Our economy is going backwards. Latest figures from the CSO reveal that the economy has shrunk since last summer.
We are now contracting at a pace last seen in 2009, when the wheels really began to come off. The Irish economy has contracted now for three quarters in a row.
Throughout recent recorded history, recessions last on average ten months. This recession is completely different, both in terms of its scope and its depth. We are seeing a massive double-dip recession led by a depressed local economy, which is compounded by the delayed effects of austerity in Europe.
Domestic consumption is cratering. According to the figures, in January to March of this year, consumption fell by 3 per cent. This is the largest fall in the whole recession – even including 2009 and 2010. Investment, too, is down 7 per cent and even exports, usually the bright point on the Irish economic landscape, were down 3 per cent in the first few months of the year.
Traditional economics tells us that, in a recession, as unemployment rises, wages fall. And as wages fall, the cost of labour falls. When you go back to Karl Marx (not a bad launch point), you will know that in any economy, there is the return to capital and the return to labour. If one goes up, the other goes down and vice-versa
The return to labour is wages. If wages are falling, then the implication is that the return on investment – profit – must be rising.
Thus, the way the economy rights itself is that wages fall and profits rise. As profits rise, the return to investment rises. Eventually, investors will come to see that they have a ‘one-off’ opportunity to invest their capital and get more for each euro invested than was previously the case. This should trigger an increase in investment and the economic cycle kicks off again.
So why is this not happening now anywhere in Europe, let alone Ireland?
The most obvious answer is debt. There is simply too much debt, which is strangling investment opportunities.
Take Ireland, for example. Many small businesses are starved of capital and are offering investors double-digit returns for working capital. Many small businesses are surviving due to the dexterous management of this cashflow, deploying a bit here and there to keep all the balls up in the air.
We know from the US that in the past few years it is these small, young businesses that create jobs. Indeed, large companies are net job destroyers, so these cash-strapped small businesses hold the key to the future.
So why are they not getting the capital, if the return on capital is rising? The reason is that the capital is trapped in the banking system and it is not being released into the economy. Now, maybe the new capital might come from outside the country in time. Foreigners may well decide that Irish businesses are worth backing, but it seems fair to suggest that foreigners will only buy trophy assets, rather than recapitalise the entire economy. Providing working capital is still the job of local capital, and it is not working.
Maybe one way of attracting capital out of the banks in the next few years is for this coming budget to be truly pro-small business. Maybe the government could think of giving a tax holiday to local investors investing in local companies.
Such a tax holiday could apply to the investor’s income or property tax. These are just obvious ideas. At the moment, there is over €90 billion in deposits in the banking system. Getting even a fraction of this money into the local economy could work wonders.
Without such initiatives, we end up with an economy with plenty of potential working capital, but no actual working capital. This explains how the return of capital can remain in double-digits without investors taking up these opportunities.
The problem with small companies offering double-digit returns to real investors is that they can’t do this indefinitely. With inflation running at a few per cent, the company that offers double-digit returns on capital goes bust quickly or becomes dependent on expensive capital, and it can’t grow because so much of the turnover is going to pay the investor.
The company that is offering such returns is only doing it because it is desperate and, unless it gets working capital, it will shut down.
Thus double-digit returns are an opportunity, but also a sign that things may actually slump further from here because it is not a sustainable business model.
The other mechanism whereby the recovery becomes a self-reinforcing mechanism is through wages. In normal recessions, wages will fall as the number of people looking for a job increases. But this is not happening because, naturally, trade unions will move to protect their members.
Instead of wages falling, as classical economics suggests, we see in Europe that companies don’t cut wages; instead they let people go. As this process tends to follow the ‘last in, first out’ pattern, it disproportionately affects younger workers.
Obviously, the people in work want to keep their jobs and conditions, even if the people out of work would be prepared to do the same job for less. This tends to lead to the insider/outsider dilemma, where the workforce is pitted against each other.
Those on the inside – with jobs – have different interests to those on the outside without jobs. The upshot is that people who lose their jobs can’t get back into the workforce and the rate of long-term unemployment rises, as we have seen to an alarming extent in Ireland. All this causes demand to fall.
The implication of both these big forces in the credit markets and in the labour market is that the economy gets stuck. Businesses not only don’t have enough credit, they don’t have enough customers.
If the government cuts spending in this context, the money the government is not spending has to be spent by someone else, otherwise the economy will have to contract.
