Friday, October 31, 2014

Definitions

Judas Iscariot on the meaning of the word politics:
"Poli from the Greek word meaning 'many'; ticks meaning 'blood sucking organisms'."
A line from Simon Callow's magnificent performance of The Man Jesus last night in the Pavilion Theatre in Dun Laoghaire. Catch it if you can.

Friday, October 24, 2014

The Physics of Debt

I recently came across Keith Weiner's theory on interest and prices. He likens zero interest rates to a black hole:

First, zero interest is like a singularity. I have repeatedly emphasized the fact that debt cannot be paid off; it cannot go out of existence. It is only shifted around. Therefore, regardless of whatever nominal duration is attributed to any bond or loan, it is in effect perpetual. At zero interest, a perpetual debt has an infinite net present value.

The next part of the analogy is the strong gravitational pull from a very far distance. The rate of interest has indeed been falling since the high of 16% in 1981, and it was pulled in to a perigee of 1.6% before making an apogee (so far) of 2.9%. The analogy still holds, objects spiral around and into black holes; they do not fall in directly.
With a growing part of the global economy struggling to pull away from both deflation and zero interest rates, it's obvious that something unprecedented is happening right now. It's happening in Ireland too:

Source: Trading Economics

What is the source of 'gravity' that is pulling our economy towards the event horizon? The answer, obviously, is debt. Ireland is in the premier league (along with Japan) when it comes to total national indebtedness (households+government+businesses): which by analogy means we're trying to escape the gravitational pull of a super massive black hole. Ultimately the developed world is learning the hard way that - in Andy McNally's phrase - 'debt is a sociopath', one that starts by killing equity and then moves on to the rest of the economy.

So how do you escape from a black hole? The first thing you do is stay away from them. Which in Ireland's case meant not joining the euro. Unfortunately, as Megan McArdle points out, it's too late for that - path dependence has its own gravitational influence:
As I noted the other day, the fact that you can avoid some sort of terrible fate by stopping something before it starts does not mean that you can later achieve the same salutary effects by ceasing whatever stupid thing you have done. It would have been painless just to not have the euro. But it will be painful indeed to get rid of it.
So now we're close to the event horizon what are our options? In Weiner's model, the actual event horizon is when debt passes the point where it can no longer be amortized - the interest on total accumulated debt becomes can no longer be funded via tax revenues and additional borrowing. We're not there yet, so maybe there is still time to escape.

As a small open economy we can still do things that a larger economy - or eurozone - cannot do. For example, creating new, parallel currencies is one option. A balanced budget is another (Budget 2015 forecasts a net increase in borrowing of €5.2bn), which would at least slow our trajectory down. And the biggest option of all is debt forgiveness - though alas that'll only be tried when it's probably too late.

Where's the warp drive when you need it?

Wednesday, October 22, 2014

Political Chernobyl

"The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies." Robert Conquest's Third Law of Politics
Irish Water looks like one of those issues that's going to run and run - or leak and leak, depending on your preferred metaphor.

But here's a thought that should exercise the minds of our political masters and betters: just think what will happen when the first Irish Water bills arrive in January 2015, along with a severe winter the like of which we haven't seen since, oh, 2010?

Add large, unaffordable bills to thousands of burst pipes and you get... Political Chernobyl.

Best pray for global warming so.



Tuesday, October 21, 2014

Passionate Intensities

Work has prevented me from blogging lately, but sometimes I do get the chance to explore ideas at gatherings and conferences etc.

Below is the text of a talk I gave recently - more of the scaffolding than the final building, but you should be able to get the gist of it. The theme was ‘changing lifestyles, values and behaviours – what’s happening below the radar’.

Passionate Intensities

I thought a handy title for my talk would be ‘Passionate Intensities’, a play on that well known passage from Yeat’s ‘Second Coming’, written in 1919:

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

I want to talk about some of the passionate – and sometimes dispassionate – intensities shaping the moods and lives of Irish people today as I observe them through my work, and to speculate about what they might mean for the future, both near and far.

But I don’t want to be all gloomy, even if I do subscribe to the old Russian adage that ‘a pessimist is a well-informed optimist’! So I will talk about change below the radar in terms of the good, the bad and the ugly, with a view to stirring your own passionate intensity for further discussion!

