October 3, 2011

Welcome to the economic stagnation, 21st-century style

Posted in Sunday Business Post · 200 comments ·

The other night, in Cork, I was chatting to a woman from Mayfield. Let’s call her May. She works in a clothes shop on Patrick Street, Cork’s main shopping street. Last Sunday, she worked all day on this prime retail thoroughfare, and guess how much she took in the till during the whole day? Well, a shop like this should be – andwas in the recent past – taking about €1,800-€2,000 on Sundays, around €6,000 on Saturdays and anywhere between €1,200 and €1,500 on weekdays. Last Sunday,May took in €60 for the entire day!

Although this example might be a tad extreme, the reality for retailers all over Ireland is one of collapsing demand. Strolling down Patrick Street last Friday morning, it was clear that everyone was struggling.Every shop I counted, from the top of Washington Street to the English market, had either ‘for sale’or ‘massive discounts’ signs on the window.This is what happens when the economy slumps.

The question that worriesMay is: what happens next? Whenwe discuss where the economy could go over the next five years,much of the discussion focuses on one of two possible outcomes: the economy will either growor it will contract.But there is another possible outcome.The economy might not growor contract; it might well stagnate. With the financial markets in turmoil everywhere and growth slowing massively all around the world, economists are mentioning the stagnation experience of Japan between 1990 and 2010 as a possibleblueprint for thewesternworld in the year ahead.

Having grown dramatically since the SecondWorldWar, Japanwent on a credit binge in the 1980s and then, following a dramatic property crash and asset price crash that destroyed its banks and its national balance sheet, Japan stagnated for a generation.The economy flatlined and the national debt exploded. One of the interesting things about the discourse among economists is the sense that what happened in Japanwas unique. It was not. In fact, economies stagnate all the time.There is nothing unprecedented about stagnation.Think about Ireland in the 1980s.

One of the most extraordinary things about the 1980s is that the Irish economy grew in nine out of the ten years of that decade.GNP fell only in one year -1986 – and even then, the fall was modest.However, for people living through it, the 1980s felt like a recession. Around 480,000 emigrated from Ireland, and thiswas in a decade when the economy actually grew 90 per cent of the time.That is what stagnation feels like, and it happens all the time all over the world.

Recent research by Goldman Sachs shows that long periods of stagnation – as happened in Ireland fromthe late 1970s to 1990 – are not so unusual.There have been 20 such episodes in the past century. Interestingly, stagnation often occurred in developed countries, rich countries, countries like Ireland. In all cases, these periods of stagnation are preceded byone of four types of crisis. The probability of stagnation increases dramatically if the country experiences either (1) a banking crisis, (2) a financial crashwith stock and asset prices falling significantly, (3) a currency crisis or (4) a war.

The stagnation is characterised by modest growth in the economy of around 1 per cent per annum. Inflation is low, and so are interest rates.However,because the economy has just experienced a crash of some sort, the balance sheet is destroyed by debt and actually needs jaunty levels of inflation towipe out the debt. Low interest rates don’t spur growth because there is toomuch debt. Unemployment in this scenario spikes upwards and stays abnormally high for long periods, leading tovery high levels of long-termunemployment – or structural unemployment, as economists often call it.

And, as anyone who has been looking for work knows, it is much easier to get a new jobwhen you have one.The longer you are out of the game, the harder it is to convince someone to take you on. House prices fall dramatically and don’t recover in the stagnating economy. They remain low for prolonged periods and, of course, the stock market gets hammered,which affects pensions.The reason pensions take a battering is that with very low interest rates, it is impossible to guarantee an easy yield.Think about it.

Take an example where the yield curve is upward sloping (as it iswhen an economy is growing and there is a bit of inflation in the system), short-term interest rates are 1 per cent,but long-terminterest rates are 6 per cent.Then it is easy for even a dozy fundmanager to generate 5 per cent for the pension fund by simply investing the pension at the long end. But if the economy is stagnant, interest rates will be very low and there will be no yield to generate the returns for pensions. This has massive ramifications for the unfunded pensions of huge semi-states and the public sector. If the economy hits a period of stagnation, how will it throw off the necessary cash to generate the money for pensions? The question is then, how likely is it that Ireland will go into a period of stagnation? It is highly likely, aswe have experienced two of the four conditions for stagnation: the banking and asset price crises.

