If we separated the banking system’s debt from the rest of the State, we could borrow easily on international markets
Yesterday, I got into a Dublin taxi and started nattering away about the usual, the weather, the football and, of course, the state of the kip.
“How was the Christmas?”
“Not bad, considering, less boot work, but. Last few Christmases, me back was broke from all the boot work, none of that this time.”
“Boot work? What’s that?”
The “boot work” was the act of opening the boot for bags and presents as laden-down Christmas shoppers stuffed his cab with their goodies.
This year, there was none of that. He went on to tell me that the boot work has been on the decline for a few years now, but this Christmas it just stopped.
‘The Dublin taxi man’s boot work index’ of consumer spending works for me. In fact, sometimes in economics these common-sense indicators tell you much more about what is going on in the economy than many complicated models, so beloved of serious economists.
But when the common-sense indicators are substantiated by hard evidence, we can get a very interesting take on what is actually happening in our economy and how it could be remedied by taking a new political direction over the next few years. Interestingly, and maybe appropriately for the last article of a desperate year, the outlook for Ireland doesn’t have to be that bleak. Provided we do just a few things right.
Let’s look at what is happening in the Irish economy — what the people are doing, what the Government is doing and the relationship between them.
In short, if the people stop spending, then government spending has to rise to take up the flak, or else the economy will contract. If the Government spends more than the people save, it will need to borrow the money from foreigners. This is called the net foreign balance.
By looking at the economy in this way, we allow ourselves to gain altitude. The more altitude we get the better, because it helps us to see the big picture.
Check out the chart above. It gives us a snapshot of what is happening in the economy. It puts the Dublin taxi driver’s lament into perspective and more crucially, it tells us why a recovery is not only possible, but actually likely — as long as we do the right thing.
The green line shows us how much the people spend or save expressed as a percentage of GDP. The red line shows how much the Government is spending or saving — also as a percentage of GDP. The purple line shows how much money we have to borrow abroad to finance our habits. You can see the dramatic turnaround in the economy from boom to bust in the past two years.
Up to 2007, the Government was actually running a small budget surplus (the red line). But the surplus wasn’t enough to cover the private sector splurge, so we had to finance the boom from abroad. As a consequence, we borrowed from anyone who would lend to us, forcing the foreign balance (the purple line) to plummet.
Looking at the chart, it is easy to see what has happened since. The people have started to save and pay down loans like never before. We are petrified. Private sector savings are now 16pc of GDP. As recently as 2007, the private sector was spending more than 5pc of GDP. Now we are saving more than 16pc. This is a wild swing of 21pc of GDP in less than two years.
Such a swing is unprecedented in the western world and mirrors exactly what happened in Japan in the 1990s.
This is a classic “balance-sheet recession”, where the balance sheet of the country is ruined and the banks are effectively dead. On one side of the balance sheet is property, which is still collapsing, and on the other side is debt, the cost of which is rising by the year. This means that the middle classes are now paying back what they can, selling where possible and saving because they are worried about the future.
The mirror image of the private sector saving is public sector spending. After all, had the Government not spent in response to the private sector rush to save, GDP would have fallen by close to 20pc!
Obviously, the foreign net position has improved dramatically from a deficit of 9pc of GDP in 2008 to a 2pc surplus by 2009. All this private sector saving has ensured that even at present rates of government spending, there is more than enough savings in the country to finance everything. Today, Ireland is running a foreign surplus with the rest of the world.
What does all this tell us? Well, the first thing it tells us is that the country is far from bust — in fact it is running a foreign surplus. It tells us that the EU is completely wrong. It tells us that we have no need of IMF or European funding of any sort. It shows us conclusively, that, if we separated the banking system’s debts from the rest of the State, we could borrow easily on international markets.
It also shows us that we can finance the whole thing internally if we wanted. So the situation is not desperate. The only thing we need is for the people running the place to have a basic knowledge of economics and finance.
