January 13, 2014
Imagine the real economy in a pair of tight bottle green flairs, the likes of which you could hide a six back of Harp up. Imagine the perm, the bomber jacket and a luxurious ‘tache’. It is pure 1970s. The soundtrack is somewhere between the Bay City Rollers and Rory Gallagher’s Calling Card. The best footballer in the world, Johan Cryuff, smokes at half time; people make “trunk” calls and drink Cadet Cola. And most crucially, from an economic perspective, like in the 1970s, there is no credit.
Now consider the financial markets where the government borrowed the other day. It is a globally interconnected world, operating 24/7. It’s a “totes amaze balls” casino, all Nikki Minaj, the XX, I-phone 5’s and Ronaldo preening at half time. And most importantly, there’s loads of credit for the government. It is quintessential 21st century economics.
The State – the most inefficient part of the Irish economy governed by 1970’s work practices – which competes with no one, can get all the money it wants at 2014 rates of interest. In contrast, while the domestic business, which competes all the time, every day, everywhere with everyone in the 21st century 24/7 world, can’t get working capital. It plays by 21st century rules but is governed by 1970’s financial constraints.
Thus the part of the economy with 1970’s work practices has 21st century capital and vice versa.
This past week the papers were full of triumphalist stories about the country borrowing on the financial markets. The spin was that Ireland was in some way unique – a former “bailout” country being able to borrow again. Portugal did the same this week too and it is not even out of its bailout yet! It is part of the large financial casino where money is no object.
But like a real casino the game is rigged.
In reality, the ability of Ireland to borrow is based on the fact that the financial markets believe ultimately the ECB will buy up bonds of peripheral governments and save the Euro from further jitters. So it is not a real market that assesses risk and reward, it is a subsidized one-way bet for lenders.
Legally, the ECB is debarred from buying 10-year bonds, but it will get around this by buying shorter-dated bonds (government short-term IOUs). Because the threat of deflation is very real all over Europe, the ECB knows it is going to have to prevent this. It will do this is by buying government IOUs that at present sit on the balance sheets of the banks and give the banks cash in return, keeping interest rates very low. Thereby it hopes to compel the banks to lend.
This action will have two definite results. First, it means that the central bank is financing the governments via the back door. In addition, while it might inject liquidity into the economies we can be certain that this ECB move will definitely force bond rates down and thus prices up, giving lenders a tidy profit.
That is the 21st century, sleight of hand economy where finance, politics and trader capitalism reign supreme, impervious to its own mistakes, relying on the “too big to fail doctrine”.
Back in the real world, credit in Ireland – and all over Europe – for small businesses is practically non-existent.
The economy here is experiencing a fragile, credit-less recovery- more 1974 than 2014. Without credit, spending has to come from income and this is what is happening.
Consider the data released this week.
Unemployment fell again last month showing that there is an economic pulse, faint enough, but a pulse nonetheless.
But what is financing this small upswing in local demand, which is thankfully coaxing people to employ other people?
The key to the change in the economy is income.
The most important figure in the real economy is disposable income. Income is everything: Income determines spending. If your income is rising your potential spending and/or saving is rising also.
Far too much attention in Ireland is paid to gross domestic product. It is the figure that those that want to paint a falsely rosy picture of the country, whether they are bond salesmen or government spin-doctors, deploy. But GDP is nothing more than all the production in the economy. Aggregate all the production together and then divide this by the amount of citizens in the country to get a GDP per head figure.
This figure is meaningless because if Viagra sells lots of pills for erectile dysfunction it is production, but it has no real impact on the rest of us. On this basis, Ireland is a very wealthy country indeed. GDP per head in Ireland is €33,000. If used to measure the welfare of the Irish people (vis a vis the rest of the world) everything seems hunky dory.
Be warned – it is lazy shorthand. We know because we live here that this figure is not accurate and it overestimates the wealth of people here.
A much better indicator is disposable income. On Friday the CSO published disposable income for the third quarter last year.
According to the CSO
“On a seasonally adjusted basis, the quarterly gross disposable income of households in Q3 2013 increased by €164m to €21,561m compared to the result for Q2 2013 of €21,397m”.
The first thing you will notice is that disposable income per head in Ireland is far lower than production per head. It is in fact on 35% lower. By looking at income, we begin to see the economy as it is and not as we would like it to be.
Of this income, spending increased by €215m to €19,754 per head during the three months to autumn and this means that total household saving decreased by €51m in the quarter. The derived gross saving ratio, which expresses saving as a percentage of gross disposable income, decreased from 8.7 per cent in Q2 2013 to 8.4 per cent in Q3 2013.
As the savings ratio falls, we begin to see how the recovery is going to take shape.
People are reducing savings gingerly each month. The process is slow and gradual but it is moving in one direction – towards more not less spending.
Normally at this stage of a 21st century cycle, the banks will aid the upswing by extending credit. However, lending figures published this week show credit falling again as banks hoard cash ahead of the next stress tests later this week.
As a result the real economy is stuck in the 1970s, while in the twilight world of government borrowing, the 21st century reigns.
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