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Mar 24 14

The graphs that only tell half the story

by Aaron McCormack

wage growth europe

This chart is all the rage this week – at least in the United States.  It purports to tell the story of how France and Italy aren’t getting their act together, but perennial “model pupil” Ireland is turning the corner because of the massive wage deflation it has engineered – enabling the country to remain globally competitive.  Paul Krugman writes an excellent rebuttal to Steve Ratner’s original op-ed, but even it only gets half the problem.

At the heart of the problem for Ireland is still the flows and imbalances caused by membership of the Euro.  This means that the reduction in labor costs in Ireland or Spain are delivered from “internal deflation” with corresponding effects on domestic standard of living and unemployment (as with the US, Ireland’s unemployment rate is somewhat flattered by people leaving the workforce for good – in Ireland’s case on a plane).

And if the charts above base their output on GDP, then Ireland’s situation is made all the more miserable – much of Irish GDP is fluffy financial flows that add little to the real Irish economy, which is why GNP is always a tougher number to grow in Ireland.

There can be little doubt that Ireland, like most economies, is in a better place for many people than it was in 2008.  But the reason for that is the overarching and very visible hand of the ECB’s backstop monetary easing, not the medicine administered by the troika.

Businesses love to blame poor results on their “environment” and good results on their shrewd insight and sharp execution skills.  Politicians are no different.  We need smart people like Ratner and Krugman to hold this stuff up to proper scrutiny.

Mar 7 14

We live in the best of times…

by Aaron McCormack
The Inniskilling Fusiliers leaving Omagh in 1914 for the trenches of World War I

The Inniskilling Fusiliers leaving Omagh in 1914 for the trenches of World War I


In the grand arc of history, and notwithstanding all the strife in the world, we are so lucky to be born and to live in these very decades.

Perhaps all generations look both backward at the harshness of history, and forward at uncertainty and possible catastrophe, and say the same thing.

I could have been born centuries ago, and like 99% of those who ever lived on this earth, had a challenging, brief and brutal existence.

I could have been born at the end of the 19th century in my own home town, and found myself amongst these men (through draft, if not choice) heading to the horror that was the fronts during World War I.  Or born in the 1940s USA and sent to VietNam.  Or born in modern-day poverty, not making it to my first birthday.

Sometimes it is good to reflect on how relatively well-off we are.  Both in the context of today’s world, and in the arc of history.  Our problems are still “problems” – but there is no excuse for not continually striving to fix them.  After all, if our forefathers hadn’t, we might still be walking our bicycle up Castle St in Omagh, headed to the trenches.

PS: If you are interested in World War I, Dan Carlin’s Hardcore History is currently doing a series of podcasts.  I highly recommend them.

Nov 18 13

Bailout Exit: Ireland has fixed its broken legs, but her heart remains critically ill

by Aaron McCormack

Irish bailout fleecingWhen our loved ones are seriously ill in hospital, we take every little piece of good news as a sign that everything could turn out alright.  Notwithstanding the very real benefit of positive thought, we are clearly biased towards a good outcome.  We really want the person to recover.

Behind the scenes, though, the medical staff will (if you are lucky) remain relatively dispassionate observers of the scene.  Whilst you definitely want positivity and a little cheerleading from them, you ultimately want to know, and need to know, the truth.

When it comes to our ailing economies, we are usually unable to pinpoint a single arc of truth.  There’s the old joke:

“How many economists does it take to change a light bulb?”

“None, can’t you see it is getting brighter again?”

So as Ireland is exiting the bailout from the IMF/ECB/EU, is the patient getting better?

Yes, categorically, the country is better off being able to exit the terms of the bailout than having to beg for a second one.  If you hear a commentator who says otherwise, they are clearly still too preoccupied with long-past arguments to admit this truth.

However (there is always a “however”)…..above and beyond the fact that Ireland has met the bailout exit terms, the main reason she can exit the bailout is because the markets are willing to lend to Ireland once again – and at rates that make sense.  10 Year bond rates are around 3.5% today.  Well down from the 14% highs a couple of years ago.

That willingness to lend is partly a matter of the Irish government’s willingness to sacrifice everything to pay its debts (even unsecured, unguaranteed junk-rated bonds in disgraced banks).

But it is also the trillions and trillions of dollars and euros swilling around the financial markets looking for a place to earn a return.  That same money is keeping stock market prices remarkably high, and is fueling something of a mini-boom in corporate M&A activity.   It is not, however, leading to a trickle down in better bank interest rates for individual savers.

The key for me lies underneath the macro-economic layer.  How is Ireland’s recovery playing out “on the ground”?  An economy is not just about the government balance sheet.  In fact, in the main it is about the balance sheet of the country’s population.

For me, one chart says it all:

Courtesy of the Daily Telegraph

Courtesy of the Daily Telegraph

Having done little or nothing to deliver relief to ordinary mortgage holders may make the moral hazard crowd happy (they are strangely silent on banking moral hazard) – but this is the single biggest danger to Ireland’s economic well-being.  In fact, it is long-term much more deadly than being in or out of a bailout scenario.

This is the backbone of the real economy.  These are working families.  They are the people whose discretionary income, if they have it, creates jobs in local service industries.  Shops, restaurants and the like.  Their prosperity is key to replenishing government coffers and helping close Ireland’s annual deficit of 7% of GDP.

