December 15, 2014

We create our own buzz

Posted in Sunday Business Post · 38 comments ·

Yesterday, in rural Kilkenny, a man stopped me and asked me when the recovery would be felt in the countryside. He told me he was watching the TV and listening to the radio about the recovery in Dublin and Cork, but he wasn’t feeling it.

His question was whether this recovery is real. By this he meant, is it well founded or just hot air – and more importantly, can it spread from Dublin to the rest of the country?

My sense is that it is real and it will percolate down to the rest of the country, but it will take time. National income figures released on Thursday, along with inflation figures, suggest that the opposite is the case. They point to an economy slowing sharply in the last three months and one where retailers and manufacturers can’t pass on price increases because people simply don’t have the spare cash. However, I feel these numbers will prove to be an aberration and that the underlying economy is moving forward reasonably swiftly.

Big-ticket items like new car sales and house prices all suggest demand is strong. Anecdotal evidence like hotel room rates, advertising rates, traffic jams and crowded restaurants argue the same. Also, critically, taxes are up across the board. Unemployment is falling – and as unemployment is always the last thing to fall in a recovery, this is also suggestive of stronger demand.

Unemployment is a lagging indicator in a recovery and a leading one in a slump.

The reason is that when demand slumps, the employer has a choice: either to reduce wages across the board for all employees, or to save on labour by letting the last in go first. Normally, the unions in the firm refuse to countenance an across-the-board wage cut, so the employer fires some employees to save other ones.

As a result, unemployment spikes early in a downturn. In an upturn, employers regard an extra job as an extra cost which has to be more than covered by revenue – both actual revenue and expected future revenue. So people are employed late, not early.

Looking forward, the Irish economy is a function of the global economy, and more specifically the Anglo-American economy. As long as the English-speaking world is doing well, we are going to participate. And equally because our debts are priced in euro, we do well when the eurozone is doing poorly because interest rates remain low in euro.

For the past five years, interest rates all over have been kept extremely low as the central banks try to re-float the battered, debt-ridden balance sheets of the world economy. In Britain and the US – particularly the US – this period is coming to a close. As it does, it should push the two currencies, sterling and the dollar, upwards. This will have an added positive for Irish exporters because these are the places we export to and we will become more competitive as their currencies rise against the euro in 2015. So internationally, things look bright both for local producers and the multinationals.

Now we come to the central issue: what happens with the local economy?

For the local economy to grow, we need ‘animal spirits’ to be released. This means that people have to be prepared to open a business, take a chance and dip into savings to finance something, or borrow to invest.

It is very difficult to explain why animal spirits are released. Context is key. Humans are incredibly sociable animals and we are all affected by each other’s actions, even if we don’t know this. In the economy, when we get depressed, we get depressed together – and when we get giddy, we get giddy together.

The best way to look at this context process and how it takes hold is to consider being at a match in the Aviva. When the guy in front of you stands up to get a better view of a crucial moment, you have to stand up too. And the people behind you have to stand up as a result of you standing up – and so on until we are all standing when we actually paid to sit!

Similarly, when the price of one house rises, the prices of other houses rise because we all change our view of the world – not because anything fundamental has changed, but because other people have changed theirs. We want things not because we actually need them, but because others want them. This is context in economics. I sense it happening now in the economy.

Because of this herd impulse, the macro economy is more group psychology than personal finance. All recessions end because pessimism ends eventually. Similarly, at the top of any boom, people get far too optimistic and make mistakes that look incredibly silly with the benefit of clear hindsight. But when the animal spirits take over, we are not clear.

I liken it to falling in love.

This loved-up economic buzz is all-consuming, devoid of logic and devoid of an ability to assess risk or project ahead to assess whether this is really the right one.

The economy is only us, all of us with our flaws, mood swings, loves, madness, hunches and beautifully human, buzz-loving irrationality.

The buzz was destroyed by the implosion of the country’s balance sheet after the property crash. Nothing wrecks the buzz like debt, and too much debt eviscerates the buzz.

However, in time, as asset prices rise – which they are doing – the memory of the crash fades and people’s personal balance sheets repair themselves. In a country blighted by negative equity, rising houses prices solve a lot of these legacy problems. (They create lots of others, but let’s come back to that again.)

Very low interest rates also reduce the real cost of debt, allowing the buzz to take hold. This is happening right now.