The chart also tells us that austerity will not work, because if the private sector keeps saving, austerity will only lead to less and less spending in total, which will cause the budget targets to be missed — as happened in Japan — and public debt will rise unnecessarily.
And all the while, Ireland will run a bigger and bigger foreign surplus, which means we will export capital to the rest of the world for them to use, while projects in Ireland are starved of capital.
This is the financial equivalent of what happened in the Famine, where Ireland continued to export food while its own citizens starved — and all because no one was in charge who had the interests of the common people in mind.
Do you want a financial equivalent of the Famine, where a country with plenty of money collapses for want of credit? Do you want a situation where we export our young, educated people rather than spend money we have here on investing in them?
Can you countenance being the citizen of a country that runs a surplus on its balance of payments to allow other countries to borrow that money to invest in projects that become profitable because our emigrant sons and daughters work for them? So we export our people and our capital to raise the return on investment for foreigners?
This is precisely what happened during the Famine and we are seeing the modern financial equivalent occurring today, complete with local gombeen men profiting from doing the foreigners’ bidding.
Is this what you want?
subscribe.
David.
Defining a reality all about an interlocking cartel of insiders interests working in collusion a paper money ponzi scam all the while funneling the cash off into their own system while they pass the toxic waste back out onto the average worker.
Great article with or without chart!
Yes, completely agree once again, but the big problem is how do we change where we are? The alternative government are seemingly going to follow the IMF deal. How can this message be spread to the masses and really implement change?
Kinda proves the point of history repeating itself. An agrarian economy run by the wealthy few for the exclusive benefit of the few. Absolutely no need to understand basic finance or economics when looking to protect the interests of a few. And it would be fair to say we do not know our own history as the population at the time of the famine far exceeded the touted 8 million and it was not a famine but the first mass genocide. Just look at the facts straight on ‘Ireland is now an enslaved economy’ and the only way it will… Read more »
David: It’s good to give a positive interpretation of published data, but there are a lot of ‘Unknown Unknowns’ out there that we cannot anticipate, because they are unprecedented. For example, the ATM in the only bank in town here has not functioned for a week now. - – – Over the Christmas Rush. That is a previously Unknown situation, and the local shops have been generously allowing purchases ‘on tick’ pending the bank getting its act together. Inevitably shoppers don’t spend as much. 10 days ago that was a little mini Unknown Unknown. Are there other straws in the… Read more »
… but if eire burns the banks causing contagion and others do the same. are you sure there will be anyone left to borrow off? or indeed will the world economy be still the same as that on which you base your premis. perhaps i need more altitude!
[…] You may view the full article and add your own comments at http://www.davidmcwilliams.ie/2010/12/29/we-still-have-the-financial-means-to-save-ourselves […]
Great article, I see the connection with the Famine, very strong (and scary) indeed. Question, where and how do we get hold of the private money on deposit… to save ourselves and regain independence? Do you know of any mechanisms? Would the people be willing to release their savings (@ 16pc of GDP) for the sake of “the country”…if this is what you are intimating in the article?
Expecting my 4th child next march… I cannot sit around and wait for another colour of political opinion to wax lyrical and do nothing to stamp authority on the Banks.
We need a political revolution… public floggings…
Ofcourse it won’t help us.. but it will make the nation feel better whilst they are waiting to fill up their water containers…
Only a handful of current serving TDs could manage their way out of a paper bag.. To cap it all German children are sending christmas boxes to St vicent de paul.
Wake up folks!
