Will 2010 be worse than 2009 for Ireland? Most mainstream economists believe that the economy will stabilise next year, and I hope they are right. But there are many reasons to be worried.
The biggest issue is that we are caught in a downward spiral where prices are falling.
On top of this, the already over-valued exchange rate is rising, and so is unemployment. Monetary policy – the mechanism whereby lower interest rates are passed on to the average person – is broken, because the banks are in tatters. As the top brass of AIB made clear during the week, the banks are in serious retrenchment mode – with or without Nama.
This retrenchment is called ‘deleveraging’ in economics. What it means is that, over time, the banks will be taking money out of the economy, not putting it back in. For many people, this probably means the banks calling in their loans now, having been rolling over interest and putting things on the long finger for the past year. All this has changed in the past few weeks, with the banks getting more aggressive.
In the boom, the banks blew their balance sheets by borrowing abroad in the short term to finance their long-term mortgage lending here. The foreign lenders pulled the plug on this short-term financing last year, and the ECB moved to make up the shortfall. But, as evidenced by the wrap on the knuckles Greece received last week, the ECB is now thinking of ways to unwind these loans to delinquent banking systems.
The government must be hoping for another off-balance-sheet deal with the ECB in order to avoid a massive new credit contraction here. For the next 24 months at least, banks will have to cutback lending and raise deposits to make sure that they have enough capital. This means less, not more, credit in the economy.
So we have less credit available and taxes are on the rise, which means that we have less income to spend, even if we had the inclination. And, of course, government spending will be reduced, adding to the overall deflationary impact on the economy. In such an environment, where is economic growth going to come from?
Some commentators are saying that this tough budget – if that is what it turns out to be – will have an effect on the economy and personal spending similar to that of the Ray MacSharry budgets of the 1980s.
By this, they mean that, if the public sees the government getting to grips with the situation, we will conclude that the worst is over and this will prompt us to bring forward spending which we had been postponing because we were afraid things were spinning out of control.
In addition, traditional economics suggest that, when the country is in difficulty, we see huge capital flight, and that this capital is just waiting for the signal to come back in. We can usually gauge this pent-up capital idea because interest rates rise rapidly in a crisis to reflect the capital leaving Ireland.
The problem in this country is that the opposite has occurred. Interest rates have fallen so far in the crisis, but are likely to rise next year because the ECB will tighten rates as Europe recovers, leaving a heavily indebted Ireland in the doldrums.
Therefore, the idea that we will get an interest rate bonus from any government contraction doesn’t stand up to much analysis.
Some balanced budget fetishists argue that, if serious moves are made towards balancing the budgets now, people who have been saving because they are afraid of higher taxes, will see that higher taxes are off the agenda and thus will bring forward spending.
This theory is called ‘expansionary fiscal contraction’ and was first observed in Denmark in the mid-1980s.However, though not particularly persuasive because it has only been witnessed once, it is only likely in the case of massive contraction.
If we had a huge one-off budget, we might achieve the idea that people would say, okay, the problem has been fixed and the risk of future higher taxation has disappeared. But, of course, we have not chosen the massive cuts strategy. Our strategy is going to be based on four years of budget contraction.
So what’s going to be the likely outcome of this policy?
The balance of economic evidence is that Ireland is in a cul-de-sac, and that we are running out of options. We aren’t spending, because we think that prices will be lower tomorrow than today. Why spend today when you will get a better bargain next week or the week after?
This is the classic depression economics dilemma. The more the government cuts now, the more the economy contracts. When you take out a euro of government spending at a time when we’re not spending or investing, the effect is to make the situation worse.
Growth will not re-emerge, and so we get involved in a brutal campaign to grind down wages and prices in an economy that is already weak. The multiplier effect of cutting spending now will exacerbate the problem, and we will try to regain competitiveness by confrontation with the unions.
Already, we have seen just how hard it has been to get concessions from the union side, simply because the unions don’t think it’s fair that their members take the pain of a crisis caused by political and financial errors.
What is it going to be like when it finally dawns on people that, to regain competitiveness, Ireland might need wage cuts of up to 25 per cent to allow us to sell our goods profitably abroad? We are only getting a taster of things to come and, given this government’s inability to make a decision, the prospect for 2010 doesn’t look good.
If we can’t get wages and prices down dramatically, then we will fail the Newry Test. This is whether an item can be bought more cheaply in Newry than it can in Dundalk. Only when we pass the Newry Test will it be possible to suggest that Ireland is becoming competitive. When do you think that will happen? As long as we fail the Newry Test, the business model in the Republic is not working.