The Good

Resilient Recovery
Yes, there is a recovery, especially in Dublin. Economic sentiment is a little ahead of economic reality, but it helps in terms of most people seeing a better future ahead, and it’s all quite recent.
Young people in particular are positive about their prospects and choices, even if they’re not quite sure how they’re going to get to the future they want.

Still, we’re in a better place than a year ago, let alone five years ago.

Digital Empowerment
Digital technology – broadband, smartphones, online services etc – has transformed people’s lives, mostly for the better. People feel more in control, that they have more choice and that the quality of their lives is better because of technology and despite the recession.

Technology hasn’t just got cheaper these past few years, it has made lots of other things seem cheaper was well – even as incomes stagnated.

Self-Investment
People aren’t waiting for the government to solve their problems: they’re giving up on the HSE & VHI and getting on with running, going to the gym, better diets and other ways of investing in their own health and wellbeing.

It’s about taking control – or taking it back – and replacing fatalism with a renewed sense of resilience, purpose and ambition that doesn’t rely on politicians or the return of the Celtic Tiger.

The Bad

Discounting the Future
People may believe things are getting better, but they don’t expect them to get good any time soon. Most are hanging on from month-to-month, not thinking about pensions, pay rises or more kids. We’ve become a ‘high time preference’ society, focused on now and the immediate future, not giving much thought to the future. It’s partly cultural (living in the now), and partly psychological (why think about something you have no control over or certainty about?)

Money is still very tight for an awful lot of people, who have little or no capacity for savings, pensions or rainy day problems.

Selfie Destruction
There’s a shadow side to our digital rapture: we’re losing connections with reality and each other. From low attention spans to cognitive problems in children raised by screens, we’re only beginning to figure out the mental and emotional toll of living in the digital simulacrum. Perhaps the highest price is an epidemic of loneliness, even among young people with 300 ‘friends’ on Facebook.

A lot of people think it’s a problem, nobody know what to do about it, and we haven’t been here before.

Losers & Winners
The future is a zero-sum game in the minds of many people nowadays. They don’t expect the cake to get bigger any time soon, so they know that gains for some will mean losses for others. Most are prepared to make the trade-offs, and to do the political triage as necessary. They know they can’t have their cake and eat it too in the current climate: whether it’s helping families at the expense of the elderly… or vice versa.

Voters are ahead of politicians in this regard: if more tough decisions have to be made… then they’ll be in favour of making them…

The Ugly

Route-less
The traditional life path for most young people – job, spouse, kids, house – appears increasingly unattainable for many, and undesirable for many more. They are ‘route-less’ in the sense of not having a defining route forward in their lives.  That might not matter at the level of individual choices, but it has profound implications at a societal level in terms of economic output, productivity, population growth and the sustainability of welfare provisions. Think of it as the social equivalent of the 'paradox of thrift': more like the 'paradox of choice'.

A lot of young people aren’t ‘growing up’ because they can’t – or they won’t.

Deeply Indebted
The Irish love affair with home ownership has now given way to divorce proceedings. Many remain trapped in negative equity, either for their PDH or their business. And with little or no prospect of a healthy period of inflation to rapidly erode the real value of their debts (quite the reverse in fact), then the ‘squeezed middle’ (mostly 40 & 50 somethings) will continue to be squeezed.

Hence the allergic attitude to further borrowing, which means less investment and weaker balance sheets for our banks (who might best be described as ‘sleeping pygmies’ since they’ll have very few customers when they are ‘really’ open for business…)

Politics without Purpose
People aren’t cynical about politics and politicians – they’re way beyond that. Everyone knows ‘it’s a game’, they’re trying to buy our votes with other people’s money. We no longer have leaders, only managers – and the political opposition campaign on the basis that they are more competent managers than the incumbents.

The rise of the independents and high share of ‘don’t knows’ in political polls all point to an electorate that feels increasingly disconnected from the governing class, and increasingly open to alternatives to the status quo.