Finally, it is often forgotten that there is a generation coming up for whom the boom period was something that happened when they were in primary school. They are unencumbered by the legacy of the 2000-2008 episode. Therefore, they live in a country which is outward-looking and full of immigrants and they have no reason to believe that they can’t take risks here and trade with the rest of the world.

Taken together with pent-up demand (as evidenced by the massive over €90 billion of personal savings in the country) and the animal spirits, this will drive the economy, because this is what always happens. It’s called the cycle.

Expansions are self-reinforcing: initially, at least. With so many people still looking for work, there are no capacity constraints in the economy right now.

The recovery will broaden outside Dublin in time. However, this too will be a function of what happens to house prices in the countryside. Recoveries always start in urban areas – economic history attests to this. They tend to spread too, but it won’t happen overnight.

  1. StephenKenny

    By ‘buzz’, it looks like you mean property prices, and by ‘recovery’ you mean increasing debt.
    Call me old fashioned, but I have an idea we’ve seen this before. I’m sure it’ll all end well this time.

  2. douglaskastle

    I am unsure that the intended conclusion is here, “The Buzz” is an uncontrolled herd stampede that will drive another bubble? Surely this needs to be avoided at all costs, I imagine heavy handed actions like the central bank to put limits on loans are the start of trying to control the herd. But already this is showing signs of being worked around with parents being shanghaied in to shore up the deposit and the likes of PTSB saying that their offer letters are good for 10 months, instead of the standard 6 (more to come I have no doubt).

    Will we ever learn?

  3. jccusack

    “This loved-up economic buzz is all-consuming, devoid of logic and devoid of an ability to assess risk or project ahead to assess whether this is really the right one.

    The economy is only us, all of us with our flaws, mood swings, loves, madness, hunches and beautifully human, buzz-loving irrationality.”

    Great quote David. More important than a driving text for the post boom generation you mentioned…have you a name for this Irish ‘sub’ generation yet ?…I suggest the “cycler’s”…as that’s what their in without knowing it ?

  4. jccusack

    For ‘text’ read ‘test’ :-)

  5. Colin

    ‘For the local economy to grow, we need ‘animal spirits’ to be released. This means that people have to be prepared to open a business, take a chance and dip into savings to finance something, or borrow to invest.’

    ok…. any ideas what kind of businesses in what sectors are going to thrive if opened now? Or are we talking about coffee shops, hairdressing salons and tattoo parlours?

  6. radhnaill

    Saw all of this before in 2006 – 2007. Remember saying to a colleague on a development in Howth in 2007 – ‘What this country needs is a good old-fashioned depression’. Well we got it. And sadly I must say it again – we are heading for another recession with the stupid property prices and the incompetence and corruption of the past and present governments. I’ll give it maybe 3 to 4 years.

  7. Buzz on Steroids

    Fantastic article and enjoyed reading it .

    I believe that the terms of engagement with the rural man from Kilkenny are flawed and should he borrow money to buy a house then he is mad . His question was ‘when’ and he was not given that answer .Instead he was made to believe he was wiser than he is .

    Economist have used and abused the catalysts of the embryonic word that gives growth from nothing . Buzz is on the caption here , animal spirit is added later ‘loved-up’ continues this path .Sex is more appropriate because what follows from that is ‘blood relations’ and we see that in ‘the mafia ‘ , ‘the quangos’ , and’ political dynasties’. From this nucleus springs the herd instinct / impulse . On a small island economic fiefdoms sprout with common surnames that hold sway .Usually they buy the town . History is repeating itself .We are an island of uncertainty and nobody knows when . If you are connected you have a better idea . Certainty is not a reliable word on the island of Ireland . The weather shows that too .

    The West is the spiritual centre of the island and if growth does not happen here then there is no national growth only illusions and hyperventilating conversations.

    Dublin and Cork are mentioned as having ‘growth’ . This is interesting because each have their separate reasons .Dublin is a political location for political plans and receives all the new high end technology companies and the banks have reason to lend in Dublin because it is safer . Cork is the padded phantom centre for the pharmaceutical industries that currently engages in grenade swinging ‘contract manufacturing’ , a concept that imagines it sells and manufactures but instead the work happens overseas and erroneously included on the CSO statistics to pacify the government and thus falsifies the national growth rate .Future Budget results will be proven to be very weak as a result of this fraud . Of course the PAC will not want to know about this .