So if we can’t or don’t want to do a Ryanair on the economy (by this, I mean get the costs structure right down),then we risk the prospect of becoming a client state of the ECB. The productive marrow of the country will be hollowed out by an overvalued exchange rate and high costs, leaving manufacturing dead in the water.
We will have a large civil service, paid for by transfers from the ECB, because the Nama bonds are redeemable at the ECB and the resulting cash can be used to buy government debt.
While we remain in the euro, we will always have the comfort that they will not entertain a default in Ireland, so we can play games with the EU, cutting a little bit here and there to escape dramatic sanction, but never being serious about anything.
We will retain what remains of the multinational sector and a few big protected industries. Maybe this is the long game for some of the top union members.
This is how a once-vibrant country turns into a vassal state – and, more importantly, this is how the insiders protect themselves against the outsiders in a crisis. All the while, house prices continue to fall, defaults increase across the board, and the prospect of a Nama mark 2 and 3 emerges, facilitated by some other sweetheart deal with the ECB.
You couldn’t make this stuff up!
The passing of the Lisbon treaty marked the end of ECB support for Ireland. They got what the wanted so why keep giving us money. The only reason I can see for continued support is that Ireland has the ability to bring down the EURO. Our model for success was fundamentally flawed but was supported by the European institutions. This blind approach shows a weakness in Europe and is contagion that can easily spread to other stable countries especially in these times. We are being supported so the plan of economic equilibrium across Europe will not fail. A considerable controlled… Read more »
David.
Great read.
An academic economic technical analysis of a country called republic of Ireland sinking into an abyss.
A society riddled in economic civil war across all social spectrums and generations.
An island community atomizing into a million pieces .
Again, an outstanding article from Mr. Williams I agree wholeheartedly with severelyltd ,your observation about the (hand ball economics) It has being a sore point with me for the past year why we the unemployed have not gone out on a permanent demonstration outside the Dail and why we haven’t done the same outside the Banks With the passing of the Fraudulent NAMA legislation it would appear this and the next generation were sold into financial slavery However I have a suggestion as to what we can do to help the country and that would be a temporary withdrawal of… Read more »
Jungerland
A great article David.If our country had strong leadership I would still have hope sadly that is not the case and that means we have no options.The disenchanted unions will strike and then we are on our way to socialism under bearded men that dream of North Korea and Jungerland.
A succinct and crystal clear article again Mr McD followed swiftly by three excellent responses. Yes Machholz, what about the unemployed willing and able (UWA’s??) who’ve been scrapped. The best of the country dumped because they don’t have “pull”. Forget things being back toi 2001, we’re heading to the 70’s and if you factor in RPI etc, so are property prices. Wills should write a treatise on NAMA and the ultimate ponzi professors. Straight to number one with a Phd certain. Now there’s the mother of all potholes after appearing between Ballyvourney and Macroom. For certain we will lose many… Read more »
The only thing that will get us out of this mess is Irish people working for €20k per year and liking it!!
And dont forget to check out the government inspired website:
http://www.anticorruption.ie
featuring a vast phalanx of government agencies,departments and Quangos.!
David could not make this up either
Actually..I wonder who does?
I’ve been following David’s blog for a long time and this article is the most pessimistic ever. Every paragraph contains a negative observation on the economic potential. Perhaps he is just softening his readers up for the crunch of a hard budget. But surely there’s no need to out-dismal all the other prophets in the dismal science? Having made his name by purveying justified pessimism about the housing boom, perhaps David’s mindset has now become schlerotic. Alternatively, let’s list our positive attributes and move on. 1. We have a well-educated, cohesive and industrious workforce. 2. We have plenty of fertile… Read more »
Hi David, First up my knowledge of economics is fairly limited so i tend to have a simplistic approach in these areas. I have a question: What would be the international reaction if Ireland was to renegotiate it’s deal with Shell regarding our natural resources off the west coast. As it stands it appears we’re not getting a fair deal so should we be looking at it again with fresh eyes? I believe one of the African countries forced a renegotiation in the past and the immediate short-term reaction in the markets was fairly intense. My thoughts are around the… Read more »
Folks, have a read of this: (by our own PaulOMahonyCork)
http://ow.ly/Jm8U
“Recession-Poetry”
… or is it more?
