Brendan O’Donoghue.

A PROPOSAL FOR THE
‘VIRTUAL DEVALUATION’
OF THE IRISH ECONOMY AS A WAY OF SOLVING OUR ECONOMIC PROBLEMS.

In the international economic conditions pertaining at present, the cost base of our economy is so high that we are beginning to haemorrhage jobs. We can continue the way we are going, with a slow and soul destroying downturn until the world economy recovers. If we were in a position to do so, I think we would devalue our currency, but due to our participation in the Euro, we can’t. To resolve our present predicament, I propose what I call ‘Virtual Devaluation’. Through ‘Virtual Devaluation’ our cost base (wages, prices, taxes etc.) would be brought back to a level they were at at a specific date in the past, hereafter referred to as the ‘Virtual Devaluation Date.’ If successfully implemented it would result in the following;

A sharp shock as a means of recover, rather than the slow depressing endeavour that we are experiencing at present, which has no positive end in sight.
The government seen be treating all the entities within the Social Partnership on an equal basis, and that there is a transparent equitable distribution of the hardship resulting from the economic downturn
A large reduction in the public sector wage and social welfare costs..
A improvement in the competitive position of Irish businesses in the international environment.
Reductions in our cost base resulting in a more attractive environment for tourism and inward investment.
Less likely for shoppers to go outside the state for bargains.
An easing of the economic pressures on the manufacturing sector due to lower wages.
Setting up new businesses would cost a lot less.
The cost of running the state would be significantly reduced, the extent of the reductions would depend on the ‘Virtual Devaluation Date’
The government would not need to borrow as much money to run the country.

There are advantages and disadvantages to this proposal. Relative to our GDP, the national debt would increase. Secondly the income received by the state from taxation would be greatly reduced, but as is indicated earlier, the cost of running the country would be reduced substantially. People with large amounts of liquid assets would find that they had appreciated in value relative to the extent of the ‘Virtual Devaluation.’ People in this position would be encouraged to spend their money within the Irish economy due to the proposed built in inflation, outlined later on. As our economic potential would improve, so too would our international credit rating. If our devaluation was sufficient, we could have a credit rating equal to, or even better than Germany! Therefore it would cost us much less to service our debts.

To achieve ‘Virtual Devaluation’ I propose that there be a renegotiate of Towards 2016 with the aim of agreeing the ‘Virtual Devaluation date.’ The emphasis on this would be on getting our wages and price back to the level they were on a specific date. (Excluded from this would be the cost of stocks, shares, land and property, but would include the income of everybody, including the politicians and self employed.) A special emphasis would be put on the employers and government to get them to agree that those at the top would the first to have the reductions in salaries, bonuses and expenses, and also a agreement that appropriate reduction would be made in the prices of their product and/or services to prices that applied on the ’Virtual Devaluation Date.’ There will be circumstances where excessive profits were being made at that time, in such circumstances the prices would have to be reduced accordingly. In other cases the reduction in the value of the Pound and Dollar may allow for greater decreases in prices, again the prices would drop accordingly. Special exemptions would be made where the prices could not feasibly be reduced due to other external costs. The foregoing would form part of the renegotiated agreement.

As part of the agreement, the unions would agree reductions in wages to those applying on the ’Virtual Devaluation’ date as well. There would also have to be some reductions in welfare payments.

It is important that the renegotiated Towards 2016 allows for a small wage increase for each year of the agreement. The aim of this proposal is to prevent the Irish economy going into negative inflation . In setting the ‘Virtual Devaluation Date, cognizance must be taken of the possibility that the world economy goes into negative inflation, and the effect that would have on our competitive position for the future. We would need to ensure that the ‘Virtual Devaluation’ was large enough to take these considerations into account. An analysis of the prevailing economic conditions would have to done, and an appropriate ‘Virtual Devaluation Date’ selected. I suggest that the devaluation might be in the region of 20%.

I further suggest that two sub committees be set up from members of the social partners. One of the committees would examine aspects of the economy where savings can be made. One particular area would be expenses and pensions paid to public servants and politicians. An example might be the means testing of pensions which apply before one reaches 65. It would also monitor prices, reporting back to the Social Partners on a regular basis. Workers and consumers would be encouraged to report where the terms of the agreement have been breached. The unions and consumer groups would need this committee to have some power to ensure prices are kept low. Such a power might be the right to picket businesses which are deemed to charge too much. If the business wishes to contest the right of those to picket, they must then allow an inspection of their books by a competent authority to determine the truth or otherwise with regard to overpricing. If found to be overpricing they would be subject to the additional tax as outlined

The second committee’s function would be to ensure that following wage reductions, that people with particular economic problems as a result of large mortgages and some other loans, would be given assistance. This would be supported by the state, and pressure would need to be put on the banks to force them to assist in this process. Where their existing lender was unwilling to assist in this, that the loans might be taken over by the nationalised Anglo Irish Bank.

The fact that the Pound, the Dollar, and interest rates have dropped, and that oil prices have also dropped, is of particular advantage to implementing this proposal at present. This should allow for a large reduction in the cost of living, that is providing that all those in the position to do so, pass on the saving, thus reducing prices.

