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The Irish money supply is contracting rapidly. The value of the notes and coins in circulation plus the funds in bank accounts to which people and firms have instant access has fallen by about 14% over the past year. This is extremely serious. It limits the amount of buying and selling that can go on and cuts employment. It reduces the taxes people are due to pay. It also makes it much more difficult for borrowers to get the funds together to pay their taxes and to service their loans. If the contraction goes on, the banks’ bad debts will soar, and, as a result of the guarantees it has given, the government will have to borrow the funds to make their losses up. At some point, the banks’ losses may exceed the state’s ability to raise more funds and the nation would default.

The contraction in the money supply has therefore to be reversed. There are only three conventional ways that this can be done. One is that the money could be borrowed, whether by government, business or private individuals, and spent into circulation. However, this road seems blocked because firms and individuals are reluctant to increase their extremely high borrowings in present circumstances while the state is already borrowing so much it would be unwise, even if it were possible, for it to borrow more. The second and third ways are also blocked. One is to earn more money from overseas by exporting a lot more than the country is importing. The other is to attract in foreign direct investment. Neither presents good prospects in view of the global recession.

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