September 8, 2014

Sugar Rush

Posted in Sunday Business Post · 43 comments ·

Our economy is showing considerable signs of life. Many indicators, which were dormant for years, are now pointing upwards. The big question is whether this is something muscular, the fruition of a long lasting plan or is it a massive sugar rush, fuelled by six years of pent-up demand and renewed buyer panic in the housing market?

A crucial part of this answer will be the path of credit over the next few years, now that interest rates are the lowest they have ever, yes ever, been in Ireland!

In truth it would be best if it were a combination of both long-term planning together with what the great Keynes referred to as “animal spirits”, the type of human effervescence that comes with thinking tomorrow will be brighter than today. Economies need this buzz. Few stony-faced economists agree with the “buzz” approach to the story, preferring technocratic explanations as if the economy were some well-functioning train system rather than what it is: a reflection of us – all of us – with our flaws, mood-swings, loves, madness, hunches and beautifully human irrationality.

Speaking of train systems, I am writing this from Switzerland where I am working at the moment in Interlaken. It’s a beautiful place, mountains on all sides, traditional Swiss houses with thick beams, low ceilings and a sort of coziness known as “gemütlichkeit” in German.

Switzerland has had interest rates at or close to zero for many years, so it is quite a good place to start. Its is also a very open economy which does almost 70% of its trade with its close neighbours Germany, France and Italy but has a significant trading footprint in the US and Asia too.

On the Asian point, if you want to see what is happening in the Chinese economy you might note the enormous numbers of Chinese and Indian tourists here. Tourism is not something we associate with China. The common image of China is the sweatshop of the world, churning out everything for the rest to consume. We tend to have the same image of India.

But here, high in the Alps, the Chinese and Indian middle-classes are on holiday. They are not just on holiday, they have bought up the main street here, which is full of, it must be said, pretty down-market Chinese takeaways and curry houses. But then again, if the British brought “fish and chips” to Torremolinas in the 1970s and we decked the world in Irish Pubs in the 1990s, why can’t the Asians do the same with their curry-houses in the 2000s?

The rapid emergence of a middle class from Asia who are now rich enough to go on European tours reveals just how quickly the world is changing and how countries need to keep modifying their economic plans to keep up.

Are we doing that in Ireland?

Other characters from the East who you see in Switzerland are Russians. In truth, Switzerland and Swiss banks have benefited possibly as much as Chelsea fans from mass kleptocracy in Putin’s Russia. But the reach of the Kremlin goes beyond Swiss banks and Stamford Bridge to the very heart of the European Central Bank.

One of the reasons Irish interest rates are zero is because the prospect of war in Ukraine and sanctions on Russia has terrified corporate Germany. German business leaders are petrified largely because about 3,000 German businesses are heavily invested in Russia. German business has reacted to sanctions by stopping investment, sentiment has collapsed and the German supply chain, the single most important manufacturing infrastructure than binds European industry together, has frozen.

This development is contributing to EU deflation and inactivity and this is what Draghi has moved to try to kick-start with his zero interest rates on Thursday.

Now think about it. Low interest rates in a country of mortgage holders like Ireland amplifies borrowing and makes debts look easier to pay. The massive debt burden of the average Irish person looks almost manageable. So by extension, the impact of zero interest rates is greater the more debt the country has, particularly consumer debt. So the zero rates will drive the Irish growth rate. People with deposits getting no return, will be inclined to spend more, while those with debts will get a boost to their monthly income.

This will push up consumer spending in Ireland.

The worry I have is that we do so little trade with crippled Europe and so much with America and Britain – both of which are growing quite strongly – that our economy will grow very quickly for the next two years and then come to a shuddering stop when European interest rates move up eventually.

The other concern is that the US and the UK economies will slow down, it’s called the economic cycle after all, and they may slow down just at the same time as the European economy picks up. This means that we will be hit by negative interest rates and a trade shock at the same time.

Look at the table of trade direction.