{ Can you countenance being the citizen of a country that runs a surplus on its balance of payments to allow other countries to borrow that money to invest in projects that become profitable because our emigrant sons and daughters work for them? So we export our people and our capital to raise the return on investment for foreigners? } I don’t know. It seems to be what China, India and Germany are aiming at…and they are in a very strong position at the moment….India bought half the IMF’s gold, China wanted to buy all of it and was stopped,… Read more »
Concerning Ireland’s budget surplus, Constantin Gurdgiev always makes the point that we must differentiate between GDP and GNP. A lot of that surplus is as never going to enter the real economy. But, economic commentators think that it will – and if you are living on credit, then you will accept every lie that supports your creditworthiness, and that sustains the party. In other words, we are not as rich as we are telling ourselves. But we enjoy telling ourselves anyway – sure it is all about pride. And humility is banned, and is un-Irish, and is the mark or… Read more »
If Ireland is exporting capital to the rest of the world, then does this indicate something about the competitiveness of Ireland for investment ?
David – you are correct. This is a balance sheet recession. We came close to a balance sheet recession in 2002, but the media and the establishment talked us into acquiring more debt. But, in the long term interest of everybody, fixing the balance sheet is necessary – and it will recapitalize the economy. The debt levels for many people are unmanageable. Basically, in the binge era everything went out of proportion, and it was unsustainable. We can rectify this now. In the medium term everything rests on the adjustment that takes place in the labour market. Basically, people who… Read more »
I think that the saving is not the problem, but a result of the fact that people have wised up to how this economy is really operating. In other words all the binge era propaganda has become hollow, and people are functioning in a more intelligent manner as economic agents, now that they are doing their own due diligence.
In other words, the savings rate is not actually a problem. The problem was the borrowing rate beforehand. The savings rate is actually the cure.
Hi, I presume once AIB and BOI are sold on the new buyers will negotiate with the senior bond holders? There should be a return to the people from sale proceeds and we will have had the breathing space to sort the problem in the current account as well as doing our bit to save the Euro? I just don’t believe it is part of any plan for the banking debt to be with us for the long term because as Constantin has consistently pointed out the debts are too big to pay and default in the current situation will… Read more »
Spending levels were too high during the boom, why would we want to return to those levels? Let the economy contract – better that than going back to the days where we borrowed to maintain our lifestyles.
“Spending” in and of itself is not the answer, spending on the right things just might be.
An economy based on consumption is dying on its legs while the economy based on production is trying to keep alive under the strain.
David is correct! From the 32% deficit, Anglo Irish Bank alone counts for 20%! I advocate for a fact finding commission since long, not this joke of a banking Inquiry that was spear headed by EU interests in form of Mr. Regling, but a peoples commission that can be trusted to not be corrupted by the current establishment. Without learning the truth about Anglo Irish Bank, we are deprived of finding closure and learning the lessons. This has to be avoided, then again, is up to the people of Ireland to demand. That this is possible to achieve do, we… Read more »
In the past two years, actions taken by Brian Lenihan and company to deal with the banks, economic doom, and the EU/IMF bailout have been swayed, not by wise words or counsel from sources like David McWilliams, opposition parties, trade unions, but from within Merrion Street and from Brussells. All the logic, wisdom, and persuasive recommendations given by David and others are wasted as long at this government remains. Since the self-serving Jackie Healy Rae and Michael Lowry did not pull the plug, it would fall to a few Fianna Fail TD’s to resign from the party in disgust over… Read more »
What Brian Lucey tweeted….
brianmlucey brian lucey
year on year household deposits in banks are down 6.7%, non-financial corporations deposits down nearly 15%
4 minutes ago Favorite Undo Retweet Reply
So far. A look at deposits in Irish banks tells a story of capital flight. This is the thing everybody is so scared of if the 2008 debt guarantee is revoked, but its happening already:
http://www.centralbank.ie/frame_main.asp?pg=sta_home.asp&nv=sta_nav.asp
See Table A.1 Summary Irish Private Sector Credit and Deposits and note the growth rates in cols 12 to 14.
DAVID.
DONT FORGET WHAT YOU ARE DEALING WITH.
BOTH PARTIES WORK THE SAME CRONY NETWORK.
THEY DONT CARE ABOUT DEMOCRACY.
THEY WONT LISTEN TO “FIXING IRELAND”.
THEY DONT WANT A FREE IRELAND.
