Back from baking amazing Dubai. Impressions to be recorded separately.

Check out this superb piece of work from Frances Coppola, ‘one-time professional banker’, on the difference between between being ‘illiquid’ and being ‘insolvent’.

The key point to grasp is that you are 100% bust if you can not pay your debts once everything you own is sold.

If you can pay your debts after everything you own is sold, you merely have a cash-flow problem. Not that that is necessarily easy to deal with, if it is hard to sell your assets. Look at this subtle passage:

I’m sure it is clear by now that the distinction between illiquidity and insolvency is a very fine one. The "job loss" example is particularly confusing, because many people find it hard to tell the difference between temporary insolvency and illiquidity. The difference is certainty.

Someone who has a contractual right to receive an agreed amount of money which is sufficient to meet their current obligations (debt service, rent etc.) is not usually regarded as insolvent even if the total amount they owe is greater than the value of their current assets.

Someone who has no idea when they will get another job is insolvent if they owe more than their current assets, even if they can meet their current obligations, because they have no certainty of future income. And if someone’s certain future income is insufficient to meet their current obligations, they would probably be regarded as insolvent if their assets are worth less than the total amount they owe, even though their immediate problem is lack of cash. I hope that makes sense.

It does! She then moves on to explain what all that means for Eurozone banks:

Now to the distressed Eurozone countries. The worst by far is Greece. Is it insolvent? Well, no. Remember my definition of insolvency – value of total assets less than the total amount owing. I hate to say it, but the assets of the Greek state are worth FAR more than the amount it owes. Anyone care to value the Greek islands?

The problem is, of course, whether there are buyers, and whether Greece wants to sell. Regardless of how much assets are worth, if you won’t sell them or no-one wants to buy them you STILL can’t service your debts. This is – partly – Greece’s problem. It either can’t or won’t sell enough assets to reduce its debt to manageable proportions. And the severe recession it has now been in for over four years is reducing its income. So although it is not strictly insolvent, it can’t meet its obligations.

What is needed – urgently – are measures to improve its income – and for a country, just as for a marginally solvent business with severe cash flow problems, that means DOING MORE BUSINESS. Cutting costs and collecting more of the tax owed may help, but they will not solve the fundamental problem. There has to be more economic activity. Somehow, Greece has to be pulled out of recession.

Therefore what?

In fact NO country in Europe is insolvent. But Eurozone countries do have severe liquidity problems. This is because they have adopted a foreign currency – the Euro – and consequently have no control over money issuance or monetary policy. Countries that issue their own currencies cannot have liquidity problems unless they have large foreign currency liabilities (as Hungary does, for example). They can become insolvent, though, if the productive assets of the country collapse to the point where the currency is backed by not very much

It’s around this point that I think the analysis needs sharpening, as Frances elides ‘countries’ with ‘governments’. That suits governments but does not suit the wider masses.

Basically, over time the state has usurped the responsibility of issuing money, and then borrowed far more than the state can afford to repay. All in the name of the citizens, most of whom will not grasp what is being done in their name but instead grab the ‘free’ benefits the state doles out. Hamish McRae today in another fine article at the Indy:

… debt is invisible. It hangs over people, worries them, changes the way they behave and may eventually result in their losing their jobs. But it is only then that you see it.

So what we are seeing are European state finances going bust, not individual countries going bust. The state of course does not want you to understand this and realise that the state could sell off huge state-owned assets and slash state spending and state processes to get back to honest financing.

Instead the state intends to dump its profligacy on everyone and anyone else. See also Obama. More taxes! No nasty austerity!

Which brings us to Dubai. Which runs on a completely different basis and is doing rather well:

In fact, none of the seven regions of the UAE impose a federal income tax, even though they are legally within their rights to do so. In the Arab world, it is considered haram or forbidden to take unearned income, which taxes are considered.

What?!

Imagine that!

The government stopping taking money from us because it hasn’t earned it!

That’s the very bottom of the problem in the European Social Model. Too many people are taking money from others that they have not earned. This cumulatively erodes confidence and ends up in Frances’ loss of certainty – hence moral as well as economic insovency.

This is the root of the absurd and accelerating civilisational crisis in Europe that Hamish McRae so carefully describes.