In the case of Ireland, our government still hopes that foreigners will take up the slack, offsetting the reduction in government spending by buying Irish goods in huge volumes. The plan was that this foreign demand would be seen in surging exports.
Unfortunately, this is not happening. Export figures are actually falling, most probably reflecting austerity policies abroad.
Therefore, national income is falling, unemployment remains far too high and thousands are leaving the country. It is difficult to see how this is all going to turn around and the more the economy contracts, the more the initial debt burden becomes unsustainable.
The economy needs a lower debt burden, a more competitive exchange rate and policies that either liberate the potential capital in the deposit base, or a slow down in government cuts and tax increases.
None of these appears on the cards, implying that last week’s atrocious figures may become a trend.
Subscribe to receive my news and articles direct to your inbox
Good Morning
Economic Proposals can never solve a National Catastrophe when National Laws are tainted in favour of a few .
We need a NEW Law Reform Strategy with a balanced representation and independent of political maneuvering .
The Real Change can only come from a Solid Base . Lets look at Daniel O’ Connell , a Barrister who changed the Law of the Act of Union and sought Catholic Emancipation .
What followed from that was ….Economic Progress .
A lot of the so called capital in banks may in fact be Debt borrowed from central banks to bolster reserves.
Perhaps David has stats on this.
However it looks like the world as a whole is in a debt trap and debt suffocation. Not easily resolved.
+1. The system has lost integrity. There are 2 ways this will move.
1. We magically get leadership and people get on the same page and clean up our act OR
2. Leadership will be imposed “for our own good”.
We see how Anglo easily manipulated our Government. Same is happening globally. Short of trying to vanish off the grid, I cannot see how No. 2 can be avoided.
David, If “the capital is trapped in the banking system and it is not being released into the economy” what is happening to the enormous amounts of additional printed money? Some would say that it is also being trapped by banking and government debt. When this money is released is there not a big chance of a money tidal wave causing hyperinflation and a repeat of Hungary in 1946 and Germany in 1922 then caused by world wars?
Morning another eejit
This is a huge risk and is at the heart of the massive policy dilemma not just in the USA but in Europe as well
Best regards David
David,
Another simple way to stimulate startup businesses is for the government to offer voluntary redundancies to those who want to become self-employed.
The entrepreneur covers wages during the early days when customers are few and cash is scarce. The government reduces headcount and gives the local economy a boost.
John
Hi David, If you never read another post if mine can you please read this one. Please listen to Kim Sinclair at the following link and his description ad to how the gold futures markets are decoupling from the physical. http://www.jsmineset.com/2013/06/28/ask-the-expert-jim-sinclair-50000-gold/ Would it be possible for you, Kelly, and gurdedive to devise a plan where the savings of ordinary irish people in Irish banks can be converted to gold deposits, kept on the banks balance sheets but ring fenced in the event of bail in? That way all agendas are served: the banks don’t lose the deposits in a run… Read more »
I disagree that the problem is in the lack of capital (or high interest rates) for SMB. I (a foreigner) would gladly lend my savings to worthy SMB borrowers in Ireland if: 1. I knew that criminal is prosecuted (now I know it is rewarded) 2. If I knew the fascists from the European Commission did not have say in Irish economy 3. If Ireland was not in the EU Instead 95% of my savings are in gold and silver (mostly physical) and will stay that way (at least) until eurozone falls apart when I would reconsider. Even if I… Read more »
David seems to go from Marx to far right wing economics here. “The other mechanism whereby the recovery becomes a self-reinforcing mechanism is through wages. In normal recessions, wages will fall as the number of people looking for a job increases. But this is not happening because, naturally, trade unions will move to protect their members.” I am not sure what “normal recessions” he is talking about here, but unions are hardly that powerful in Ireland, and recessions always increase unemployment, not reduce wages. And that was true in the 19th century too. In modern economies what probably stops young… Read more »
Hello David I think you should refer to the economic state of the country as a “depression” rather than a recession it became a depression a long time ago. Kenny and that nut Shatter have given the banks the power to repossess houses andwe all know how dysfunctional they are! What will this country be like in 2 years from now ? An even bigger mess.