It’s time to spell it out – all of this stuff that Banks and Government and EU are engaged in is negative actions that has no motivation for the Highest Good of anyone, even themselves. i include all those who collude either by working for or with these institutions and not registering their disapproval of larcenous/fraudulent practices no matter what they are called.Bad actions in the long run done with bad motivation create bad outcomes both short term and long term.Good actions done with good motivation create good outcomes both short term and longterm. This is the law of cause… Read more »
YAYA – I absolutely agree with you however until we can start Karma and to rise we must hold together while we fall ……..to the bottom. Before our eyes are up to 25% reduction in take home pay since the beginning of the year due to reduction in wages in budget , increases in taxes , levies, stealth taxes and then cost of cleaning up the rising interest costs on home loans and inflation that will follow after ‘ a deflationary binge’.There will also be further cut backs in public transport and increases in car repairs due to Pot Hole… Read more »
Yes but it is imperative to behave in a highly ethical,and neighbourly manner while we fall,stating very clearly to leaders and banks and EU et al that this sort of bad action is not acceptable and one wishes to be in NO way associated with it. Sometimes our silence can also be a form of COLLUSION. The truth is all of our wealth , including the future generations is being harvested and stolen without impunity because the gangsters or should i say banksters are on the inside of government and civil service. And from the other side -From a first… Read more »
I agree with you .I still think I am in a Bad Dream about all what is happening everywhere and somehow writing on this blog is a therapy.As David said you cannot make this up.We as a nation have created our own rotten eggs that have eaten into ourselves and all we see is a terminal end in itself .It is everything that FF was never suppose to be and how these IMPOSTORS can still hold face is mind boggling and worse again PATRONIZE the electorate.
This failure of State is systemic-not just ireland.Recently Goldmann Sachs boss put a reg plate on his car 2BG 2 FAIL
Understanding the truth of what is happening to you, how you are being abused, is what comes first. My father told me this truth about Nation States in 1983.
This is some heartening stuff for you because we are not alone in this mess and harvesting of wealth see http://maxkeiser.com/
There is a wonderful article by Thomas Berry in the Book The Great Work ISBN: 0609804995 called the Corporation Story. It gives a good explanation of how things have come to be the way they are-humans confusedly do all kinds of bad actions in an effort to avoid suffering and find pleasure, all of which is unreliable and ends sometime. But most people have very good hearts, as evidenced in the recent flooding. It’s very important to point up and shed light on bad actions of government et al because it’s not doing them any good in the bigger picture.… Read more »
David, I agree with a lot of what you write about the stagnation of the economy but I think that you’re getting things the wrong way round about deflation. “We aren’t spending, because we think that prices will be lower tomorrow than today. Why spend today when you will get a better bargain next week or the week after?” Prices are not falling so rapidly that they change significantly from one week to the next, or even from one month to the next. It’s the reduced spending of the consumer that is causing deflation and not the other way round.… Read more »
David – you mention the NEWRY Price. The Newry price is itself a fraud. Because prices in Newry are rising. Here is an example. In September my niece (aged three) put an electronic car key in the Microwave and pressed “Auto-Defrost”. And started laughing. That was the end f the key. I had to get a replacement. 1. So I phoned a large dealer in West Dublin. Howsagow en – yeah – yah want a key – riih – give us the chassis number – lets see now – yeah – that will be 229 Euro – including the VAT… Read more »
Bearded Shopping Malls – maybe in jungerland after the appearance of the yoyos all retail trade will be state controlled and margins uniform.We wont have any price variations then ………and neither will we have a choice of product.
Deco, we should make a video of this for you tube. You’ve a gift as a playwright-it came alive – jumping off he page! There is a lot of truth in what you are saying. Two thing that Country retailers have going for them (i was a retail manager one time):- 1) Commercial Rents tend to be a lot cheaper than in the bigger Towns and Cities. Rent was the biggest factor in pricing goods when i was in the retail trade. 2) In a smaller town, you rely hugely on retuning trade and not on either casual returning trade… Read more »
Listening to Newstalk – lots of coverage of the gardai and Blue Flu Two.
Suggestions coming in to Eamon Keane – ‘take the gardai away from the ministers and let the politicians themselves around.’ That is an idea that I would agree with. Do we really need Gardai driving those wasters around. I mean could we not tender for it like we tender for everything else, and let the Gardai concerned protect the public instead ?
You should string the columns together where you repeat the phrase, “you couldn’t make this up.” Or, you should provide 5 models of the condition of this country in 5 years, from best to worst. You appear to be coming close to the eventuality in this article. The condition of the 96% who don’t own the country and the best means for them to survive the re-engineering of the economy to satisfy big money, foreign investors, etc. or in other words the development of a black market, barter economy outside of the official and declared businesses and organisations, state regulated… Read more »
What about a Ministerial MiniBus?
