Tuesday, November 29, 2011

Hanging On

Ahead of Budget 2012, my company has recently conducted a survey for RTE Frontline and the Irish Daily Mail. The picture it paints is stark: a large and growing minority of Irish people are 'running out of road'. Judge for yourself:



Tuesday, November 22, 2011

After Democracy

A wise man once said that in economics there are no solutions, only trade-offs. The same goes for politics. Democracy is nothing if not a process of trade-offs: 'which do you want: lower taxes or higher spending?' For a while our politicians (and others in the PIIGS) pretended there were no trade-offs: you could have lower taxes and higher spending. That hasn't worked out so well.

The problem is: there are no trade-offs any more, nor any solutions. There is simply the programme - what the Troika wants. Let's be clear: most of our problems in Ireland are self-inflicted. We didn't want to make trade-offs. Though in fairness we are also suffering from a wider problem: the failure of the ECB to make trade-offs. That's why - as Colm McCarthy recently pointed out - 40% of Ireland's debt/GDP ratio is solely the result of the ECB's insistence that we bailout the private creditors to private banks. The trade-off should have been for the ECB to provide the money to pay the creditors rather than let Ireland leave them to their own devices (and haircuts). But no: the ECB wants us to pay the creditors and no haircuts.

The politicians of the PIIGS are not the only ones who can't make trade-offs.

But there's a bigger problem: if there are no longer any trade-offs then we no longer have a democracy. There is nothing to be decided: only targets to be met. In which case: why do we need political representatives, let alone elections? The answer appears to be that we don't. Increasingly our leaders are technocrats - mostly alumni of Goldman Sachs as it happens.

Of course there is a precedent for this: in times of war, democratic countries - including Ireland - will often form a 'government of national unity' or some such thing. Until the emergency is over, of course. But what happens if the emergency doesn't end any time soon? In a fascinating review of Francis Fukuyama's new book, philosopher John Gray criticised the Western hubris that thinks our model of liberal democracy and free markets somehow represents the 'inevitable' outcome of societal development. A brief perusal of history would suggest otherwise. That and the 'brute' success of China and Russia.

Democracy has shallow roots in Ireland. Instead of a trade-off between representative democracy or participative democracy we have ended up with managerialist democracy. Even the Cabinet don't get to make decisions any more - as explained by Fintan O'Toole

And that's what worries me. We are only in the early stages of the Troika's programme and already our democracy - and that of other European countries - is severely weakened. The Germans elected Hitler in 1933 (though the Nazis only got a minority of the votes). But that only came after a decade-long roller coaster of economic depression, hyperinflation, and crippling reparations. A desperate people eventually reach for desperate solutions when democracy fails to make the necessary trade-offs: or no longer can.

I fear we are living in the age after democracy. I hope I am wrong.

Sunday, November 20, 2011

A Matter of Time

Is Europe experiencing a clash of cultures? Especially cultures relating to time? It would explain why Germany appears unwilling to countenance short term measures that have unwelcome long term consequences. The chart is from a survey of students in 45 countries (yes, another 'Weird' study).

They were asked:

Which off er would you prefer?
A. a payment of $3400 this month
B. a payment of $3800 next month?

The chart shows the percentage in each country willing to wait one month. Guess which country comes tops? And guess which one comes, em, 19th?


 
No wonder Enda was at cross purposes with Angela last week. He needs to start talking about how good things will be in five years time when we sort this all out: if we do the 'right thing' now. Rather than do the right thing now... in the hope that it will work out for the better.

In other words, we need a plan that everyone is agreed on. Though it'll probably involve a tad more than $3,800...

Saturday, November 19, 2011

Sterling Stuff

If the euro goes I don't think we'll end up with the 'punt nua'. We'll end up back in the sterling zone. Here's why:


They'll have no choice but to take us back - in order to save the UK banking system...

Source: BBC

Thursday, November 17, 2011

Runaway Train

Here's a great quote from Golem XIV (who sees Credit Crunch 2 gathering pace already):
Like a train sliding backwards over a precipice, as each carriage goes over so the weight pulling down grows and the weight resisting decreases. And the engine at the front, the ECB/Germany has to think can I still pull all this back up or should I cut the coupling and save myself at least.
For those who prefer percentages, here's a handy chart from Zero Hedge:


That works out at a 25% chance Ireland will have to do an 'Argentina' (I had guessed 20% in correspondence with an anxious friend abroad wondering what to do with his savings in an Irish bank - let's just say they're not there now...)