We are also in a dreadfully overvalued currency compared to our major trading partners, Britain and theUS, and this means that to get competitive,we have to go through the stupidity of this ‘internal devaluation’.Thismeans that we will grind downwages and prices over years, practically guaranteeing the stagnation that we are trying to avoid. We are entering a period that could come to be termed the ‘Great Stagnation in Ireland’.Like the 1980s,we may achieve the statistical feat of GNPgrowth, but it will feel like a recession characterised by high unemployment and emigration. It can be reversed by applying normal Leaving Cert economic solutions to an economy, such as a managed default and a profound change in the value of the currency. If we are not prepared to do this,welcome to stagnation, 21st-century style.

What does a 21st-century version of stagnation look like? It looks like a till with €60 in it at the end of a full trading day.

  1. Vincent Brown, Election Debate

    After wasting more than 30 minutes of my evening with this Muppet show, I just switched off. What a ridiculous setup, format, and performance.

    Sick to the bone

    • Praetorian

      I did the same, but spent less time, 12 minutes, whole thing was an absolute disgrace. I am sickened as well.

      • FG’s sorry excuse for a presidential candidate truly looked like THE MUMMY, which is perhaps appealing to the overwhelmingly reactionary Irish electorate, but apart from looks, which are always a hyped up aspect in the media frenzy, personally I find them all 100% unelectable.

        A public educated would boycott this farce of an election and occupy the IFSC instead.

        One truth about the candidates can not be overlooked, they represent the true state of this beautiful country, ripped apart by incompetence, begrudgers and Gombeens that still are sticking to the Irish corpse like leaches.

        The Irish Council of State hosts Bertie Ahern, Brian Cowen and many more inappropriate personalities.

        Peter Sutherland and other unacceptable consultants are still in full control.

        The hard core of ‘Implementers’, the most senior civil servants are still in power.

        ….Nothing changed in Ireland, nothing!

        To elect an Irish president at a time where Ireland is occupied territory and is governed by FG/Labor EU compliance managers can only be described as a political distraction maneuver for the public.

    • Deco

      There is a leadership problem in this country, when you have a collection of muppets running for President.

      I have heard it described as “the donkey race”.

      No mention of that term in the media. If that term was used in the media, it might give the game away, and show that nobody is impressed.

      • Adam Byrne

        Who would you recommend for President yourself Deco? I mean, outside the current ticket.

        • Gay Mitchell looked like a dressed up grey corpse to lie in a coffin.His face had that death look about him.

          From the distance from the TV I was not able to determine if he smelled like that too .

          • Mary was on quangos but didn’t get the message because she was nominated by a political party. She was supposed to be a FF crony on BOI or DAA, maybe she was but didn’t realise that’s the role she was supposed to play. Gay Mitchell would do better as an Independent due to collective betrayal of the electorate by FG. Gallagher should be running for FF but they wouldn’t elect him, we know why he’s running as an independent, he can’t escape his own past or having betrayed FF, FF past. McGuinness we know was in the IRA, but he’s done a lot for the Peace Process and might even defend us in some way from the banxter ants. Norris could be hiding highly incriminating evidence we believe is against him and now moves into the realm of questions re Social Welfare payments, he’s good for a scandal a week on ‘Carry On Up the Park’. Show us the evidence! Dana will take a right wing interpretation of the constitution but appears to not fully grasp the limited extent of the presidents constitutional powers and might be more at home with a new Consitution authored by her; these limited powers McAleese ignored as she supported FF against the people in the past, at least McAleese knew the meaning of crony. This pilot (hand washing by candidates) should be turned into a full series by RTE, called ‘The Celtic Wing’ (on a wing and a prayer). Lol.

          • Gay Mitchell is there to shore up the banxters and ensure the FG position supporting the banxters will not be challenged at presidential level; same as FF position on banxters was guarded and left unchallenged by Mcaleese.