IRELAND IS BEING DELIBERATELY ATTACKED.
WHY DO FILTHY SCUM WANT ENSLAVE THE IRISH?
BECAUSE THEY ARE CRIMINAL, GREEDY, PARASITES.
THEY WILL RAPE THE LAND UNTIL THERE IS NOTHING LEFT.
ITS JUST WHAT THEY ARE.
What is David suggesting here? That the Government borrow the people’s savings, and forget the IMF/EU? What terms could savers demand or expect (assuming the Government would play fair and allow supply and demand to determine terms, rather than just grabbing or confiscating savings?). I’d expect to hit 3% fiscal defecit by 2013. I’d want 3% per annum for my money. I’d want the public sector wage bill brought back to pre-boom levels. I’d want all the quangos shut. I’d want foreign aid reduced to 100 million whilst a fiscal deficit remains, with a promise to allocate 50% of any… Read more »
” We still have the financial means to save ourselves”
….[ but intellectually we are more bunched than we ever were ]….
let us not forget….the Anglo “gang”…
From the Cookie Monstor at politics.ie
http://www.politics.ie/economy/140523-anglo-irish-bank-bondholders-revealed.html
This, for those that never seen it before, is THE LIST.
The list of the concerns who benefitted from the Anglo Bailout.
And this is how Ireland is run by the people at the top. Just search for the word “Haughey”….and you get the interesting paragraph about how “business” operates…
http://www.politics.ie/economy/140523-anglo-irish-bank-bondholders-revealed-8.html
I am beginning to suspect that media coverage of the recession is done in such a manner to provide every possible explanation except that the people were sold a pup and “out advertising sponsors” ran off with money. This is a country that spent 750 Million Euro on Property advertising in the binge era. That is correct 750 Million Euro to get people to bid up the prices of houses to statospheric and nonsensical levels. And there has not been a word about it. Instead it somebody else’s fault. Usually Seanie fitz’s fault. The point of this is to keep… Read more »
We have No Financial Means to save ourselves .When did cash/investments get an Irish Passport ? Cash is mobile and does travel fast and to anywhere at the touch of a mouse. Trust and loyality at the Irish social level that holds and manages that cash does not exist and soverignty of that cash does not require a passport to travel. That means Soverign Bankruptcy is a Reality and upon us and nothing will change that soon . We are in a Sovereign Camp ( call it Dafur #~) without a city or a management and all the way back… Read more »
I think the figures and the argument that David lays out show us clearly that the European and global political and financial elites are trying to save the global banking system by nationalising the losses. I don’t see that our domestic political and financial elites can or will break ranks with their European and global colleagues. It might be argued that since we are so insignificant economically no one would notice if we jumped ship and sorted ourselves out — along the lines of Iceland for instance. But our European friends would notice and would resent the hammer that would… Read more »
The Ditherer is stepping down as a TD. This makes no difference because he does not appear in the Dail anymore anyway. http://www.breakingnews.ie/ireland/ahern-to-retire-from-politics-487471.html The only accolade provider so far is the chancer he left in his role as Taoiseach. We can expect McUseless to issue more accolades tomorrow. There will be special coverage on the media. By the end of it you will wonder how we will ever survive with the hoor. No doubt lecture tours will be organized by his mates here, plus New Labour in the UK, and various other parties in the Euro Liberal group. And of… Read more »
David, I have to say I don’t like this article nor the previous article ( on the trusty bus driver) for what I feel are an element they have in common. The general argument of both I think is that somehow the ordinary folk are not to blame for all of this and should in no way shoulder the cost. i can’t say i agree with this. For me both articles are a bit awkward. They express a patronizing note of solidarity with the common man, while making very big and unsupported assumptions and ignore some very basic truths about… Read more »
Sorry all – about the size of all of that ( above )!
Smaller next time I promise!
Happy New Year!