Brian Lucy has started a handy discussion about Ireland's post-euro economy, likewise Nama Winelake envisages the introduction of the Punt Nua.

As for how it went for Argentina, Peter Day's recent podcast took a look at Argentina ten years on from its devaluation and break with the dollar. The message: it only works if you have a balanced budget and a strong export sector. Argentina had both going into devaluation (and taxes from the latter helped offset pressure on the former). We've got the exports but not the balanced budget.

So it's going to hurt if Germany cuts the coupling...


Tuesday, November 15, 2011

Richard Douthwaite RIP

I was very sorry to learn about the death of Richard Douthwaite, co-founder of Feasta. I met and corresponded with Richard several times over the years, and read most of his books. Like I said at the start of the crisis, his was the kind of original economic thinking that we sorely needed (and still lack) in Ireland.

I didn't agree with everything Richard advocated, but then you tend to learn more from the people with whom you disagree, and he was a great teacher. And in hindsight I tended to agree more than disagree.

There's a tribute to Richard over at Feasta. He really was one of the good guys. He will be sorely missed.

No Going Forward

In his lates post, Ashwin Parameswaran compares the unfolding eurozone crisis to what happens when you keep suppressing small fires in a forest... you eventually get a big one that destroys the forest. Or as he puts it, sacrificing social stability in order to preserve economic stability will only hasten the conflagration.

Spot the flames:


Send in the water bomber.

Monday, November 14, 2011

Bottom Up Happiness

Is happiness personal? Britain's Office for National Statistics has just issued a discussion paper on the measurement of national well-being, inviting feedback ahead of a measurement exercise next year. They propose measuring multiple 'levels' of happiness - from the personal to the social to the political.

A recent debate organised by Open Democracy has pointed to potential problems with this approach. Firstly, it puts the emotional state of individuals at the centre of national 'happiness policy'. And emotions are - to say the least - quite fickle in most people's experience. Moreover there are profound cultural differences in perceptions of well-being and the sources of life satisfaction - as evident right across Europe. Nor is there any real consensus on what is happiness, never mind how to measure it, as I've noted before.

Still, the ONS initiative does contribute to an important debate. As the prospects for growth in Europe (including the UK) fade we might benefit from a reappraisal of what really matters to our country, our families and ourselves. Even if we discover there isn't much politicians can do about it.

Sunday, November 13, 2011

The Reactionaries Usually Win

From Sheri Berman, contemplating revolution (or the lack thereof):
What lessons does the historical record provide to those interested in trying to figure our whether or not today’s discontent is likely to produce revolutionary change or simply peter out?

One important historical lesson that seems particularly relevant to our contemporary moment is that it is much easier to be negative than positive. Or, to be more precise, it is much easier to mobilize against an old order than to generate consensus for a new one.  

...Today, we are certainly living through a period of massive discontent. Sclerotic and unresponsive political regimes, economic downturns, and financial crises have created grievances and dissatisfaction in many corners of the globe. But much of this opposition remains focused more on what it opposes than on what it wants, better able to articulate why it wants to do away with the existing order than able to convey viable alternatives to it.

...Prognostication is always a difficult and dangerous business. Perhaps we are still in the early stages of our “age of uncertainty.” Powerful and attractive plans for changing the status quo might soon emerge. But if history is any guide, the chances of that happening are slim. Particularly in the West, what seems striking about the current period is the widespread sense of the need for change combined with the lack of any coherent plans for it.  

Tuesday, November 8, 2011

Ciao Silvio, Ciao Euro

Vox Popoli calls it as Italian bond rates soar to nearly 7%:
This is a very big deal. One year ago, the Italian 2-year was at 2.010 and the 10-year was at 3.924. The Italian 2-year is now rapidly approaching where the Portuguese 10-year was one year ago.

What this indicates is that the end of the Euro and the end of the EU in its present form will likely take place within one year. Greece and Ireland were sideshows. Italy is the main event.
Maybe it's safer being a sideshow?

Monday, November 7, 2011

Plan G

On January 1st 2002 - the day euro notes and coins entered circulation in Ireland and throughout the eurozone - an ounce of gold would have cost you just over €300. Today, as the tenth anniversary approaches, an ounce of gold costs €1300. The chart tells the story - from the excellent World Gold Council website (free registration).