            VB was much better than Tubridy!

        • coldblow

          Whatever reservations people may have about McGuinness it appears the establishment is united against him, despite what Harris thinks. (I’m open to correction.) I’d be concerned if he did win as this could conceivably give the real right wing (not the one that Dana is supposed to represent, but the Real or Continuity Wing of the Right Wing – what exactly does the term neay these days anyway? – although they might, if desperate, try to steal her clothes – whoa! – as I don’t think they’d be too fussy about ‘the optics’ one way or another so long as the ‘economic fundamentals’ are looked after) a pretext to get involved in a more ‘hands on’ kind of way. Of course they don’t need to do that as the govt is ‘on programme’ as far as they are concerned. I’m basing this on the 30s where the lower orders were perceived as the threat whereas the mayhem was actually the work of others. So, on the lines of SF-IRA, I’m thinking about a kind of McGuinness – Weimar/Bolshevism. We might yet see rugby types driving buses and delivering the post. A time to mind your vayels? Start practising while you can!

          In the same way, could the ongoing street protests in Athens be used to justify (at some stage) a suspension of democracy so as to restore law and order? Not unlikely, surely.

          Needless to say, all of the above could be wildly wrong.

          • redriversix

            Hey Coldblow

            I did’nt read David’s Book “The Generation Game”

            I was just looking for a suitable phrase to describe the War we are in.

            Indeed it is ” A Perfect Storm ”

            I think you guy’s are great that you are able to write so well with your articles , I Get so angry sometimes that I am barely able to put a couple of sentences together.

            But we are almost at the eye of this storm and it’s going to get a lot worse before it even starts to get better.

            Watch out for any major events over any Bank holiday weekend’s

            Forget about the Presidential election , it is a waste of time , resources and a distraction from the real problems facing us

            Take care of yourself and your families first.

          • RE “So, on the lines of SF-IRA, I’m thinking about a kind of McGuinness – Weimar/Bolshevism”

            Its a fair concern, but it depends whether you ignore his contribution to politics in NI and the Peace Process over the past decade or so; if this mitigates those fears and puts him closer to Mandela; compared to what eventually led to Stalinist dictatorship or WW11 and the Nazis…hopefully the fact that the Nazis or Stalin didn’t make a contribution to a similar peace process, separates him out from that fold.

          • coldblow


            No, I agree with you about his contribution to peace. What I was thinking is that if he were Pres and things got ugly around the country and he found himself in the position of figurehead for a vigorous minority opposition to current govt policy and used his constitutional position to show support (however vague), that his past record could be useful cover for others to suspend civil rights to ‘save the country from serious disorder’. Like a red scare.

          • coldblow

            In other words SF could be a focus for unrest, but the bigger danger would be that this threat would serve as a convenient excuse for introducing authoritarian measures. First the red scare, then the backlash. A pure guess.

          • coldblow,

            These are quite amazing vistas and scenarios opening before us. Rather like the military takeovers of banana republics, when the army suddenly step in. Hopefully, we’re not there yet. However, in the event of civil disorder for whatever reason in the future, given the present disenchantment with politics, who knows what’s on the cards. Perhaps the EMU will force us to increase numbers in our army and accept some blitzkrieg help from a newly centralised EUSSR defence force much in the way the nordic countries were occupied in WW11. Perhaps the Barrossa emphasis on centralisation and the recent comparison to WW11 by Trichet of present dangers, is their way to prevent such a scenario as you describe arising in the IVth Reich.

      • Pedro Nunez

        ‘Donkey derby’ is too kind a description for it, more of a ‘slug & lettuce’ race, none of these lugubrious jokers has a core agenda for moving forward for the country. No-one seems to be enthusiastically rallying around the vision of any of these conceited slugs ready to gorge on the trappings of the presidency for 7yrs.

        Gay Mitchell is perfect as the ‘undertaker’ for the corpse of an Irish State, so perhaps he’s well cast for this role.

        What a gombeen ridden, intellectually stunted nation we are if this is all we can come up with.