With all due respect I disagree. Your conclusion that Ireland can pull itself up on its own capital is probably incorrect, because: 1) The green curve (private savings) is strongly dependent on government employment (red curve), which in turns depends heavily on borrowing (not sustainable) and on taxation (one cannot pour out of an empty vessel). 2) The hole is too deep. If the total banking liability are (were in 2008) ~600Beu – that is about 150keu per person. Even if reneged upon (which would be perfectly OK since they are, sorry – were private companies), it leaves about 120Beu… Read more »
Folks, some people *still* do not seem to understand what we are dealing with. This may assist some to see the light: The following is the full text of a speech given by former Taoiseach, Bertie Ahern, to his local branch of Fianna Fáil this evening. In the speech Ahern indicated his intention to step down from political life at the coming general election. “Chairman, thank you for the opportunity to speak this evening to you my closest and my longest standing friends in Fianna Fáil — the members of the O’Donovan Rossa Cumann. It is 40 years ago, this… Read more »
Good Article David and it was nice to see you using the lives of ordinary working people to illustrate the main points of your last two articles. Any high profile individual who uses public transport is leading by example and such actions speak far louder than words in my book. Matt Busby also used the bus by the way Anyone who has ever succesfully managed a project of any complexity will tell you that altitude is a position which you often need to visit if you are to stay on track and keep a sense of perspective. It is also… Read more »
The economic legacy of Bertie Ahern – by the economist who has been calling repeatedly for a cull on wasteful useless quangoes.
http://www.independent.ie/national-news/bailout-is-his-legacy-says-snip-economist-2479591.html
Who would ever guess The Ditherer could make such a large contribution to the quenching of Ireland’s flame? Good piece last April by Jody Corcoran here: http://bit.ly/9fqWjr http://www.breakingnews.ie/ireland/ahern-to-retire-from-politics-487471.html http://www.woodlandleague.org/ [ link above provided by Deco last article ] “The Irish Government is moving closer to a huge sell-off of the public forests managed by Coillte (The Irish Forestry Board) to private investors. An area greater than 1 million acres, equivalent to two medium sized counties will be lost forever. This will include some of our most valuable native woodlands, wild places and some of the last refuges of our native… Read more »
Freemantle Doctor of Political Economics : We all stand at a point on the globe somewhere having arrived there to that point on a magic carpet that someone made and at a moment that the heavens saluted .At this moment the Irish Political Scene is liken to a ‘farm in south Kerry’. This Kerry heavens tell us something and we must try to understand it now. The Moon Wobble does not exit eventually until Jan 20th so much has yet to happen eventhough it is already impacted mostly before Christmas the amazon proverbial fly might yet arrive here too in… Read more »
Hi David, we have the means but we don’t have the will. It’s really a sad state of affairs. What your article makes clear is that the problem with Ireland is not the banks, it’s the government. Without wasting billions on bankrupt banks, the state could easily self-fund. The solvent banks would be lining up to do business in Ireland. Instead we have an economy being systematically destroyed with illegitimate debt. Banks are nothing special. A bank takes depositors money, gives them a tiny bit of interest and uses their money to lend out at a higher rate than they… Read more »
Happy New Year to you David; thank you for the articles, Outsiders, Kilkenomics et al. In a strange way it helped make 2010 bearable!
The article in Village Magazine Issue 12 Dec-Jan entitled ‘Irregularities at the Regulator’ might provide an engaging end of year read for posters on this blog. It deals with the liquidity breach by UniCredit in the IFSC of 50%; the reaction by the Regulator, media, politicians, and the bank itself. It ends outlining links to the Vatican….
As Georg R. Baumann sometimes says on this site: ‘You couldn’t make it up’!
Best to all for 2011.