My guess is that gold has a big future ahead of it in the eurozone. With the ECB and Germany suggesting that Italy puts up its gold reserves as collateral for future bailouts, we are going to hear a lot more about gold and gold reserves in the coming weeks and months... and years. The funny thing is: the Germans could probably transition to 'Der Gold Mark' more easily than any other eurozone country as they have the largest gold reserves in Europe (and the second highest in the world). Then again, maybe that's the plan...

Here in Ireland, our leaders are not ones to follow the gold herd, no sirree. Though maybe that is changing. In the chart below I have plotted the price of gold in euro and the value of the Central Bank of Ireland's gold reserves between January 2003 and September 2011:


It is quite clear that the value of reserves has moved in lock step with the price of gold - suggesting little net addition or subtraction to the total stock held by the Central Bank. Although curiously, September saw an increase in the value of reserves even as the price actually fell - suggesting a net addition to the stock of reserves. But it's very little, very late.

According to the World Gold Council report on World Official Gold Holdings October 2011, Ireland has 6.0 tonnes of gold reserves, with a value equivalent to 15.4% of the country's total foreign reserves. We used to have 16 tonnes as recently as the late 1990s. Just to put that in perspective: we currently rank number 72 in the world in terms of tonnes held - the lowest reserves in the eurozone. By the way, the eurozone average for the share of foreign reserves held in gold is 66.3%. While Germany holds 74.7% of its foreign reserves in gold...

So forget Plan A or Plan B - Ireland needs a Plan G: just in case the eurozone doesn't get to celebrate the tenth anniversary of its launch into circulation.

Sunday, November 6, 2011

Perpetual Finance

Charles Hugh Smith explains global finance - and why it's about to collapse:
Modern financial "products" and "instruments" are often highly complex and abstract, but the entire edifice can be distilled down to this: the system is based on the assumption that all risk can be hedged, and the difference between the initial position's yield/gain (i..e. placement of capital at risk for a gain) and the cost of hedging the risk of the wager to zero can be skimmed from the system risk-free.

That is the entire system in a nutshell, and we can immediately see the advantages of this system over traditional Capitalism, where risk can be hedged but never to zero, and the return is correlated to the risk taken on.

...The entire global financial system is thus based on the equivalent of a perpetual motion machine: money can be borrowed or leveraged into existence in essentially unlimited quantities, and then deployed in risk-free skimming operations to harvest unlimited wealth.

What does this promise of using leveraged capital to skim risk-free fortunes do to the "real economy" of production and investment in plant and technology? It guts it. The risk of industrial Capitalism is real and cannot be hedged away; high-risk investments may blow up or they may return high yields. It literally makes no sense to risk real capital in productive Capitalism when a zero-risk skimming operation can be developed that essentially needs near-zero capital.

Thus financial capital has come to completely dominate industrial or productive capital. The pernicious consequences of this dominance have poisoned the economy and culture on multiple levels. 
Now you know. Go read the rest here.

Saturday, November 5, 2011

Nobody Knows Nothing

The Department of Finance has seen the future, and it doesn't look great. The Medium-Term Fiscal Statement paints a less than rosy picture to be sure. But what if it's still too optimistic? Robin Hanson points to a recent review of forecasts by the equivalents of Ireland's Department of Finance in 33 countries which found that:
... the average upward bias in the official forecast of the budget balance, relative to the realized balance, is 0.2 percent of GDP at the one-year horizon, 0.8 percent at the two-year horizon, and 1.5 percent at the three-year horizon. The longer the horizon, and the more genuine uncertainty there is, the more scope there is for wishful thinking.
Of course, our Department of Finance might be better at measuring and forecasting macroeconomic variables than finance ministries elsewhere. Hmmm.

The reality is that the Department's forecasts are like a business application for a bank loan. The applicant inevitably emphasises the positive, without exaggerating things to the point it lacks credibility. But it's still spin - or a 'scenario', if you prefer. There is nothing wrong with such an approach per se - so long as you see it as a communications exercise rather than something more profound. Or more useful.