        Four legs good, two legs bad’ take it away Napolean and Snowball……

        Totalitarian gombeenism!

  2. CitizenWhy

    Here’s the speech where Ronald Reagan called for “class warfare” on the rich, that is, the right calls any attempt to tax the rich “class warfare.”

    But right wing darling Ronald Reagan called for aggressively taxing the rich, as seen below.


    • coldblow

      It’s surprising all right. Do you think he escaped from his minders on that day? I didn’t watch the video. Was he reading the speech or ad libbing? However the excerpt doesn’t imply ‘aggressive’ taxation IMO.

      • CitizenWhy

        Ronald Reagan raised taxes a number of times. The Republicans want to bury this fact. many Democrats assert that the US budget would be in good sahpe if the US went back to the Reagan tax levels. Taxes in the US have been lowest under Obama, whom many consider a somewhat moderate Republican rather than a labor Democrat. Moderate Republican s are flexible on social issues, and were often ahead of the Dems on these issues. But they always favor Wall St, business and the military over the middle class, the poor and labour, as does Obama.

  3. Fergal73

    Micheal Lewis on NPR (American talk radio): “There was a moment, just after Lehman Brothers failed, when Ireland really could have walked away from its obligations – justifiably. It wasn’t the Irish government that borrowed all this money; it was Irish banks.”

    “The Irish banks could have been allowed to fail; they could have at least said to the bondholders, ‘We’re not repaying you.’ And the Irish government made a decision to basically nationalize this obligation. And the amazing thing is that the Irish people did not protest. The Irish people just said, ‘Yep, we have to pay it back.’ “

    Says it all.

    • The GREEN Deception

      Its called ‘Latent Opportunity ‘ .Unfortunately , that was blurred by Fianna Fail.

      Their Veil of Secrecy was further supported by their cohorts in Banks , Dept of Finance and their Sponsors and this aquiescence was the Poison that was administered to The Electorate in the First Republic.

    • Re:

      The Irish people just said, ‘Yep, we have to pay it back.’ “

      Nope, the Irish people never ever said that. Many of us demanded a referendum.

      We were disenfranchised and stuck with the bill left us by disastrous political leadership.

      • We were not told the truth, all we were told was that we if let the banks fail the sky would come crashing down. They played the FEAR card very well.

        • banks had schmoozleDucks like Suds, Dukes, Honahan, Pravda RTE FG/FF in their grasp previous trough feeders taken care of through NAMA, our pockets were picked, job done, Lenihan gave ‘write your own cheque to the banks’ , and they sure came back for more and more…..Now its printing press time and gameOver:) Interesting to see http://dealbook.nytimes.com/2011/10/04/france-and-belgium-to-back-dexia-again/ how much of the banking sector in Europe will be guaranteed against Greece . No point in schudadonethisthats but Anglo should have been flushed into a good bank/bad bank and the bad bank folded after its guarantee removed

          • Overall, I’d say there is a lot of disillusionment with the political process on this island.

            Probably gonna be a very low turnout on polling day.

            Even the media seem to have run out of questions to put to our piloting ‘don’t look back’ salt of the earths:)

  4. Fans of Darwin should see parallels here between the markets attacking the euro and Ants vs Termites here. We are so like insects:


    key phrases:

    last ditch defence
    buying precious time safe but at a terrible cost
    seal off embattled bunker

    Or maybe there is more traction to be got from observing Greece as The Cuckoo in the Nest. Maybe this is the reason the present bailout tranche has been taken away pending further decision making.

    Greece pulled a cuckoo on us all. See here: http://www.youtube.com/watch?v=dAU5MTXmAPY

    Don’t tell me I should be starring in One Flew Over the Cuckoo’s nest, now:) It’s not just me, Banxters if they have their way will have us all starring in that one!

  5. CitizenWhy

    Web site for voting on Occupy Wall Street demands. Since Wall St wrecked the world, everyone should vote, not just Americans.


  6. CitizenWhy

    Toward a Political, Institutional and Legal Framework for a New Irish Republic.


    What do you think of this document?

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