Main Export Destinations:


Main Import Sources:

























































After Germany, we do modest trade with the big European countries. 2.5% of exports go to Italy and the same for Spain with hardly any imports. The figure for Belgium is obviously massaged. We export almost twice as much to the UK as Germany and export more to America than France, Germany, Italy and Spain combined. As for imports, over one third of everything we import comes from the UK. This dwarfs the entire Eurozone, yet we use the currency of Europe but do most of our trade with Britain! Bizarre. Where is the logic in that? It makes absolutely no economic or financial sense – and never has.

This massive imbalance at the very heart of Irish economic policy means that we are geared to the Anglo/American world but financed by the continent, which moves in a totally different cycle.

Today Anglo-America is booming while the Continent is in recession. But when Anglo-America is in recession in a few years’ time, the Continent will have picked up. At that stage we will need lower rates, but we will get higher ones and a currency that will be rising against our trading partners, making us externally uncompetitive at a time when the debt-fuelled local economy is squeezed.

You actually couldn’t have engineered a more inappropriate macro economic policy for a country, custom-made for booms and bust, if you tried.

For now, the economy is likely to grow much quicker than anyone thinks. With zero rates, it is not inconceivable a 4% growth rate could be achieved and that this will go on for the next two years. The banks will lend again because a zero interest rate does wonders to even the most clapped out balance sheet.

But when the global cycle turns, Ireland will be caught in a brace again.

Enjoy it while it lasts!

  1. Grey Fox

    Fool me once ……. Ireland works on a very definite economic cycle….a five year cycle….one general election to the next, we are in election mode and this sugar rush couldn’t have come at a worse time.

  2. MunsterNZ

    The Keynesian ideology that we are currently subjected to across the world whereby stimulating credit growth to drive consumption is flawed. This is what causes malinvestment and bubbles.
    Savers need to be encouraged to save with higher interest rates as this money is what drives business investment, job creation and thereby increases demand and economic recovery. Stoking the economy with a .1 % cut in interest rates is not going to work. If interest rates are at an all time low and economies are not recovering then why keep cutting them? What possible effect does Draghi think this is going to have. look at Japan…they have been injecting stimulus for years with no recovery. We need a return to sound money economics.

    • Munster,

      I believe they are doign what they consider to be the only polciy now. They have tied up fiscal policy in knots and believe that texpanding the monetray base is the path of least resistance. You and I probably won’t agree with my short-term solution which is government expenditure until the porivate sector starts to spend again.

      But welcome to the debate!!



      • michaelcoughlan

        “and believe that expanding the monetary base is the path of least resistance”

        What a nonsensical statement. The path of least resistance to what ends?

        The poster said we need sound money. Bill Still thinks so too but govt issued.


        Why don’t you think about that the next time you are paying your wealth (water charges etc) tax. The establishment KNOW your income like everyone else’s is dropping as is our purchasing power.

        You are too wedded to intellectual solutions to REAL WORLD problems.

      • MunsterNZ

        Hi David,
        Yeah it would appear we are on different sides of the fence. Government interference is the issue we have across the world and free markets no longer exist. Why should governments decide on on what area of the economy should be stimulated? Why are we talking about short term solutions to stimulate growth? Economics/Growth/Money are not short term problems…they need sustainable policies that are based on sound money…not debt or printing or zero interest rate stimulus to give a short term jolt. Keynesians think that these jolts will suddenly kick start the economy and things like wealth effect will cure all our woes as we will all feel richer and spend heaps. This is a fallacy as it is self defeating and leads to more debt and loss of spending power leading to even bigger issues further down the road. Since Nixon took the US ( and therefore the world ) off the gold standard the world has been flooded with currency to keep the good times rolling. This is coming home to roost now and once the velocity of money turns we are in for inflation the likes of which will make the 70′s look like playtime. I hope I’m wrong but I think we will see this play out as a USD crisis.
        Love the site btw…great debating.