There is, however, a bigger challenge than one of mere accuracy. And that is that we just don't know what drives growth, or what the future holds. Russ Roberts gets to the heart of the matter in a recent critique of Paul Krugman. Economics is more about ideology than about engineering:
...when we’re dealing with complex systems, truth is very hard to come by. To claim otherwise is the pretense of knowledge. What we are really debating is ideology and philosophy. That’s the fight of the century - more bottom-up or more top-down. That’s what’s really at stake. We may pretend otherwise, that we’re just economic engineers trying to make the system work better but I think that’s an illusion fostered to encourage people to buy our intellectual wares.
We simply don't know enough about what makes any economy grow to be able to forecast the economic future, let alone shape it.  According to Charles Kenny some 18,000 statistical analyses have been published since 2005 alone on what drives GDP per capita growth. And the answer?
So what’s the secret to economic growth? The short answer is that there appears to be no short answer. ... the available data don’t allow us to make any hard and fast statements about “what causes economic growth” at all.  That there might not be a holy grail of growth policy, however, is unlikely to prevent people of economic faith from looking. The next six years will undoubtedly see another 18,000 papers on the topic. Just don’t spend too long reading them. Episodes of fast growth and stagnation around the world will continue to take us by surprise.
Worth remembering as the debate about austerity etc gathers pace in the years ahead. And as we ponder the probability of Ireland experiencing the future forecast by the Department of Finance. I'll leave the last word to Charles Kenny again:
There’s a reason it is hard to predict the future: It hasn’t happened yet.






Friday, November 4, 2011

Mind Games

Ever since I read Robert Whitaker's book about the explosion of mental illness in the United States (see my recent post) I've been much more conscious of mental health trends.

The 2011 Pfizer Health Index provides recent information about health and illness in Ireland. I've highlighted data from one of the report's tables showing the incidence of depression and of other mental illnesses. It comes to about 5% of the Irish adult population (the same as in the recent CSO study of the nation's health status). Though even at 5% that is still nearly 150,000 people - more than twice the numbers affected by cancer over the same period.

Of course, the predominant paradigm for the treatment of mental illness is a biological one (necessitating treatment by psychiatric drugs): even though there are several other models of mental illness that have stood the test of time. This means that any increase in the incidence of mental illness tends to automatically increase the prescription of psychiatric drugs. Whitaker and others have charted the alarming increase in the incidence of mental illness in the United States and elsewhere - and the manner in which it has grown in lock-step with prescription drug consumption.

Almost uniquely in the medical domain, the incidence of mental illness (as opposed to, say, cancer or heart disease) isn't just a function of epidemiology. It is also a function of 'definition'. Which is why there is so much controversy about the forthcoming edition of the American Psychiatric Association's Diagnostic and Statistical Manual of Mental Disorders (DSM-5 in the jargon). Effectively, the APA are being accused of widening the definitions of mental illness to such an extent that huge majorities of the population could be diagnosed as mentally ill. In effect: the APA are 'inventing' mental illnesses (my favourite: 'Apathy Syndrome' - as if anyone cares).

Practitioners of the 'other models' (cognitive therapists, psychoanalysts etc) see DSM-5 as a more-or-less self-serving initiative by psychiatrists to 'grow the market'. With the implication that we will see a growing population of 'mentally ill' (as more and more people are so-defined), and the resultant growth in demand for prescribed psychiatric drugs that will inevitably follow.

Economic reality (certainly for the HSE in Ireland) might curb such a trend - and cultural influences may also have an influence (e.g.: I still haven't figured out why the Portuguese are three times as likely to take anti-depressants as the Irish - see my previous post). Given that the share of Irish adults suffering depression hasn't risen the past five years, then perhaps we are somewhat immune to the 'mind games' of the psychiatric profession?

Thursday, November 3, 2011

It's Complicated

That's a map of Ireland you are looking at. Admittedly an unfamiliar one.

It comes from The Atlas of Economic Complexity - published recently by Harvard Kennedy School. The idea behind the atlas is simple enough: to express the degree of globalisation of countries in terms of Diversity (the number of product markets an individual country is connected to) and Ubiquity (the number of countries connected to an individual product market). Thereafter it gets a bit more complex: but you can enjoy the equations for yourself in the main report.

What is interesting is that Ireland scores highly in terms of economic complexity (profile on page 196 of the pdf).  We rank number 18 in the world: just below Denmark and just above Israel. Greece ranks number 53 in the world, by the way, just below Brazil and just above Columbia. More fuel for the 'Ireland isn't Greece' meme perhaps?

The authors of the Atlas argue that economic complexity is broadly associated with higher standards of living, better growth prospects and a degree more economic resilience. All good things to be sure. Of course, the index is just based on trade-related data. And there's more to an economy and society than exports and imports obviously.

Which is why it is handy to compare Ireland's standing in other measures. Luckily we have two new ones to examine. The first is the latest Legatum Prosperity Index for 2011 - Ireland ranks 11th in the world (Greece ranks 40th by the way - just thought I'd mention that). I like the Legatum approach as it combines both economic data and social indicators, including survey based measures of social capital.