The Second Birth
Yeats originally called his poem ‘The Second Birth’, to reflect the other, famous stanza from his poem:

That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

Yeats was writing at the end of the First World War, in the midst of the Irish War of Independence, as Europe was convulsed by the Spanish Flu, Russian Revolution and the collapse of empires. He had good reason to feel a sense of foreboding about the future.

But 2014 isn’t 1919 – Ebola isn’t the Spanish Flu nor is ISIS the Bolshevik Red Army. Nor, for that matter, is Paul Murphy TD the equivalent of Michael Collins!

Yet, in a sense people today are ‘trapped in the present’, waiting for the future to resume, and not sure if it will. A the same time, people are optimistic right now – for Ireland, for Europe and, to a lesser extent, for themselves. The question is: despite all that is ‘bad’ and ‘ugly’ in the landscape will the ‘good’ prevail? Or will the hour come round at last for the rough beast to slouch its way and birth a different future to one we would wish for and prefer?




Wednesday, September 17, 2014

Nations Once Again

Ahead of tomorrow's referendum in Scotland, Stratfor's George Friedman explores the wider implications for Europe (and they're not good):
More important, perhaps, is that although Yugoslavia and the Soviet collapse were not seen as precedents for the rest of Europe, Scotland would be seen that way. No one can deny that Britain is an entity of singular importance. If that can melt away, what is certain? At a time when the European Union's economic crisis is intense, challenging European institutions and principles, the dissolution of the British union would legitimize national claims that have been buried for decades.
The vote will come down to the emotional appeal of national self-determination vs the rational self-interest of continued union. History is made by emotions.

Monday, September 8, 2014

Scottish Dependence

A friend asked me the other day if I favoured Scottish independence. I have to admit I was stumped by the question. My heart says yes, but my head says... 'seriously?!'

I can understand the passion that fuels those who favour independence - I'm a big fan of Irish independence after all. I'm just not sure why the Scottish want independence in 2014. The Scottish enjoy considerably more freedom to manage their own affairs (political, economic, social and cultural) than the Irish did one hundred years ago.

From various conversations with Scots over the years, I think some of it is a visceral hatred of the English that is as bad, if not worse, than the kneejerk Brit-bashing that was a familiar refrain in Ireland until recent times. Though not any more. And if it isn't as crass as that for many pro-independence advocates, then there is undoubtedly a big streak of anti-Tory sentiment. Let's face it, this wouldn't be happening if there was a majority Labour government in London.

Still, hatred only gets you so far: in the end you have to be for something, not just against everything. Nor will a 'rational' case for independence do: there are as many (if not considerably more) reasons to rationally favour retaining the status quo as there are for changing it. All that talk of tax revenues from North Sea oil might have worked back in the 1970s: but output peaked in the 1990s and has plunged since. Scotland won't be the next Norway, on the economic front anyway. Though it might be the next Norway on the social policy front, given the recent announcement of a state guardian for every child in Scotland.

Independence will likely mean economic turmoil - if not deep economic depression - for many Scots for the first decade or two after independence (unless the English taxpayer comes to the rescue, but frankly, why should they?) We had the best part of five decades worth of depression in Ireland, but hopefully they can learn from our mistakes in that regard.

But... even that might be a price worth paying if independence unleashed creative forces of construction that would make Scotland not only a better place to live than it could ever be as part of the United Kingdom but also an inspiration to small nations everywhere who wish to set out on their own path to the future, away, for example, from the lowest common denominator of globalisation and consumerisation.

The thing is, I suspect that following a new path is the last thing the SNP wants to do. Theirs is very much an ideology of Big Government, Big Spending and Big Taxes. Politics is their religion and Government is their God: they just want more direct control and the political power that goes with. Which is all very well if you're into that sort of thing - politics, after all, is just the negotiation of power between interested parties. But most people aren't that interested (though at times like this they probably should be). A Scotsman I know describes the SNP as a cult. He's obviously not a member, but then again 95% of people aren't members of political parties in most democracies.

I'd back a 'Pearse' any day in the cause of national independence, but I'd back away from a 'Machiavelli'. I'm still conflicted.





 



Tuesday, September 2, 2014

The Wrong Side of Geography

It's a common refrain:

Against same sex marriage? You're on the wrong side of history.
Against globalisation? You're on the wrong side of history.
Against the singularity? You're on the wrong side of history.