  3. Aoife

    Dear Readers,

    I am writing to inform you that due to a technical fault the wrong version of this article was posted to the site this morning. However, the page has been edited and the correct article posted. As the site administrator, I would like to apologise for any inconveniences caused.

    All the best.

  4. kinsele2

    From the chart I calculate 36.7% of exports going to the eurozone and 33% to US / UK. Obviously historical ties / no language barrier means we will always have a large amount of trade with the US and the UK, but being part of the eurozone surely the low figures for some eurozone countries could also be areas for improvement? And from the points made here lessen the instability caused by over-dependence on the US / UK, particularly on imports?
    Also I would be very interested to hear David’s view on Scottish independence. A lot of articles here mention how being shackled to the Euro makes no sense when it comes to who we trade with. Looking at the Scottish independence argument they seem to be aiming for exactly what is argued for here, a currency linked strongly to the pound but also firmly in Europe with the ability to control exchange rates. If it happens maybe something we could look at, and take heart that big decisions can be made and can actually work?

  5. Tull McAdoo

    I read the article and it reminded me of a post I made back in early 2009 on here, might be worth re-reading..

    1. jim says
    I just had a revelation but I need some of you economists to confirm if my theory is correct. Here it goes.

    Irish economic policy pushed through by the FF/PD administrations of the last couple of years has been one of low tax, low wage to productivity, competitive in the sense that a larger proportion of profit per unit cost could be repatriated i.e. the Anglo/American model.

    We found ourselves at the mercy of the dollar’s/ pound’s fluctuations and their (Anglo/American) economic cycles more so than the rest of Europe because of our exposure to same (trade) even though unlike Britain, we were tied in to the Euro as a currency and ECB controlled interest rates over which we have no control.

    This was most evident when we needed to raise rates to dampen demand (property bubble) at the very time ECB were cutting interest rates and vice versa at other times. We had ceded control to Europe and found ourselves falling between two stools so to speak. We were caught in what I would call a ripple effect, i.e. high when Europe was low and low when Europe was high. We were out of sync on both sides of the equation and while this hasn’t as much an effect on the owners of capital who can hedge (if their prudent) it has a huge effect on wage earners as they are less equipped to deal with these fluctuations.

    What we needed to do was use the ready available credit to smooth out the ripples, improve the lot of the wage earners as a whole, and not allow it to be hijacked by the owners for their own self-interest (speculation). We failed and ran up a huge debt on our day to day spending and compounded the error by going back to bail out some of the owners(of capital) with the bit of savings we had put by.

    That being said it is my contention that the weight of the present recession should allow a smoothing of the imbalance between Europe and Anglo/American economic cycles. If we play, our cards right this time we as a nation should be able to act as a bridge, or conduit if you will, between the two conflicting ideologies and reap the benefit, which I hope will not be hijacked this time.

    David is familiar with Dubrovnik’s unique historic position between the Turks and Rome and we could use a similar model. We are well positioned to do it.

    January 1, 2009, 3:18 am

  6. TrackerMan

    If the Scots vote yes for independence, the probability of a British exit from the euro greatly increases in their proposed referendum and many US banks based in London have plans in place to move to Dublin if this happens in 2016 – this could really distort the Dublin property market.

  7. Shane F

    As for imports, over one third of everything we import comes from the UK. This dwarfs the entire Eurozone, yet we use the currency of Europe but do most of our trade with Britain! Bizarre. Where is the logic in that? It makes absolutely no economic or financial sense – and never has.

    I would be very glad when to hear how that “bizarre” situation could be rectified.

    A lot of that import figure is due to the distributorships for Uk and Ireland are long established in Britian or Northern Ireland as I’ve found repeatedly. If you want to buy parts, see where you’re told to deal with.
    For ecomomy of scale we’re treated as one geographic entity,

    (As an aside – In the German speaking part of the world where you are now, very often we’re often all regarded as ‘Englanders’.)