[…] full article at source: http://www.davidmcwilliams.ie/2013/07/01/caught-in-a-capital-trap […]
The Irish Sunday Times/B&A survey polled 898 Irish voters on their general knowledge/numeracy & literacy. These are the Highlights. Q: Name one of the three members of the Troika? A: Don’t know. 60% A: Anglo Irish Bank. 4% A: Bank of Ireland. 7%. A: Nama. 8% A: AIB. 8% Q: Name the three members of the Troika? A: Don’t know. 95%. Q: What is 10% of 15 euro. A: Don’t know. 50%. Q: Spell the word ‘Their’ as in ‘Their children are on summer holidays” A: Don’t know. 25% You get the idea. Here is their conclusion. “… poll punctures… Read more »
What galls me is that if i set up my own friendly load shark operation, offering fair return and taking some deposits (based on I know where u live precepts of reputation ) I would be shut down over night and treated like a criminal more readily than a proper criminal operation. Why is it so difficult to side step the current nonsense in the manner above? The pat response will be our ability to import what we do not make will be shattered overnight. If I try and buy oil, I need to trade in petrodollars – any attempt… Read more »
Two new Xbox games are due out, one called ‘end poverty’ in which the player has to find a way to give everyone on the planet a right to food water an education and safe place to sleep The other is called ‘black ops drone wars’. Microsoft has pre-order in the hundreds of thousands for ‘black ops drone wars’ and none for ‘end poverty’…
So who among you is not ordering ‘end poverty’ but instead is ordering ‘black ops drone wars’?
We are poor we need to accept this! Would employing the unemployed people into enforced job share productivity wise using a spoon instead of a shovel – this would reduce the welfare budget (borrowing) but in doing so the borrowed money would not be in circulation and private/ public sector company would close. If a person has a take home pay of €500 and bills of €600 what would they do – what should our government do, throw back the keys to the ECB. We are heading for massive debts the money system depends on exponential growth a mathematical impossibility… Read more »
Last night on Film 4 I watched The Spirit of 45, a film by Ken Loach. Maybe some of you watched it and found it as interesting as I did. It was made in 2013 and it is in Black and White but ends with a surprise colour scene of Trafalgar Square on VE Day In 45 people still remembered the first war and the social horrors of George Orwell’s England where employers treated workers like asses and could cast them off when they were no longer fit and healthy. This was an embarrassment and the incoming Government were for… Read more »
Where will the money for the 30,000.0 homes that Noonan say we need at an average of €238.000.00 = €7,140,000,000 should the Irish peoples banks be lending more debt
Year and a half goes by….This is worth a re-look. Vincent Browne and Steve Keen. Formidable guy who says it like it is.
http://www.youtube.com/watch?v=aqY_DYtp60s
But it is all kicking off again – yer man Noonan says we need 30,000 new houses, pronto like!
http://www.irishtimes.com/news/noonan-says-up-to-30-000-new-houses-will-be-needed-annually-1.1449225
Apparently, according to whatever birdie has been whistling in his ear, the 150,000 or so apartments built in the boom are not suitable for families and those families are now going to have to shell out (or commit to a big loan in an uncertain market) and buy a nice house with a garden for their growing darlings!
We will all be grand! Off it all goes again…!!!
I wonder which birdies have been whistling into Noonan´s ear?
In my opinion the basis of the article is highly questionable –
The economy we all work and do business in is corrupt.
How much evidence do we need to see that free market enterprise according to the doctrine of Adam Smith is over, until the oligopoly banks and power elites who now control and run the markets and economy are overthrown.
{ Our economy is going backwards. Latest figures from the CSO reveal that the economy has shrunk since last summer. } Never mind that…the latest “news” is that real estate in the leafy suburbs of South County Dublin are going upwards again. Honestly, I cannot make any sense of this at all. It is completely nuts. How can real estate in the one location which continues to be overvalued relative to rents, continue to be overvalued in a capital crisis ? Because the banks are concentrating their capital in that market ? The state mandated Irish banks are trying to… Read more »
Outside of the food sector, and the small scale domestic owned engineer sector, Exports are a bit of a joke. They should massive, but a small proportion of the top line statistic actually remains in the pockets of people in this eceonomy at the end of the day. The state gets it’s 12 and a half percent cut. The employees get their wages (with the state getting a 52% plus marginal cut at the average industrial wage). The fuel and the inputs are taxed. And that is about it. It is a private sector economy, where the money is either… Read more »
The current govenment (and indeed the last) are decidedly already proposed to David’s small business suggestion. And the previous one, and it’s constituent parties were no better.
A walk down the main street in Dun Laoghaire, close to David’s Dalkey base will tell us that. Shops boarded up. For Sale/For rent signs all over the place.