Any one remember Comical Ali?? “Ireland’s banking system will emerge from the current crisis viable, well-financed and with enough capital to resume normal functions, according to Central Bank Governor, Patrick Honohan. He said he expected Irish banks to be so strong that there would be private capital ‘scrambling’ into Irish banks. Prof Honohan added there would be more capital injections into the banks early next year, but did not say whether this would come from private or State sources. “The global economy (is) recovering from the “V”-shaped collapse in global trade triggered by the sudden losses of credit and confidence,”… Read more »
France and Germany Called On ToSave Defaulting “PIGS” December 6, 2009 (LPAC)– A sovereign default within the eurozone has always been the nightmare of Eurocrats. This is now becoming a concrete threat, as Portugal, Ireland, Greece and Spain (the four countries named PIGS by piggish Anglo-Dutch bankers) approach insolvency conditions. A special report by French investment bank Natixis addresses the issue, while at the same time trying to scare France and Germany into bailing out these countries. Saving the PIGS means, of course, saving the British Empire banking nexus that holds their debt. The study first outlines where these defaulting… Read more »
The above extract was taken from
http://www.larouchepac.com
Furrylugs, it appears that our friend Mr Honohan has been using a keyboard (or dictation to a secretary, perhaps) for too long and has fogotten how to write the alphabet; When forming one’s characters properly, one always begins with a “V”, while making a “W”.
Back to senior-infants with you, Patrick Honohan! (and sit in the corner, for a while, too!)
Monetary Schism : After the defrocking of Irish Bishops Cowen will dress himself up and post to the door of the ECB ‘ default by a thousand lashes ‘ .The PIIGS will bolt from the barn and the farmer Charlemaign will hold his French Goose and His German Pig safely away from Irish Eyes and be happy to hold his own roost instead.
The PIIGS will die under a thousand fleas.Cowen will be cemented thereafter .
He’s just another financial parrot. “Pieces of Eight!! NAMA NAMA!! Who’s a pretty boy BRIAN??” From what I’ve learned on here Tim, if we’ve gone down and we have to come up(because capitalism fails otherwise) but we’re not ever going to see free money again like we have done over the last 40 years, shurely the recovery is going to be saucepan or wok shaped?? Or even up and down like a baking tray? No-one gives a toss about learning intellectually any more so we might as well go back to the symbols scratched out on the Dun Aengus walls??… Read more »
Furrylugs – you know and I know da book is a ‘double think’ and dangerously accurate .Its frightening that it really is true .
Folks, here is a pretty good example of why our mainstream media is a big part of our problems, always trying to keep people in the dark about important things and feeding us bucket-loads of inane drivel:
The questions Ursula Halligan asked Bertie Ahern on that show last week:
http://www.gavinsblog.com/2009/12/04/ursula-halligan-interviews-ahern/
Hi David, Another good article from you. You ask “where is economic growth going to come from“? It can only come from a competitive private sector which is not being held back by an excessive cost base and salary expectations. We need to get all workers to work harder, faster, better and cheaper. Those years of living off credit have gone, and it IS painful to adjust. And no-one wants to adjust to a reduced cost base. The people that ‘made the money’ during the boom and have it ‘banked’ (elsewhere) cant be got at. Thats money taken out of… Read more »
I’ve seen this all before. In a company I worked for. It boomed in the late 90’s and then dot com bubble screwed it. The utter lack on imagination of management and the sudden lack of competitiveness due to high salaries relative to the now open for business India meant long term stagnation, and even that was won off the hard work of all concerned. It limps along still, but is fairly banjaxed all the same
Maybe we have hit a limit. …”We need to get all workers to work harder, faster, better and cheaper.”… Crack goes the whip for increased wealth…work and shop ’til you drop. Compete with China…be like Germany…educate your children for the next generation of debt enslavement. Maybe the time has come to stop. Irish people work too hard or work stupidly and are all too used to ignoring the realities around them. Child Abuse, Mounting Indebtedness etc. I vote for disengagement. Full national strike. Everyone out. A tax strike is needed as well. Strike for 1) Deactive NAMA 2) Ditch Euro… Read more »
Just a quick response for the moment. I think Wills said above that this article gives all the negatives about the present policy. I’d agree and I was expecting DMcW to then give the exit-Euro scenario and devaluation to restore competitiveness. I suppose he ran out of space. Someone recently quoted a figure for the huge amount of savings on deposit in Ireland. In this total is the proceeds of my house sale last December as we are still looking for what we want in our new location. Exiting the euro would be painful for me, so imagine how those… Read more »
Blue Moon – the second moon in december is 31 st and by then maybe the ….men in blue might have strike on their agenda …if that is so…..were all gone to jungerland north korea
How to save millions
http://www.independent.ie/national-news/budget/news/department-to-save-millions-by-moving-offices-1966172.html
We should have been doing this years ago.