    • Pat Flannery

      Forget it Shane. No logic will ever induce David to look at the facts as you have pointed them out. Believe me I have tried.

      What is “bizarre” to him is that we don’t recognize who we are, a UK colony. What is “bizarre” to you and I is that we continue to allow a foreign country, the UK, to act as middleman for “over one third of everything we import” while very few of those imports originate in the UK.

      Even more bizarre is that, like good little colonists, we continue to export our cattle LIVE to the UK, happily exporting tens of thousands of meat processing jobs to “our main economic partner”!

      Ireland has a long way to go before real independence. David, like many others, are stuck in colonial thinking.

    • Gearoid O Dubhain

      I am curious, when we import ‘japanese cars’ are we importing cars which are merely passing thought the UK in transit – I do know some Japanese brands are manufactured in the UK of course.
      When Tesco sends over its trucks with say South American beef, or Spanish vegetables, presumably it is shown as imports from the UK ?

      • Pat Flannery

        Gearoid, the problem with David’s figures, puffing up our great trading “partnership” with Britain, is that he does not break down those imports by country of origin.

        The Brits always manage to secure an agency for the U.K. AND Ireland. I have been at trade shows all over the world and am always told the same thing: “sorry, we already have a U.K. agent who supplies the Irish market”. This giant handicap is being deliberately hidden by people like McWilliams who want to see us rejoin the U.K. and the Pound Sterling.

  8. Shane

    I believe it is bizarre because it is. We are linked to the UK economically but out political system ignores tis and acts as if we are Holland with links to Germany. We therefore, have idiotic monetary policy which is destined to be pro-cycical making booms more amplified and bust more difficult.



  9. StephenKenny

    This is getting rather peculiar – all the European economies, the US economy, and the UK economies, are living on record low interest rates and record high borrowing. As a result, asset prices are starting to resemble 2007, in some cases making 2007 look like an era of balance and sanity.
    Capital for low-risk investments is verging on a tsunami, and capital raising for higher risk businesses has dried up almost completely. When looking through even the online consumer-to-business lending market, most of the money is going to property development.
    I’ve no doubt that given a bag full of money, people are keen to hit the shops, but isn’t it prudent to consider at least the source of the bag?

    • Gearoid O Dubhain

      They are also living off the currency printing presses to some extent with ‘quantitive easing’, i.e printing money not backed by real assets.
      So what is now real and what is illusory ?

  10. If the US and Europe continue to play Russian roulette then all bets re the economy are off the table.

  11. Perhaps the smart money realises that all paper fiat currencies are trash. People are investing in hard assets as inflation protection

  12. There is really no such thing as an economic cycle as all is manipulated by the central banksters and the power elites that control them. It is boom and bust at their whim to encourage debt and then bankruptcy and then seisure of real assets.

    Nothing much has changed in the last 100 years, including the understanding of this fact by most economists.

    “The real menace of our Republic is the invisible government which like a giant octopus sprawls its slimy legs over our cities, states and nation. At the head is a small group of banking houses… This little coterie…run our government for their own selfish ends. It operates under cover of a self-created screen…seizes…our executive officers…legislative bodies…schools…courts…newspapers and every agency created for the public protection.” … John Francis Hylan, Mayor of New York City from 1918 to 1925


    “And YET with what is going on in the Access Market in silver, with the same ASTRONOMICAL odds, the CFTC, and no one else, says or does a thing. It is beyond sickening … and corrupt.”—Bill Murphy,Midas Du Metropole, Le metropole cafe . com

  14. Reuters reported yesterday that sovereign wealth funds are piling into stock markets and other high-yielding assets at a rate that some warn could destabilize the world economy, as returns on government debt are near record lows.

  15. All the signs that are not manipulated indicate the US economy is on the skids.

    “The housing market is starting to really fold, I don’t care what the propaganda artists and spin-meisters are saying. They are wrong.”—-
    Dave Krensler

    The US housing market is tanking again.