    Maybe I am lucky I do not live in either Dublin or Cork because my future property tax will not rise this may allow me to take an expensive train to Dublin and drink coffee and watch the ‘Herds’ pass by and I can smile then .

    I am more worried about that seat I paid for and was forced to stand up instead as mentioned in this article . What am I paying for when I do not receive it . Will the Government be able to deliver what we pay for ? Water comes to mind so does Pensions and Broadband to name only a few.

    Illusionists have arrived in the country to whet their appetites and parasitic skills to consume as if it were a sexual process of procurement and the victims cannot speak because they are covered in shackles by the Minister . After the coupling they have more greed to repeat again with impunity .

    Reality in the country can be best summarised in one word ‘FEAR’ and this over-rides hope in the economy and that is where we are in the bottom of the barrel .
    We are now on the first anniversary of the departure of the Troika .I am reminded of what happened in Paris immediately after the departure of the Germans and the arrival of the Allied Forces. It did no honour to the liberators or the liberated – hysteria followed by paranoia and hatred could not wait for the new authorities to calm as there were convulsions of orgasms of retribution that took over . Acts to recreate patriotic virginity began to exorcise the souillure ( filty stains) that besmirched French honor. Womens heads were shaven but not prostitutes . Formalities became infinitely more complex than under the Occupation . These parallels and our own reality cannot be separated .

  8. EugeneN

    I see McWilliams has moved from Cassendra of the bust to Pollyanna of the Boom.

    I am more an AEP man, tightening in the US will cause fairly large problems for the world economy.

  9. ASark

    Does this mean that we should be expecting thousands of our Irish young workforce flooding back Home from Australia, Canada and UK.

  10. Adelaide

    I think David has overdosed on ‘Behavioural Economics’ as peddled by its current star Dan Ariely who I saw last year at Kilkenomics. Such a disappointment of anecdotal mumbo jumbo. Honestly, astrology has more scientific grounding that Behavioural Economics.
    Also David’s article doesn’t mention the several international train-coming-down-the-tracks crashes that could KO our ‘recovery’ in 2015.

    • McGoo

      I think you’re being a bit hard on Behavioural Economics. While it is a newish and underdeveloped field of thought, at least it shows that mainstream economics has finally, finally recognised that their “rational man” model was nonsense – something that has been obvious to the rest of us for ever.

  11. radhnaill

    Sorry. Meant to say recession but what’s the difference?

  12. McGoo

    13 comments and not one agreeing with David. Is that a record?

    Unfortunately, I agree with the other comments. The article basically seems to say that our economic recover depends on young adults repeating the mistakes of their elders. Is that really a plan??

    • paddythepig

      Young adults have to pay for the mistakes of their parents first, seeing as their parents have handed them the bill.

    • We write not to know who is right or wrong rather to learn and be informed . What David has said can easily be true and so can mine and yours .Whether he is is right for the wrong reasons or wrong for the right reasons that is what we are here to find out.

      What is definitely true is that the QE on the words published / printed by David is music to the Editors ears and increases the demand for more copies of the newspaper .

      We should ask how will Mario Draghi forthcoming decisions will compare and where will the re-printed Euros go .

      • McGoo

        John, of course you are right. Whether we agree or disagree with David or each other, the free exchange of information, opinions and ideas is always a positive thing.

  13. goldbug








    -> CREDIT














  14. Feta Cheese

    Bad Feta Cheese smells so bad it makes others seem like a gouda delicacy and you would wish you could disappear . Mario Draghi now just feels like that and wants to embrace the art of a real illusionist only that what he shows you to appear from nowhere is already there and convinces you that you cannot see it and that it is not there .

    His face never moves and retains that cold stone motionless Italian sculpture and full of intrigue as he battles the intricacies of currency control .His greatest solitary act is about to commence on stage alone NOW and without the choreography of a Mozart or a Webber baton and he will unleash the best of Corleons Opera Stanza 4 Minor and will lift the roof from every building .

    Lets hope we hold on to our seats .

  15. michaelcoughlan


    “Yesterday, in rural Kilkenny, a man stopped me and asked me when the recovery would be felt in the countryside”

    When the fella who stopped you has more moola in his arse pocket.

    That wasn’t too hard was it?

