Now that we are at the end of the year, here are a few things that 2013 taught us about economics, how our economy is doing and what determines where it goes from here.
HOUSES AND PROPERTY PRICES
This was the year the property market started showing signs of life. Two years ago, in January 2012, this column suggested here that Irish house prices would stop falling in 2012 and begin to start rising in 2013.
Interestingly, back in early 2013 after five years of house prices falls, the notion that house prices would rise sooner than people expected was met with derision. But that’s what happens. When things are good most people don’t think that the good times will end and when things are bad most people think things can’t ever get better.
Regarding the property market, lots of people are worried about a “bubble” re-emerging. This is not a bubble; it is merely a reflection of supply and demand.
During the boom, when a few of us were calling the boom a “bubble” and warning that it would burst, the mainstream was saying it was supply and demand. Now I am saying this recent rise is a case of supply and demand and the mainstream is calling it a bubble.
You can’t have a bubble without credit and there is no credit, or very little credit, in the Irish system. Even as house prices rose in the past few months, mortgage lending didn’t grow in tandem, actually it fell. We are seeing a cash-driven market, which is very unusual. It implies that there is no bubble because you need leverage for a bubble and there is no risk of a reversal in prices unless the banks get involved again, which they have not got the capital to do, just yet.
However, we should be aware of the societal impacts of a cash-driven property market. It means that legitimate first-time buyers are being priced out of the market by cash-rich investors. The reason is simple. Sellers prefer cash buyers and because the cash buyer doesn’t have to borrow the money at 5pc from the bank, he will always be able to outbid the first-time buyer.
RECOVERY IN CONSUMPTION
In the past few months there has been a slight pick-up in final demand in the country. This is consistent with the analysis offered in the column for years. The recession in Ireland is what is called in economics a balance sheet recession, caused by the collapse of a property bubble, which destroyed the balance sheet of the middle class. In such a recession, the savings ratio rises as those with money — both individuals and companies — save huge amounts and those in debt try to pay back what they can. Obviously domestic demand collapses. But as the people save, the Government has to spend, otherwise the economy goes into a total tailspin.
Thus the budget deficit, far from being the cause of our woes (as the government policy of slashing the budget deficit suggested), is actually the consequence.
All the private sector savings imply that there is possible “pent-up” demand, which starts to be spent when some confidence returns, which it has done this year.
CONFIDENCE AND ROLE OF UK
The best thing that happened in the past year has been the increase in jobs in the country. Why did this happen? And why did it happen in the second half of 2013?
My best guess, given that domestic demand was held back by tax hikes, spending cuts and a lack of credit, is that it has come from outside. But what was the most positive development in Ireland’s meaningful trading partners?
The European economy remained on the canvas last year and it is now flirting with deflation and record levels of unemployment. The US economy is in better shape, granted, but hardly match fit — as evidenced by the Fed’s injection of €85bn into the economy every single month.
The economy that really surpassed expectations was the UK — our biggest trading partner, home to our largest recent emigrant population, our biggest tourist market and by far the largest buyer of Irish agricultural produce.
When looking for reasons the Irish economy did better in the second half of the year, look no further than a massive boost from the UK’s much better-than-expected performance. This also propelled sterling upwards, making Irish companies competitive in Britain and Ireland a cheaper place to visit for our neighbours.
Yet, if you were looking for anyone in official Ireland to credit the UK’s role in the past 12 months, you’d be waiting a long time because as usual they are in Brussels pleading with some Eurocrat or other.
THE PROMISSORY NOTE
Last March, Ireland defaulted in all but name on a €3bn payment of a €30bn IOU. A default is when you change the terms of a debt repayment to the benefit of the debtor and to the detriment of the creditor. Defaults are always a cash-flow event. Anything that changed the contract to benefit the cash flow of the debtor at the expense of the cash flow of the creditor is a default.
By kicking out the promissory note payment to 2038, we changed the terms of the contract with our creditor and didn’t pay. Readers will know that I support this wholeheartedly and would go for a full non-repayment rather than one that is postponed two generations out into the future. That said, the interesting aspect of not paying the promissory note is that nothing happened. Before this event, many argued that non-payments would scare the market. In the event the opposite happened. The yield on Irish government debt fell, implying less risk after we didn’t pay!
Why is this? It is because, (a) the debt was not legitimate and, (b) for the financial markets, not paying the note improved Ireland’s cash flow.
Now that the precedent has been set, we could do something similar with promissory notes and the present hole in the banks, which threatens another banking crisis next year.
DRAGHI
This year was also the year of Draghi and his threats to and nudging of the financial markets ensured that Greece — the biggest defaulter in history in 2012 in terms of sheer numbers — was the country with the best performing bond market in 2013!