The second of our comparative measures is the United Nations International Human Development Indicators - just out today. On this measure, Ireland ranks 7th in the world (Greece ranks 29th, in case you are interested). The HDI lacks the depth of the Atlas of Complexity and the breadth of the Legatum Prosperity Index - but as a measure it does provide comparative data going back to the 1980s. And the trend for Ireland has been extremely positive.

Of course, all such trends and comparisons must come with the usual warning: past performance is no guarantee of future performance. It seems to me that Ireland is going to need all the complexity, resilience, diversity and ubiquity we can muster in the coming months and years.

Occupy Yourself

Quote of the day...
"This is perhaps why everyone running around in V is for Vendetta masks makes me laugh. Moore’s vision of a rebellion against a totalitarian fascist dystopia was predicated on a simple duality: “Us” vs “Them”. The people vs the system and similar tropes. The problem is that an “us” doesn’t exist anymore. As much as anyone who appropriates the anonymous rebel idea wishes to believe they are in league with everyone versus the man/the system/whatever, they’re more likely to be in league with a startling minority of people who happen to believe in a given cause. A cause which is in any event one amongst many." Jack McDonald

Wednesday, November 2, 2011

A Growing Family

Growth must be the number one priority for Ireland.

The importance of the growth agenda was brought home to me by the recent OECD report on Ireland. The chart from the report shows the trajectory of Ireland's gross government liabilities as a percentage of GDP given different growth scenarios to 2025. The impact of even modest differences in projected nominal GDP growth (plus or minus 0.8% per year in the higher/lower scenarios) is huge. The central or baseline scenario assumes 4.8% nominal annual growth, or real growth of 2.8% when inflation is stripped out.

Of course, even 2.8% growth is very high relative to the global outlook. With the OECD forecasting just 0.3% real growth in the eurozone next year then we'll have our work cut out to achieve even the baseline over the next twelve months, never mind over the next twelve years. Nor is this just a problem for Ireland. As Chris Dillow regularly explains, the global economy - and international capitalism - may well have entered a prolonged, even permanent phase of low growth teetering on stagnation. His recent explanation for the origins of the present crisis explains why:
Put simply, the combination of China’s export-driven growth and the desire to build up FX reserves to prevent a repeat of the 1998 currency crises generated a glut of savings which was invested in western bonds, causing a fall in their yields.

In principle, this drop in interest rates might have triggered a boom in real capital spending. But it didn’t, perhaps because the "great stagnation" meant there was a dearth of investment opportunities. Instead, lower rates unleashed a bubble in house prices, the bursting of which brought down banks.
Nevertheless, the growth agenda needs to be pursued vigorously.  And not just in Ireland. Now the world has 7 billion mouths to feed, getting on a path to sustainable growth is more vital than ever.  Whilst there have been many suggestions for how best to kick start growth (for example ICTU's recent call for a €6 billion investment programme over the next 3 years), most ignore the biggest long term issue affecting growth: demography.

We are lucky in Ireland to have relatively favourable demographic trends for the next decade or so, but not everywhere is the same. A fascinating series of studies on The Sustainable Demographic Dividend has recently observed that marriage has played a key role historically in sustaining growth, and its decline in recent decades has contributed to the great stagnation now facing us:
Finally, the global retreat from marriage is also likely to depress and distort economic growth. Evidence drawn from Europe and North America indicates that children who are raised in an intact, married home are more likely to excel in school and be active in the labor force as young adults, compared to children raised in nonintact homes. Married adult males also work harder than their unmarried counterparts and enjoy an income premium over single men of between 10 and 24 percent, in countries ranging from Germany to Israel to Mexico to the United States. These findings suggest that market economies in the Americas and Europe—from Canada to Chile, from Spain to Sweden—that are now experiencing a retreat from marriage will also reap a new crop of problems as fewer children have the opportunity to acquire the human and social capital they need to thrive in the global economy and as fewer men have the motivation that marriage brings to fully engage the world of work.
Reversing the retreat from marriage might not seem like an obvious solution to the growth problem we are facing (to economists anyway), but feeding 7 billion men, women and children - and the next billion that will be born in the decades ahead - will take all the economic, social and technological skills we can muster.

It will also hold out the prospect of a better future than merely one in which we dutifully pay off our debts - and the debts of others foisted upon us.

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