The state can buy office space from NAMA for 25% of it’s official value. And then stop paying hyper-rate rent for city entre property. The state does not need to rent office property anymore. The state owns property as a result of the NAMA debacle. Alright – forget Long Term Economic Value. What about getting short term economic value from the NAMA properties ?
Posters –
One second the banking spokes people tell us its a v shaped recovery and all is on the up and then next second IMF loolaa in charge tells us banks are still hiding massive losses of books.
http://www.reuters.com/article/idUSTRE5AN4QD20091124
All-out strike? Ditch the Euro. Gather your pitch-forks. Storm the Dail.
Lads, get a grip.
I won’t be impressed though if they fail to make the requisite cuts on Wednesday.
Paddy
There is something hilarious about Richard Branson releasing a plan to send people into space, at enormous cost in terms of the carbon footprint, the day that the Copenhagen Environmental Summit starts.
Snappy link here breaking down the numbers the big time developers back in the day, 2005.
http://www.businesspro.ie/pressreleases/press_2005_02.htm
Folks, the “Geography” of NAMA here:
http://irelandafternama.wordpress.com/2009/12/07/towards-a-geography-of-nama/
Folks, there is a MAJOR problem arising: those who might “buffer” the sheeple from the onslaught are faltering. There is a major “push” by government, the media and Trade-Union leaders, to silence the “ferrets” that would overturn them. The “Officer-Boards” of union branches, FF cumainn, etc., are feeling “worn-down” and are on the brink of resignation from their positions-of-organisation, due to the constant hammering they are receiving. If this happens, the “divide-and-conquer” tactic of the elite will have succeeded. We cannot allow this to happen. If you know someone who is involved in organising workers at a local level, you… Read more »
Liam, wills and Malcolm may have an interest in this twitter list.
It is a live contribution exposition from people involved in the Copenhagen summit:
http://twitter.com/guardianeco/copenhagenclimatesummit
Fellow posters,
David’s latest article made for stark reading, it made me feel cold inside. Your posts as accurate as they are made me weep for the first time since I don’t know when. I’m so sad for our country for our people. To be honest, it’s getting harder and harder to bare reality, I can see how x factor has such a following. Even the handball incident was a distraction.
Where is the hope? Everything dear and trusted is collapsing!!!
I feel frustrated, depressed and lost.
A certain “Renault” dealer was able to buy, four years ago, or so, the last-remaining renault garage in the country, that he did not own for €25 million. (the owner was getting divorced and the wife wanted “half”, so he was pushed into selling). Nothing has been done with this site in the interim. The buyer, the main “Renault” dealer in our country earns so much money that he can “sit” on such a land-bank on Rochestown Avenue in Dun Laoghaire, for so long and not have to worry about having spent €25 million on it. Now, there are three… Read more »
“If we had a huge one-off budget, we might achieve the idea that people would say, okay, the problem has been fixed and the risk of future higher taxation has disappeared.”
Yes David, I like it, I presume you mean cutting spending by about 7bn or 8bn. Close down all quangos, 50% reduction right across the board on Public Sector salaries over 100k, 20% reduction on salaries between 50k and 100k, 10% reduction on salaries below 50k. Close down all tribunals regardless of progress being made there. Sell of ESB and all the other Semi States.
Folks, in case anyone missed this:
http://diaspora.ie/starship/2009/12/budget-2010/
Everyone should proliferate this link in evry social medium that they can,
David, this is pretty dismal stuff. One wonders what the appropriate response should be. I am seriously torn between Malcolm McClure’s optimism (with some reservations) as expressed above and those who say the emigration is the way forward. I’m not sure that I agree with the contention that Ireland is a vassal state, nor that this is some new condition. What is so different about how things are now, with insiders and outsiders, compared to how it has been for the majority of the history of the state, including the last ten years? Debt created the impression of independence, dynamism,… Read more »
Some ramblings… Our Irish version for greenwash http://www.eeac-net.org/bodies/ireland/ir_comhar.htm http://www.comharsdc.ie/ I heard one of their members on TodayFM yesterday defending scientists in East Anglia http://www.msnbc.msn.com/id/34311724/ns/us_news-environment So Carbon Dioxide has being declared harmful to humans and Obama doesn’t need to ask congress to approve what he is going to do in Copenhagen? The illusion of democracy is crumbling fast if you ask me Having followed one of Wills links – which led me to Alex Jones Fall of the Republic. And I think it was Alan Watt who said that “our rulers study history you know”. Now I was never one for… Read more »