  16. Sovereign nation must ask for permission to pay down debt. Ha Ha. More like a satellite state doing as it is told. Good boys and girls will get a golden star.


    Ireland in talks to refinance IMF loans: The FT reported that the Irish government has begun talks with the European Commission, the IMF and the ECB in order to allow it to make an early repayment of a portion of its €67B bailout debt to the IMF. It said that Ireland believes it could save €375M a year in interest payments on €22B of IMF debt by refinancing three quarters of the amount in capital markets by taking advantage of lower interest rates. The article noted that the IMF has no objections to an early repayment, but Dublin must get backing from other European officials in order for it to happen. ” posted on

  17. ” No market price today is a result of free-market discovery, but rather a “policy requirement” to keep hundreds of trillions of dollars of derivatives from coming into the money at the expense of the big Wall Street financial institutions. Within the financial and precious metals markets are invisible Lines-of-Death; unknown prices and interest rates which, if crossed will render Wall Street’s elite institutions incapable of meeting their specific performance obligations to their counterparties. These Lines-of-Death may not be too far away from current market prices; central banks are now buying stock futures just to support the current insane valuation in global stock markets, and they’re not doing this to protect pension funds and insurance company reserves! And yes, of course central banks are selling paper gold and silver futures to keep the old monetary metals prices insanely low for the same reason.” Mark Lundeen

  18. StephenKenny

    On a slightly tangential subject. If the Scots don’t vote ‘yes’, I think they’ll be kicking themselves for decades. The scare stories in the newspapers, on TV and radio are getting laughable – I keep expecting to see the BBC to start warning of it raining frogs, plagues of locusts, and the death of every firstborn! It’s fantastic! It’s crazy!

    Once they’ve got over the first mess (the huge party, the wrong initial politicians, etc) they have the potential of becoming one of the most effective countries in Europe. I suspect that’s the real reason the English are so desperate for them not to leave.

  19. Gearoid O Dubhain

    Sorry to go off thread, sometime ago a poster posted details regarding a Supreme Court case on the exercise of arbitrary powers by the government – I would like to read up on this so if that poster or anyone else can tell me what Supreme court case it was, I would appreciate it.
    I gather the poster has frequently commented on this case.

  20. This is what the economic recovery in the US is all about. Short hour jobs provided by government funding. No industrial economically productive jobs have been provided at all.

    “Stated differently, the bartender, waiter, bellhop, maid, shoe repair, retail clerk and temp positions reflected in the graph below represent 40% jobs from an economic value perspective. And from a societal angle, they provide no foundation whatsoever on which to support middle-class families and a thriving citizenry.”

    • The above commentary attached is a comprehensive account of the US non recovery that is already entered its final stage of dissolution.
      It is useful reading for anyone on this blog to get an understanding of the collapse of the US economy currently occurring.
      There is no recovery as averred by main stream economists and our disillusioned host.

  21. I see the government is patting itself on the back again for standing around and doing (pretty much) nothing:


    Kick Russia a couple more times and it may not play with Europe anymore and take its toys(energy )home and play with a better pal.


    “Greenspan’s incoherent ramblings aside, we don’t know if we should be more stunned that Greenspan has clearly summarized the bulk of the reasons why none other than Zero Hedge repeats day after day that the economy is nowhere close to growing or “recovering”, or because with statements such as this:

    “The whole structure of the industry is the mechanism by which you’re converting consumption into savings,” Greenspan said, “and the only way the economy can grow is to save.”
    … it is revealed that the man who unleashed the worst Keynesian nightmare in the history of the world is in fact… an Austrian?


    “Well, lo and behold, I see a report from some guy at the Brookings Institution, which is a reasonably credible outfit, saying that since the global crisis began to sort of heal itself, 3.5 million jobs created by the Birth/Death Model in the United States are bogus. That fits with my overall view of what is really happening in the United States. The economy isn’t nearly as robust as the U.S. government would have the world believe, but this is just part of the whole Western world’s gradually heading toward recession or worse.”

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