Unravelling an Irish conundrum

Anyone who’s ever visited the Emerald Isle will confirm that humor always lies just beneath the surface. Even in these tough times, with the “Celtic Tiger” reduced to the status of a bemused kitten trying hard to look cute beside a begging-bowl, the Irish can fall back on their love of irony and their taste for gallows humour.

So it’s hardly surprising that the following droll story is now hurtling round the email circuit at breakneck speed. It’s actually quite hard to find the original source, but this particular yarn does seem to have been spinning around for at least a few weeks – before the Irish government was forced into a painful climb-down in the shape of a bailout deal with the EU and IMF. In fact, I suspect it’s an older story which has been dug out, brushed off and tweaked to make it fit the current circumstances.

Whatever the source, the events of the past few days have sent this tale zooming round cyberspace all the faster, so much so that I received it from two quite separate sources on the same afternoon:

“It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

“On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

“The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.

“The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him ‘services’ on credit.

“The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.

“At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

“No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

“And that, Ladies and Gentlemen, is how the bailout package works.”

It’s a neat little story, but I have two problems with it.

First, nobody in it is actually in debt – not net debt, anyway. Their net balance sheet is zero. Take the butcher. He owes the pig farmer €100, but is owed the same amount by the hotel owner. And so on for all the Irish characters.

Second, I am not sure how appropriate it is to dwell on the underlying message of the story. What does the story really tell us? For one thing, it reveals the way a bit of liquidity (the German's ready cash) oils the wheels of the economy.

That is a perfectly sensible thing to point out - normally. But you don’t have to be a Ph.D. in economics to realise that pumping in too much cash will overheat the economy. Too much liquidity will jack up demand and ultimately create a bubble.

Sound familiar? Well, of course that is what happened in Ireland in the boom years: the housing sector floated high on oceans of liquidity, and then when someone pulled the plug the result was a bust, and a bunch of crippled banks. The rest is Irish history.

So moral of the story, if you will, is actually a dangerous one – and certainly not the one the story-teller had in mind. Mind you, if the rich German had had the presence of mind to demand an interest rate based on the average of 5.83 percent the Irish will have to pay for their bailout, the conclusions might be different.

But it’s still a good story – so why let dreary old economics spoil it?