The ‘boot work index’ is worthy of deeper analysis. Is it a good thing to have taxi’s bringing home boot loads of goods for Irish shoppers? That depends on the contents of the boot. If the boot contains lots of goods designed and made in Ireland, it is good. If it contains SFA made in Ireland, and instead has stuff made in Germany, Japan, China, UK, US and so on, it is bad. Unfortunately, the boot work that the taximan was referring to was the latter variety, with imports outstripping exports during the Celtic Tiger. All fuelled by debt. One… Read more »
As 2010 draws to a close in this house as in many others people are occupying themselves waiting for midnight to arrive in order to celebrate the arrival of a new year. Perhaps not so much to welcome a new year but to turn their backs on 2010. A final act of defiance? The only act of defiance to the disastrous chain of events that was 2010. People are not just waiting for midnight. They are also waiting for someone to lead them out of this mess Ireland now finds itself in. They are driving their buses. They are driving… Read more »
Seven and Irishminx, It seems to me that you are trying to say similar things in your posts to what I have been saying here for years. I salute you. However, there are some contributers here that will never address your points properly. Make your point, by all means, but do not expect that it will be dealt with by those at whom it is most properly directed. What a pity. Please keep doing what you do and continue, justifiably, to be proud of the contribution you make in your job. Educate others in your way of thinking and nevere,… Read more »
ALL:
A little, hopefully peaceful, tune that I made a few days ago. It is somewhat epic.
Imagine you walk on a large ice field, a glacier, the Himalaya, Mount Everest…. Your very own quest for Shangri La…..
Forgot to master the version for loudness, so you might want to turn up your speakers a bit more.
http://dl.dropbox.com/u/4914840/shangrila.mp3
Best
Georg
Insiders and Oursiders 2011
This year the above will have a new meaning .Those outside ( depositors) the bank that have their money inside the bank cannot get inside to it ( it’s frozen ) and those inside the bank ( New Stakeholders – taxpayers ) cannot get outside ( sell the nationalised stakeholding )and are bonded slaves indefinately.
This new circus act can also be called a Junkie and a Monkey business.
The diagnosis, prognosis and cure for our problems lies in David’s article “Forgive the ‘legacy debts’ and save the economy” of November 8, 2010. I have copied it in its entirety below. In my opinion it should become a mantra for our way of viewing and solving our current mess. Quote- “Let’s say you own a company. It’s a retail company which you set up in 1999. It traded well in the boom, but to grow quickly, you took on debts commensurate with your turnover. Every time that you wanted to increase turnover, you had to rent a new outlet… Read more »
Happy New Year! Thanks again DmcW for the chart analogy. Simple chart like that goes such a long way to rebut false allegations made by imFFers against critics of its financial and economic madness. The more charts like this the better. Anyone with even the simplest grasp of finance and economics able to understand your chart will be described as a radical left wing loon! Lol. Such criticism comes from the IMF football club:) You can see the inevitable outcome of increased borrowing and increased saving will inevitably lead to debasing the capital upon which the economy is built. This… Read more »
cbweb: I was talking to a German a few days ago and asked if German people wanted the Mark back, as they seem to be contributing disproportionately to the support of the fringe Euro countries. He said that there was no way that they wanted to leave the Euro, because, if they refloated to the mark, it would quickly become so strong that no other country would be able to afford to buy German cars, etc. I guess the best way to show our gratitude for their bailout of Ireland is to continue buying german cars. Maybe that’s why government… Read more »
I got the bus from Hueston station on Dec 27th heading to the airport to catch a flight to Poland, interestingly, the bus passed down the quays, past the SIPTU building, the IFSC, the empty Anglo building, (which reminded me of a scene from Full Metal Jacket), quite a triangle, two Americans behind me commented – this isn’t a very nice. Poland, a country which has been through a huge amount, didn’t engage in a mad banking/property ponzi scheme, growth was 3% in 2010, it is estimated to be 4.3% in 2011. Irish people are arriving here (some irony) as… Read more »
I would like to wish happiness, prosperity, and survival to all of you in the New Year.
And also I wish progress to DavidMcW – the man who brought everybody to this forum, and who helped many escape the greatest “hard sells” of the past decade !!