As a way of ensuring that prices are reduced to the fullest extent possible I make two proposals:

1/, That both income and profit taxes be substantially increased, but that the those complying with the terms of the agreement be exempt from these increases. People outside of the PAYE system would have to opt into this agreement. Were individuals, or company directors through the actions of their board, fails to comply with the terms of the agreement, that all their income for that year be subject to the increased level of taxes as indicated above. If the prices are correct that the organisation organising the picket be subject to a fine.

2/ That the urgent investigation take place into exclusivity deals that traditionally have been agreed between external entities and Irish wholesalers/suppliers, which give them a monopoly position with regard to importing specific products into the state. Differences between the prices of some products sold here, as compared to their UK prices, suggest excessive profit making due to their monopoly position. Both Ireland and the EU have laws dealing with competition and monopolies, through these laws something needs to be done urgently.

What is proposed here would be very difficult to achieve, but if it was achieved it would leave us in a very advantageous position. Tourism and inward investment would be more inclined to come into the country. Our competitive position would be much improved and we would be in the position to get back to the position in were in during the Celtic Tiger. With a lot of hard work, and a united determination to work for the national interest, this proposal could be a runner. If we got back to the position we were in during the Celtic Tiger, perhaps we will have learned how to avoid the mistakes we made then.

For a detailed analysis of the effect it would have on our economic position the following will have to be examined in detail.

The effect this proposal will have on government expenditure. My answer. The expenditure would be greatly reduced.
The effect on the government’s income from taxes. My answer. Taxes would be considerably reduced over the short term.
The effect on our external debts. My answer. The external debt would appreciate in relation to the governments income.
Our competitive position with regard to our major trading partners. My answer. It would appear that we would become much more competitive.
The effect Ireland’s credit rating on the international market. My answer. As our trading position would improve, we should regain the confidence of the international market, therefore our credit rating should improve and we should be able to get loans at much lower interest rates.
The effect on people with large mortgages and other large loans. My answer. Those with mortgages and loans would find it more difficult to repay these loans, therefore some assistance would be required so as to treat everybody in an equitable manner.
The effect on the property market. My answer. In the short term property prices will continue to drop. But as the economy improves with the recovery in the world economy, the demand in Ireland for houses will increase and the property market should recover somewhat. As things are, more people will probably emigrate, thus reducing the demand for property, therefore the property market may take many more years to recover.

Many anomalies will present themselves with regard to negotiating this proposal by the Social Partners, but I’m sure that it is within the competence of the Social Partners to resolve any that do occur.

It is not the aim of this proposal to solve all the economic problems affecting the country, but simply suggest a way of re-positioning our economic position relative to our major trading partners so that we can be in a more advantageous trading position now, and into the future.

If you can, do youself a favour and emigrate. You’ll get international experience, learn how to live in a different culture and if you want to return in a few years, maybe you can, to a country where house prices reflect a realistic multiple of income – 3 to 5 times gross. The Irish Times article today predicting 80% fall in real terms is right on the money.

General Secretary Blair Horan said:

“This ship of state did not drift onto the rocks due to an engine failure caused by the global financial crisis.

“This ship of state was driven full-speed ahead onto the rocks through a failed housing policy and reckless lending by the banks.”

http://www.independent.ie/national-news/unions-warn-of-crippling-strikes-if-pay-cuts-imposed-1600625.html

September 17, 1960

“It was precisely in that dark epoch of the sugar depression that the task of the banks was very important, since all depressions {recessions} are always felt by the mass of the people. Depressions {recessions} are when the great monopolies see their profits increased and when they consolidate their economic empire, absorbing all the small ones, all the sardines in this sea of economic struggle. Thus in that epoch the US banks had an important task. It was the task of foreclosing for debts, according to the laws of the country, on all those who could not resist the force of the depression {recessions}, and they rapidly consolidated their empires.”

we certainly need to wean ourselves quickly off our dependency on the US. we also now need to borrow to develop our towns, cities and transport infrastructure. some of the ‘cities’ in Ireland are criminal in terms of how run-down the look, they do not inspire, Cork is a great example, it looks so poor, so run down in places, with terrible roads and footpaths (basic stuff).

we need to look to ourselves for the answers and quit taking the easy road of Foreign Direct Investment and call centre jobs, which contribute only to the profits of US multinationals (and we have seen the consequences of that). These jobs do not develop people’s minds, and therefore in the long run we all lose out.

If our universities and graduates are as good as our university presidents (with their absurd salaries) keeping telling us they are then we should create our own technology industries especially in Green technology and biotechnology. It’s no longer time for short term solutions for long term problems, we need some vision and leadership, sadly both seem lacking but then what do you expect from the parish-pump style system of politics that we have in this country, maybe the positive out of this horrendous negative period is that Ireland and its people will mature in the furnace of this economic crisis and demand more of its politicians than soundbites and ideas after the event.

I found it interesting how quickly people were writing and talking about people emigrating again, well at least the bombast and arrogance has gone, maybe now we can have a sensible debate about our country’s future and not charge €9000 per hour to do so.