  16. michaelcoughlan

    “With so many people still looking for work, there are no capacity constraints in the economy right now”

    Morbid statement Dathi. People differ. There was plenty of capacity during the famine. Sure the place was a hive of obesity. So much so in fact food exports continued during the whole episode.


  17. coldblow

    I call it extrovert behaviour because, well, that’s what it is. I was convinced about it a few years ago by studying the good people on this site. Dorothy Rowe, the psychologist, writes a good bit about them and understands the dynamic well. Her big insight is that every couple has one extrovert and one introvert (even, mysteriously, arranged marriages). In the five or six years I have spent checking this I have never found an exception.

    Rowe (oddly, I find for an introvert) seems to have embraced pc. What I have noticed, and nobody else has it seems, is that extroverts are attracted to the mainstream, and pc is now the dominant ideology. David is a good example of an intelligent extrovert: he covers so much ground and has an understanding of things that I, as an introvert, couldn’t hope for but it has its drawbacks too in terms of thinking about things. One of the main ones is that extroverts find it next to impossible to go against the crowd. Eoghan Harris is an interesting example of an extrovert. He does indeed, and quite self-consciously, defy conventional wisdom, but he will always go with the herd in the end, in a bigger way. I think Mary Kenny is similar, as is Sarah Carey.

    Extroverts need stimulation and you can spot an extrovert toddler easily, whereas introverts are uncomfortable with too much stimulation. An introvert husband can be tortured by a wife (by definition extrovert) who won’t stop talking. Extroverts want to do things, to act, take risks, socialize. They are the ones who pay over the odds for the latest gadget. There’s a good scene in the Simpsons where a salesman shows Homer a machine that can cook fifty hamburgers in 45 seconds. “But I want them now!” Introverts want to know why things are as they are, they seek explanations.

    There is apparently a technique for determining what one’s orientation is, called laddering. After a few questions about what motivates someone, each leading from the previous one, the final one is either the fear of things falling apart and losing control of your surroundings (introvert) or of being left on your own (extrovert). I find that I can usually work it out in new people in seconds. You do get the odd hard one where you just don’t know. If you can meet or see the other half then you will know. This is where Rowe’s insight is so valuable. Without it I don’t think you’d be able to get enough solid data to make valid generalizations.

    I have had a few insights myself, as well as the basic discovery that extroverts are attracted to conventional thinking. Their thinking seems unable to rid itself of cliché and rhetoric. I strongly suspect they form the backbone of any twitter mob. The outrage surrounding the Swinsford nursing home scandal (I prefer the old pronunciation, with an ‘s’) is surely extrovert-based. I shared a room in my first year at university with an extrovert psychology student (I was studying history), who was 23 at the time. He had worked in such a home and told me that it is sometimes almost impossible to keep your temper, and he was about the kindest person I knew on that campus and gave a lot of his time to voluntary charity work. Leo Varadkar said, “When there are evil people, evil things happen.” That is a stupid remark that probably only an extrovert could make.

    People have often dismissed this as ‘pop psychology’ (usually extroverts, that is that half of the world who identify with their external reality, who almost by definition are not able to grasp this, simply because it is not received opinion) but it is rather unpopular psychology. I have no great interest in psychology (I started off as a student of psychology at London University but after one term I switched to an northern location and history) and am inclined to pay absolutely non attention to the pronouncements of psychologists, except to jeer. This is a real, tangible thing and it is amazing that nobody understands it.

    • coldblow

      Re pc, where do extroverts like Jeremy Clarkson and (I think) Kevin Myers fit in? Historical figures in the extrovert camp include Kennedy, Thatcher, Blair, Cameron, Sarkozy, the current French President, and many more. Even Gordon Brown (which was a bit of a surprise but if you look at his wife then this seems to be the case). I don’t know about Stalin, but Hitler and Mao were surely extroverts, and Churchill and Roosevelt, including Bush Jr, Clinton and Obama. It seems that most politicians are.

      I read somewhere that there are forty-odd categories of sexual orientation on Facebook. I wonder what our liberated intellectuals would make of the fact that there are only two basic categories of person? You are either one or the other. If you are not sure you are very likely an extrovert. An introvert knows what he is before he opens his eyes in bed. The extroverted Beatles travelled to India to try to find out. Such thoughts amuse me and keep me going.


