers are spending more, imports are growing. In fact, import growth exceeded export growth recently. It is just that these changes will not happen overnight. But overnight is just about the time frame the US is demanding.

View other articles on China’s re-balancing act.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

It all began last week when the President of the Bundesbank Axel Weber told a delegation in New York that he thought the ECB purchase of bonds drawn on the Eurozone’s more vulnerable countries “should now be phased out permanently”.

Then in an interview with the Italian newspaper La Stampa this morning, Jean-Claude Trichet, head honcho at the European Central Bank, was asked if he agreed with Weber’s comments. He replied that the “overwhelming majority” of ECB members were not in favour of discontinuing the bond purchases.

What makes the debate all the more interesting is that many have tipped Weber as the next president of the Eurozone central bank.

Germany is of course hugely resentful of the debtor countries within the Eurozone. The idea of bailing them out is an anathema to Germany.

And yet it is thanks to the problems in Greece and the rest that the euro is so cheap, which in turn is boosting German exports.

Germany may hate the way the Eurozone is bailing out countries that didn’t adopt its more prudent ways, but the alternative would be for it to leave the euro. This is what Nobel Laureate Joseph Stiglitz recently predicted.

See: Germany may pull out of Euro, predicts Joseph Stiglitz

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