Small business is now a host for suppoting a plethora of political parasites from the local authorities to various state bodies stuffed with political appointees who did the party favours.
Egypt a volcano for change http://www.abc.net.au/news/2013-07-02/egypt-army-gives-morsi-48-hour-ultimatum/4792836
…Lambay Island was a volcano once…
Did you hear about the two neighbours, in their late 50s, an accountant and a landscape gardener, can’t get work in their respective fields. They separately go to FAS to see what retraining courses they’d offer. You guessed it, the gardener is offered accountancy and the accountant is offer landscape gardening.
Seemingly this is a true story on Scambridge.ie. It made me chuckle.
Good article. I have the impression that in the last few months the reality does correspond to the statistics (cited in the first part of the article here). In layman’s terms if there is such persistently high unemployment and cuts, and we are at the bottom of the interest rate cycle and we have a wave of defaults, then it seems inevitable that things will come to a head in the next few years. Especially when rates go up to more normal levels and tracker holders start to pay real interest. I don’t see how the banks will survive that… Read more »
Checked out the reference to Mr. Sinclair in the previous article. The goldprice.org stats bear that out to some degree. On a more local note a contact in the Credit union is concerned that moves underway to centralise the Credit Unions in Ireland may result in local “talking heads” with a centralised back office operation which creates two imminent dangers for members. 1.Funds are centralised and the large numbers involved attract sharks who raid the funds of shareholders a la Anglo. 2. Funds are centralised and the large numbers involved attract the interest of Government who raid the funds of… Read more »
Dear David, what Ireland is experiencing is not, has never been, and cannot be described accurately as ‘a recession’. In the United Kingdom, ad Ireland, recessions are defined as two successive quarters of negative growth. That’s mad of course, as though there is something called ‘negative’ growth (death therefore being ‘negative life’, hunger being ‘negative sufficiency’, a stationary car is in ‘negative motion’ and your liabilities are apparently ‘negative assets’). Perhaps ‘economic performance below trend’ might be a suitable shorthand. A return to trend is generally anticipated, and soon. That’s not the situation in Ireland. To illustrate, an aircraft cruising… Read more »
David, so in effect we have this societal shift, old jobs for jobs in new industries that few people currently have the skill set for, at a time when the country has very high debt levels. What exactly is the total private sector and public debt as a % of GDP / GNP and what % of national income is used to pay interest on this debt every year. I heard a figure of 25% being mentioned, but this surely sounds too high and what % of income will interest alone consume if global interest rates rise – and how… Read more »
Christ almighty, when is this insanity going to end? According to the CSO, something of the order of 7.5% of the population has fled in the last four years. We export more people in absolute numbers than Italy. So I’ll throw this out there as a what-if: In some far off land called rationality, Noonan would take that extra €1B and use it to kickstart investment in LFTR reactor technology (a quick summary below, worth 5 minutes of your time) https://www.youtube.com/watch?v=uK367T7h6ZY Invest while everyone is cutting back, The post-Fukushima wave of anti-nuclear hysteria is an opportunity that would give a… Read more »
This recession is behaving differently to others and we discussed some of the reasons why I think this is. Mortgages have approached their natural limit of taking two incomes around 30 years to repay. The money supply has doubled about every decade going back 4 decades but it’s not feasible for that to happen for the foreseeable. In response to “So why is this not happening now anywhere in Europe, let alone Ireland? The most obvious answer is debt.”: I’m surprised that you don’t question how we could b e in so much debt in the first place. You do… Read more »
This Capital Trap is also known as a Zero Interest Liquidity Trap. Ultra-low interest rates cause the banks to hold onto cash waiting for the interest rates to rise, but now they have huge piles of cash. Governments can’t let interest rates rise because of the massive amount of cash that will come rushing out of the banks all at once with only a small rise in interest rates, causing hyper-inflation. The choice now is recession or hyper-inflation, thus the trap. This is the result of government interference in free markets. This has been going on so long that the… Read more »
The attacks on Noonan are misguided. There are, in fact, very few houses for sale in Dublin, about 2,000. I say as someone sort of looking – although I will wait and see what happens to the arrears. It’s about 30K State wide, which is about 10K in Dublin per year. Thats about right long term.