    Nice panel showing the depth of the meltdown of the fiat currencies. There is a currency war on and the perceived results are higher prices. This has little regard to increased of improved economic activity and everything to do with inflation as defined as expansion of the money supply.

    It is no surprise that four euro countries have asked for repatriation of their gold from the US and the UK. Germany, Netherlands, Belgium and now Austria.

    This tells us that they consider gold as real money. and that they trust not the US or UK to be a safe trustee. Neither do they seem to trust the current EURO currency as they have not asked for cash in lieu but insist on receiving the real goods. Funny attitude toward a barbarous relic. Why is this if the world economies are on the upswing, David?

    • StephenKenny

      It isn’t a currency war, it’s economic war.

      There seem to me to be two possible reasons for all this: either the US & UK economies are on the edge (timing, timing…..) of cratering, and this lashing out is the frantic flailing of a terminally corrupt system; or secondly, a meteor is due to strike the world in the next few years, so nothing matters anymore.

      The first is more likely (although if there were only these two options, the second might be quite fun):

      - Consider recent events in the US & UK (and much of Europe);
      - Anti-free speech laws that bigger belief, in a number of European countries;
      - the Cromnibus act (which I thought was a spoof, when I first read about it);
      - the media outrage when a Spanish judge convicted a bank CEO of massive fraud – nothing like those committed in the US & UK, but still tens of billions – and sent him to prison!;
      - the continual wars all over the middle and near east – can anyone tell me what they’re all really about?;
      - the appearance of the ISIS who couldn’t have been designed by Hollywood to be more of the ‘baddies’;
      - the UK having used their anti-terrorism laws over 68,000 times in recent years;
      - the Saudis and Kuwaiti’s cutting the oil price in half, and then claiming that it isn’t because the US told them to (I mean, please!);
      - Citi bank moving their HQ into the Capitol Building in Washington (I thought this was a joke as well); and on and on.

      I prefer the meteor – otherwise everything that i ever really believed to have been ‘right and good’ finally be replaced by a system that will make the lives of ordinary Joes, grim and horrible, and the societies that we, our parents, and our grandparents, tried so hard to build, reduced to the most sleazy and corrupt.

      • The currency war is a part of the economic wars. A weapon if you like. A tool to leverage a competitive advantage that always fails. But it succeeds in driving the people to poverty.

  19. fredparle

    I’m reluctant to admit that we have gotten off to a new beginning . Folks still saying things like “my house is worth 25 grand more t Han last week . We got ta kill this attitude by only using borrowed money for productive purposes . I see great kids all around me with grea t ideas failing to get seed capital , and yet others who are doomed to fail in six months getting the cash from suits in Banks who couldn’t fry an egg let alone vet a Resturant Project . Mentors are very scarce . Real mentors who have been in the real world . This get rich quick again mentality must be squeezed out of every business plan and serious long term , hard working plans encouraged. Where are our Incubation centres and what are they doing ? If not working now flat out will never succeed . Copy the best in the world . We must have world standards and smartest business to succeed if we are not to stifle in a State Mothering by quangoes which have mainly only failures running them . Give the 150,000 Irish Kids abroad something to come home to . Hope from real men and women and mentors who know the real world . Ireland has arrived , it’s the best place in the world , don’t allow fools , firemen , and first trippers to put us on the reefs again .

  20. Posted at Midas,

    Behavioral Finance

    *The yield of the 10 yr T note fell to 2.05%. That is no vote of confidence in the U.S. economy, or many other economies for that matter.

    *For two days in a row The Gold Cartel has been front and center, awhile their counterpart PPT was doing their thing too. The difference was that the PPT FAILED today, BIG TIME!

    Crude oil was last up .03 cents per barrel to $56.29. While WTI came WAY back off its lows, Brent crude oil was down 2%.
    The dollar fell .37 to 88.11. The euro rose .0062 to 1.2496. The pound gained .0094 to 1.5726. The yen was up .50 to 117.20. GOLD/SILVER had every reason to take off today, which is exactly why they were not allowed to!

    All good signs of economic recovery—-NOT

  21. michaelcoughlan

    “We create our own buzz”

    Do we?

    Tell the Russian citizens in the following video which gives an excellent demonstration of how catastrophic deflation and runaway inflation can occur concurrently.

    Blather Obarasement is like the scorpion in the fable the frog and the scorpion Dathi.

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