MULTINATIONALS
It was the year when the myth of multinationals paying 12pc tax was blown apart. They, in fact, pay 2.5pc effective corporate tax in Ireland. According to the US Bureau of Economic Analysis, US multi-nationals in Ireland reported net income of €95.6bn. On this “taxes other than income and payroll taxes” payable in Ireland in 2010 amounted to €2.4bn, giving an effective rate of tax of 2.5pc.
THE DIASPORA
A few short years ago, anyone who suggested that the diaspora could be a small but important economic resource for the country was laughed at. Today, almost everyone has a “diaspora strategy” of some class or other. The Gathering was one such event. It was a success and could be built on by other initiatives such as Ireland Reaching Out.
THE NEXT STEP
Looking back on the year, the economy is still much, much smaller than it was at its peak. There are 400,000 fewer people here and many hundreds of thousands of lives have been destroyed by long-term unemployment, but the local economy is beginning, very gingerly, to recover. A big deal on mortgage debts, using something like a promissory note again, could help 2014 enormously.
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via Holger Zschaepitz, @Schuldensuehner :
World’s top bond market in 2013? #Greece. Greek bonds returned 47%, almost 4 times as much as any other govt bonds.
https://twitter.com/Schuldensuehner/status/417617574424109056/photo/1
Mario Draghi has spoken out against the “perverse angst” displayed by Germans over the European Central Bank’s policies
http://www.telegraph.co.uk/finance/economics/10542289/Draghi-complains-of-perverse-angst-among-Germans.html
Spiegel interview with Draghi [German] http://www.spiegel.de/wirtschaft/soziales/ezb-chef-draghi-sieht-ermutigende-zeichen-bei-euro-rettung-a-941064.html
Not only multi-nationals but also wealthy individuals based in Ireland avoid paying tax. These companies use the same Dutch schemes that enable Bono escape paying tax on about 95% of his income.
From FinFacts : Bono’s hypocrisy on Africa, corporate tax avoidance in Ireland
http://www.finfacts.ie/irishfinancenews/article_1026589.shtml
Dublin house price increases in 2013 can also be seen as a swing back from an over correction in the wrong direction and are coming back to a more accurate level. 30 percent increase scare is just not credible.
Bubbles only caused by leverage? So if a couple of large funds got it into their heads to buy a €1bn if residential property in Dublin, then the subsequent rocketing prices wouldn’t be a bubble?
Surely, a bubble is caused by unsustainable funds going into a market/asset class: short term speculative cash; loans on the back of, for example, interest rates at a pension destroying 300 year low; loans with
wver decreasing collatoral; etc
Quarter of Irish would accept pay cut to secure euro future
http://www.independent.ie/irish-news/quarter-of-irish-would-accept-pay-cut-to-secure-euro-future-29875001.html
“There are 400,000 fewer people here and many hundreds of thousands of lives have been destroyed by long-term unemployment, ”
That is the indictment of both governments, FF and FG/LP.
It seems DMcW and the mainstream, have massive problems with the concept of credit, throwing bubble expletives at each other. I would venture that stems from the muddle of the Keynes-Hayek dog-and-pony economics circus.
To clarify the principle of Credit :
For a New Credit System
The flea circus that Keynes, Hayek and Friedman posture in, is shown up as simply serfdom.
“THE NEXT STEP” – envision the sound of a goose step – financially or military – the IO-EU is starting to appear like a Taylor Burton relationship…
“House Sellers prefer cash buyers..”
Could David or someone please explain why this is so. I’ve often heard this expression and never understood its logic.
Cash buyers outbidding each other for scarce quality houses in a handful of desirable areas is a localised Dead Cat Bounce. It’ll dry up. I follow Daft.ie regularly as I’m half-heartedly house hunting nationwide and house prices outside Dublin are noticeably dropping. Meanwhile, rents in Dublin are noticeably soaring. I’m back in work and the landlords of two colleagues-renters have demanded exorbitant rent increases while another has just rented a 2-bed house in D12 for e1600 per month. This is simply gouging on the fact that, yes, there is a pent up demand for housing but nobody’s getting mortgages (the… Read more »
“Bitcoin Is Evil”
http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/?_r=0
I believe that Einstein lent the Nobel Prize its credibility and not vice versa. People equate the Nobel with Einstein and hence its allure. In reality the Nobel is as credible as X-Factor when one reads through the list of previous winners across the fields. That this Krugman clown won it is further proof.
Around 28pc of the €12bn worth of contracts awarded by state bodies in 2013 were won by companies based outside Ireland – up from 18pc the previous year, putting Ireland at the top of the list of countries most likely to award contracts to foreign companies, according to Tony Corrigan of TenderScout. Guess where these go : UK and NI.
http://www.independent.ie/business/ireland-loses-35bn-as-state-contracts-go-to-foreign-firms-29874247.html
Apparently tender costs are so exorbitant Irish companies don’t even compete. Something DMcW failed to register above.