Most people reacting here seem to think he is trying to stoke the market upwards, in fact if 10K houses were on the market this year, extra, house prices would fall significantly.
yea worth the watch Liam ,but you spoke of kick starting investment maybe with this emerging technology …. and DMW similarly when he said “Foreigners may well decide that Irish businesses are worth backing” but for an investor,return on investment is the focus,right? and Ireland Inc is no competition on a European/Global scale ( re manufacturing certainly )so the investor chooses the country that will deliver the greatest profit… Ireland Inc needs to reinvent itself as it currently has nothing to offer… I.T. & Pharma are all leaving or have already left and WHEN the corporation tax is a level… Read more »
“Capital is money: Capital is commodities. … Because it is value, it has acquired the occult quality of being able to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs.” Marx
Debt has been given a value in our society
Are we there yet-‘Unbridled Capitalism Will Destroy itself’ David are you there yet Can you resist elitist in you – machines and media control- every one want to be an elite? On ‘the 99 percent “You are horrified at our intending to do away with private property. But in your existing society, private property is already done away with for nine-tenths of the population; its existence for the few is solely due to its non-existence in the hands of those nine-tenths.” (From “The Communist Manifesto,” 1848 Marx was right about capitalism and about communism, communism has never been tried but… Read more »
Humanity as a species is inherently insane. (at least in the current prevailing autonomous, self serving, grotesque mindset) In the 20th century alone, humankind wiped out 100million of their fellow brethren…
When this is viewed as a backdrop to the current unfolding events they take on an even more chilling resonance.
The richest man in the history of the world the was the last emperor of Russia (Nicholas II, Emperor and Autocrat of All the Russians)He’s also the richest ‘human’ saint in history…he was by default the creator of the USSR
Morning Thanks for all the comments and the quality of the discussion. I spoke last night to a Serbian friend who has lived most of his adult life in Russia as hanging around Serbia was probably not a great option in the 1990s. Anyway we were chatting about the usual, kids, family etc and quickly the chat got onto world affairs and the way the place was going, the lack of “a new deal” and the fact that everywhere the broad middle classes are being squeezed. I tell you this simply because we were joined by a few others from… Read more »
We need to bring back jobs / industries that employ thousands in Europe…so where have these industries gone to…look at the auto industry in Europe for instance…growing hugely in Germany due to high productivity, competitive labour costs, relative efficiency compared to rest of Europe. Unit labour costs since 2000 have shot up in France, Italy, Spain, Greece and not come down even through recessions have occured in those countries also. Germany did not allow this to happen, even though unions there are now allowing for higher wage settlements, which is feeding through to domestic demand and outweighing the effects of… Read more »
Bonbon will you please give the Classical Greek and Roman references and economist nomenclature a bleedin rest? I’m told some English bishop once said that there’s no point having a mind as sharp as a razor if it’s also as broad as a razor. Distill those esoteric economist terms into plain English. I want to hear your views but I don’t want to spend half the evening checking references. This isn’t academia, this is a discussion forum for people with an interest in economics and politics but from diverse backgrounds. Edit. Thanks.
Hi, Their agenda is undoubtedly to save the Currency at almost any cost seemingly but a Sword of Damocles truly hangs over this failed ‘Euro’, appallingly contrived Monetary Union experiment… The other day I noticed on the back of a 2Euro coin (an exceedingly shiny one admittedly!!) the almost childlike impression of a man coupled with The Euro symbol commemorating the 10th anniversary of EMU (1999-2009) Can a reasonable man logically now foresee the doubling down of this particular milestone?? More broadly, unless a divergent path is plotted the entire European project may be imperilled. I doubt this is what… Read more »
As for Anglo Tapes… Lesser events than the Anglo tapes succeeded to bring millions of people onto the streets in Egypt. The political-economical Junta in Ireland is still laughing very hard and the Fitzpatrick trial could already be in jeopardy. Well yeah…really? Surprise surprise. The legal principle of animius nocendi no longer seems to serve a purpose. 1. Knowledge about the law which prohibits a specific action, 2. knowledge of outcome or consequence of the action; and 3. Intention of breaking or acting against the law. Good morning Ireland. It is quiet on the streets of Dublin, no Laser pointers… Read more »
Chomsky, at his recent Dublin Lecture, was asked why austerity was continuing across Europe, when it is obvious to all that it’s not working. His answer was facinating: He read a quote from Mario Dragi in a little known publication, that said, among other things that “the social contract in Europe is broken”. In other words the contract that existed in between employers and employees in Europe and the labour laws that govern them are being steadily eroded by what David describes as the “insider/outsider dilemma”. This claims Chomsky is the purpose of austerity, to shift power to corporations and… Read more »