Even poor old Vladimir Putin gets 'the wrong side' treatment from Lilia Shevtsova in her analysis of the new world disorder:
By attempting to shift Russia backward to an older civilizational model, Putin has already inflicted a deep strategic defeat on his country. His efforts to turn Russia back to the “Besieged Fortress” model will only rob Russia of its chance to become a modern society. Moreover, Putin has also unleashed forces he can’t hope to contain, thus accelerating the agonizing decay of his own regime. Nevertheless, though he has lost the battle with history, Putin has been moving from one tactical victory to the next by forcing the West to constantly react and try to accommodate his reckless behavior.
But Shevtsova's analysis suffers from the same problem as others who claim history's telos as their own: she's on the wrong side of geography. Mark Lila provides a masterful critique of the new world delusions that have gripped Western elites since history 'ended' 25 years ago:
Never since the end of World War II, and perhaps since the Russian Revolution, has political thinking in the West been so shallow and clueless. We all sense that ominous changes are taking place in our societies, and in other societies whose destinies will very much shape our own. Yet we lack adequate concepts or even a vocabulary for describing the world we find ourselves in. The connection between words and things has snapped. The end of ideology has not meant the lifting of clouds. It has brought a fog so thick that we can no longer read what is right before us. We find ourselves in an illegible age.
Not only did history end, ideology ended - to be replaced by a kind of dogmatic libertarianism:
It tells us that this is a libertarian age. That is not because democracy is on the march (it is regressing in many places), or because the bounty of the free market has reached everyone (we have a new class of paupers), or because we are now all free to do as we wish (since wishes inevitably conflict). No, ours is a libertarian age by default: whatever ideas or beliefs or feelings muted the demand for individual autonomy in the past have atrophied. There were no public debates on this and no votes were taken. Since the cold war ended we have simply found ourselves in a world in which every advance of the principle of freedom in one sphere advances it in the others, whether we wish it to or not. The only freedom we are losing is the freedom to choose our freedoms.
Geo-politically this has given rise to aimless (and often self-destructive) goals such as 'The European Project' in the case of the EU, and bringing democracy to the Middle East in the case of the United States. The former has undermined democracy, the latter is built on sand. For a time liberal democracy appeared to be on the right side of history, but not any more. As Lila notes:
Clearly, the big surprise in world politics since the cold war’s end is not the advance of liberal democracy but the reappearance of classic forms of non-democratic political rule in modern guises. The break-up of the Soviet empire and the “shock therapy” that followed it produced new oligarchies and kleptocracies that have at their disposal innovative tools of finance and communication; the advance of political Islam has placed millions of Muslims, who make up a quarter of the world’s population, under more restrictive theocratic rule; tribes, clans, and sectarian groups have become the most important actors in the post-colonial states of Africa and the Middle East; China has brought back despotic mercantilism. Each of these political formations has a distinctive nature that needs to be understood in its own terms, not as a lesser or greater form of democracy in potentia. The world of nations remains what it has always been: an aviary. 
The West's dogmatic libertarianism - where we are no longer free to choose our freedoms - means that our political elite is simply not prepared - perhaps not even capable - of defending our culture and our values. When our highest virtues nowadays are 'be nice, don't judge, offend no one' then the West, including Ireland, is clearly on the wrong side of geography. History is about to get interesting again.


Friday, August 29, 2014

It's Criminal

You know Europe's economy is in a bad way when even the mafia is a shadow of its former self.

The timing is terrible, of course, as some had hoped GDP would get a handy fillip from the inclusion of illegal activities.

Proof, if proof was necessary, that poor old Europe can't get a break these days...






Thursday, August 28, 2014

Every Assistance Short of Help

Is the ECB about to go QE? We await with breathless anticipation.

Today's appointment of BlackRock to help the ECB design a programme to buy asset-backed securities (ABS to give it its full acronym) has been interpreted by many as a sign the eurozone will soon witness full blown quantitative easing. And needless to say, it's all being sold as really really good for Europe's small businesses still desperate for bank finance to help expand and create jobs. Why, I'm sure it'll even reduce our carbon footprint as well, come to think of it.

