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: |
% |
|
USA |
19% |
UK |
34% |
|
|
UK |
14% |
US |
13% |
|
|
Belgium/Luxembourg |
13% |
Germany |
8.20% |
|
|
Germany |
8% |
Netherlands |
5.10% |
|
|
France |
6.30% |
China |
5.10% |
|
|
Switzerland |
5.10% |
France |
3.80% |
|
|
Netherlands |
4.30% |
Nigeria |
2.90% |
|
|
Japan |
3.10% |
Belgium/Luxembourg |
2.30% |
|
|
Italy |
2.60% |
Norway |
2.20% |
|
|
Spain |
2.50% |
Italy |
1.80% |
|
|
China |
2.40% |
Switzerland |
1.50% |
|
|
Sweden |
2% |
Japan |
1.50% |
|
|
Poland |
0.83% |
Spain |
1.40% |
|
|
Denmark |
0.77% |
Denmark |
1% |
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!
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.
David, 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… Read more »
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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… Read more »
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… Read more »
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.
” 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… Read more »
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.
Best
D
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,… Read more »
If the US and Europe continue to play Russian roulette then all bets re the economy are off the table.
http://blog.milesfranklin.com/europe-plays-russian-roulette
Perhaps the smart money realises that all paper fiat currencies are trash. People are investing in hard assets as inflation protection
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… Read more »
http://www.bloomberg.com/news/2014-09-08/cftc-said-to-alert-justice-department-of-criminal-rate-rigging.html
“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
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.
http://www.reuters.com/article/2014/09/08/sovereign-investment-idUSKBN0H31P120140908
All the signs that are not manipulated indicate the US economy is on the skids.
http://investmentresearchdynamics.com/category/financial-markets/
“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.
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: 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… Read more »
” 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… Read more »
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… Read more »
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.
Thanks
I gather the poster has frequently commented on this case.
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.”
http://www.zerohedge.com/news/2014-09-08/jobs-friday-why-bubblevision-misses-epic-failure-us-labor-market
I see the government is patting itself on the back again for standing around and doing (pretty much) nothing:
http://www.irishtimes.com/news/politics/government-has-broken-boom-bust-cycle-howlin-says-1.1923924
http://www.reuters.com/article/2014/09/09/us-china-russia-idUSKBN0H40X020140909
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.
http://www.zerohedge.com/news/2014-09-10/alan-greenspans-nine-reasons-why-economy-stinks “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… Read more »
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/9/9_Embry_-_Vladimir_Putin%2C_The_U.S._Dollar%2C_Gold_%26_A_Warning.html
“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.”
The 25 year depression is well started.
https://purchases.moneymappress.com/MMRBSSH39/PMMRQ819/index.htm?pageNumber=2&iris=252776&h=true&link_source=redirect&vidTime=full