Jobs for the boys.
Coalition breaking own rules on state boards
http://www.irishexaminer.com/ireland/coalition-breaking-own-rules-on-state-boards-253804.html
From DT to the Indo :
The West has lost control and disaster awaits
Writer fails to mention the firing of Bismarck or at all, but gets the period right.
Russia is testing ICBM’s now as the new Eastern Front (Ukraine) becomes deadly – Volgograd. Any disaster now would mean extinction. What does the EU think it is going for?
Land Grab of Farmland in Eastern Germany and East Europe Is Underway, Spurred by EU Co-Funding for Biofuels Hot money investment groups are increasingly buying up arable lands in eastern Germany, which is a pattern also encountered in other parts of Eastern Europe. The process is spurred by the considerable benefit from the generous EU co-funding of expansion of farm land used for bio-fuels. In five years, prices for land in some regions have tripled, reaching EU25,000 per hectare. For those farmers and cooperatives which farm a substantial part of their land area, on the basis of leasing, the rising… Read more »
A bubble doesn’t need credit, it just needs people willing and able to pay more than the long term sustainable price. We have that in spades — for the utterly tiny number of desirable south Dublin properties that are coming on the market. Elsewhere, even in Dublin, prices fell in 2013. A chorus of vested interests are talking about a “recovery”. House price rises are not a recovery, they are an unwelcome development in a capital city where even after the biggest crash in history, prices are still obscenely high in many areas. But we can rely on the Irish… Read more »
I saw this front page headline on the newsstand.
“Pent Up Demand For Wage Increases Risks Recovery”
Discuss.
Where we’re headed
Opposition to the Trans-Pacific Partnership explodes on Twitter
Read more: http://www.digitaljournal.com/news/world/opposition-to-the-trans-pacific-partnership-explodes-on-twitter/article/364701#ixzz2ozco5CtI
How do you explain profitable medium ICT companies with salary freezes for the last five years? On my observation there are three scenarios when a company has locked in salary freeze, the management recognise their key personnel and by hush-hush hook&crook keep them sweet with all-but-in-name salary increases and the company motors along nicely as before, the second scenario is a repeat of the first but here the staff rumble the hook&crook scheme and there is a poisonous air bad blood and the company begins a death spiral, the third scenario is the management don’t recognise their key personnel who… Read more »
A useful link Below the links about the Government there is a plethora of reasons to cop on and avoid placing your data and internet activity in the hands of tech corporations and governments https://sites.google.com/site/corpsins/ It is extremely difficult to put back doors in open source software. This is cop on number 1. Stop using defective products. 2014 and beyond is much bigger than parochial nonsense like the cash price of a south dublin pile or the moral utterings of loose lipped secret kinksters parading as moral guardians in public The bigger picture is far more interesting but in tiny… Read more »
A longer term perspective on the world economy from a Chinese observer.
Re the stability of the 1814-1914 era to the record instability from 1914 cumulating in todays disasters as yet unresolved.
http://www.ingoldwetrust.ch/china-accumulates-gold-world-dream
Tipping Along
Off to New York with the iPaddies
http://www.irishtimes.com/blogs/generationemigration/2012/03/30/off-to-new-york-with-the-ipaddies/
China accrues another 2500 tonnes and India 1200 tonnes despite the duties. Western Gold flees Eastward
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/12/31_Absolutely_Shocking_Developments_In_The_War_On_Gold.html
This whole financial War is a Ponzi Scheme..nothing more..nothing less. Debating Garbage is really becoming boring..not to say I find anyone here boring..its just that we,as a people must move on.Concentrate on the positive things in life. Some days I get really annoyed..the next day I am wondering “what the fuck am I giving away my peace of mind for”? Depression can still hang around,you don’t go through a major life event without some scars..but its not here today,…and thats all that matters. Saying all that,I do enjoy studying History,Economic History & Military History..my wife refers to it as my… Read more »
This whole financial War is a Ponzi Scheme..nothing more..nothing less. Debating Garbage is really becoming boring..not to say I find anyone here boring..its just that we,as a people must move on.Concentrate on the positive things in life. Some days I get really annoyed..the next day I am wondering “what the fuck am I giving away my peace of mind for”? Depression can still hang around,you don’t go through a major life event without some scars..but its not here today,…and thats all that matters. Saying all that,I do enjoy studying History,Economic History & Military History..my wife refers to it as my… Read more »
New year used to be spent in the tenements.
http://www.youtube.com/watch?v=mSz54539hSI
A Chairde
The Corries Bonnie Dundee
http://www.youtube.com/watch?v=Av2-A-igOJk
Happy New Year folks and be the best you can be in 2014.
Mise le meas.