Of course, it's all BS (another acronym). Apparently, in order to get the banks to lend enough money to businesses (with a modest margin added for profit), the ECB has to (sharp intake of breath) get the banks to bundle existing loans into securities that are sold to fixed-income investors (in this case, the ECB) so that the banks will then have better balance sheets which in turn will enable them to raise low interest rate funds in order to be able to lend money to SMEs. Or at least I think that's the plan. The fact that the whole 'mortgage-backed securities'/QE thing has been tried and failed in Japan, the United States and the UK (from a lending to SMEs/sustainable growth point of view) should not in any way be considered a reason not to try it in Europe too.

Needless to say there are many people in favour of QE. Like the executives in charge of large corporations who have used QE to indulge a binge of share buybacks to boost the value of their own share options, which has in turn exacerbated the wealth inequalities many people seem vexed about. Apparently this is a much safer bet for the banks than taking their QE gains and, you know, actually lending money to businesses who need to it to grow.

A case, once again, of 'every assistance short of help' for Europe's small businesses.

Still, it's not too late to consider the alternative. Like giving the money directly to the people. Even Foreign Affairs thinks this might be worth trying. A sort of 'QE for the people'. As Mark Blyth and Eric Lonergan explain it:
Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
But the problem in Ireland is that most of the money will simply go to paying off debt, with only a limited impact on spending and growth (which would help most SMEs dependent on the domestic market). Which means that QE for the people requires another, even more radical policy if the nation's debts are to be reduced. And there's only one way to do that: DF.

DF is an acronym that stands for the thing that will have to happen anyway in Ireland, the eurozone, the UK and the United States. And the sooner the better. DF stands for:

Debt Forgiveness

Though probably not before Europe's executives have enjoyed their own share buyback binge. Europe's small businesses will just have to wait their turn.

Wednesday, August 27, 2014

Stringing Up the Recovery

Like a lot of people I'm scratching my head at the conflicting statistics about Ireland's economic performance. On the one hand, the latest QNHS from the CSO tells us that the numbers in jobs were 1.7% higher in Q2 2014 than a year ago. On the other, the CSO also reports that average weekly wages were down 1.1% in Q2 2014 from last year. It's a wage-less recovery apparently.

There may be several explanations for what we are seeing - or there may be none. Such low percentage figures, based on survey data, are in turn vulnerable to margins of error that could leave one or both in reality close to zero. I used to think we witnessing a 'macro-recovery, micro-recession' - i.e.: improving headline numbers like GDP and exports, but weaker indicators at the level of firms and households. Now it seems the other way round, with the macro numbers remaining flat and the micro numbers (job creation/confidence) showing improvement.

I think these anomalies are further signs of our continuing balance sheet recession. In other words, despite a degree of pump priming by the authorities, and even some old fashioned boosterism by the media (and who can blame them), we're still coming to grips with what happens when you try to push on the monetary string. The number one financial priority for the majority of Irish adults is to reduce their exposure to debt. It's less of a priority for the very young and the very old, but then they tend to have both low debts and low incomes. Those with higher incomes - the 35-55 age cohort - are also more indebted, so any extra spending power/disposable income they get will only go one way.

But to add to the head scratching, the latest money supply statistics are enough to make your nearest and dearest wonder if you've picked up something contagious. The chart shows what is happening to the M1 and M2 measures of money supply in Ireland (data here). They tend to move together, but since the start of the year, M1 (currency in circulation and overnight deposits) has moved away significantly from M2 (M1 plus longer term deposits):


The source of the jump is the amount of currency in circulation (not overnight deposits, which are flat). In June 2014 there was €14.5bn in 'cash' circulating in the Irish economy, up 10% from a year ago to  reach the highest level on record. Sure looks like a lot of pump priming to me. The only question is: whose pump(s)?

It certainly isn't showing up in residential bank deposits, nor in wage packets for that matter. It may simply be more proof of the degree to which our financial system remains fractured and broken after the collapse six years ago. Or it may indicate that the wider economy is still very vulnerable and that recovery is still some way off for most of those seeking jobs, or waiting for pay rises for that matter. Despite an awful lot of pushing on string.







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