Personal debt in Ireland is twice the country’s GDP (and remember, Irish GDP is hugely inflated by foreign revenue flows, which makes this debt figure even more serious).

Ireland may have mended it’s broken legs, but the heart is still in serious trouble.

Not only is Ireland still in a critical condition, but she will will not be unable to withstand a single external shock.


Nov 4 13

It’s easy to forget, but money is never destroyed – it just moves around

by Aaron McCormack

greater foolA few pieces recently about the (re) emergence of boom conditions in some places.  Whether it is house prices in Dublin/London, or the surge in tech-startup funding that is being reported.

In most of these cases, people talk about a huge destruction of value that occurs when bubbles burst or when a tech investment fails.  It is as if the money suddenly disappears into a great fire, never to be seen again.

If you end up selling a house or a share for less than you buy it for, then you have certainly lost money.  In your world, the money may as well have disappeared.  But it hasn’t.

If you put $1 million into a tech startup and it fails, then you have lost your money.  But it didn’t disappear.  It paid salaries and rent and consultants fees and for computers and servers and hosting and internet connections.

It’s called the principle of the Conservation of Capital.  It is like the principle of the Conservation of Energy in physics.

In a boom it is known as the Greater Fool Theory.  If you are foolish enough to buy an overvalued stock or house in the heat of the bubble, you are a fool.  But if you wait a while, an even Greater Fool may well pay more for it.


Thinking about where money goes when people “lose” is a fascinating exercise.  You can be sure in most cases that a number of people along the way have racked up fees – and those people make more money when prices are higher.  Real-estate agents, stockbrokers, investment banks, advisers – and, yes, governments (through transactional, property, income or capital gains taxes).  That may give some insight as to why institutions who are in the best position to spot and stop bubbles will rarely be motivated to do so.

One last question people often ask me when I go on this riff…..what about governments printing money?  How does that affect the picture?

At this point it means that banks in particular (although companies too – an estimated $3trillion in the US alone) are sitting on piles and piles of money with no obvious place to invest it.  That may explain low borrowing costs for some people, companies and governments as well as the somewhat surprising levels of the stock market indices. (Risk-aversion, however, means that these piles of cash, until now, have only been flowing in the main to “safe” places and people – that’s why a lot of people and small businesses cannot get a loan).

However, the fundamental, long-run action of printing is to make all the other money out there that little bit less valuable than it was before.  It takes a while to make this happen.  It acts through mechanisms such as inflation but also in collapsing bubbles and their fallout.  The money, however freshly minted, is never destroyed.  It does, however, tend to end up in the hands of those who already have a lot of it.

Aug 31 13

Am I the only person who isn’t quite sure what should be done about Syria?

by Aaron McCormack

SyriaIf the true humanitarian measure of our impact is the least number of civilian deaths over time, then it seems to me that it is impossible to judge whether targeted missile and air strikes will make things better or worse.

Of course no-one cares what I think – but I hope in some way I am
representative of the sensible majority, such as it may exist. So if I
am confused about what to do, then I imagine many others are as well. Be
they lawmakers or voters.

I believe that I am a decisive and opinionated person. Very much so. Give me a tricky business situation and with a little exploration I can usually drive to a point of view on what needs to be done. Even if it isn’t a business that I am overly familiar with.

In politics or economics it is usually the same. I knew in my head and heart that invading Afghanistan was right, and invading Iraq was wrong. I know what I think about most economic and social issues, much as I may appreciate that others have genuinely-held but different points of view.

Above all I favor action over dithering. Dithering is not to be confused with doing nothing. Actively deciding to wait and see is often the right thing to do in life.

I don’t know about you – but the situation with Syria has me in a real muddle.

In some ways I envy those who are obviously and passionately clear about our course of action. There are those who say we must immediately and decisively wipe the regime off the map (the ultra-hawks). Those that say the rebels are worse than Assad and don’t believe that the recent and horrific chemical weapons attack in Damascus was carried out by the Assad regime. Finally there is a group who say “it is none of our business, and anyway, we don’t have the money or the political capital to be involved, so let’s ignore it and let it play out as it will.”

The world keeps throwing up these dilemmas – those that are as much about human rights and international justice as they are about geopolitics. Bosnia. Rwanda. Libya. Syria. Even our own little tribal battles in Northern Ireland were worthy of international attention and American help was vital to resolution in the end. However, whilst each one has similarities and can be learned from, they are all absolutely unique.

I think the problem that I, and a lot of others, have with the Syrian issue is that Iraq has poisoned the well.  Both in terms of the trigger for action and the appetite for engagement.

With Iraq we had the “evidence of WMD”, the “intelligence briefings to the UN” (poor Colin Powell), the “clear case for action”. What evidence I have seen that Assad gassed 1500 Syrians seems compelling. But there is the niggle in the back of your mind – what if they are lying to us again? Opponents of intervention are able to play on that.

I do think the circumstances are different – shady evidence of possible existence of WMDs in Iraq, backed by dubious intelligence sources are very different from the clear use of WMDs against civilians. The likelihood that rebels, or others, staged the event is low. In this case, I am firmly able to believe that Assad’s regime did this.

The problem doesn’t end there. Even if Assad did do this, there is a tougher question. What do we do about it?

If he is mad enough and bad enough to have committed this atrocity on top of all the others, how mad and bad will he get if we strike at his regime and infrastructure? It will take a huge and sustained amount of aerial bombardment before you could see Assad and his people being deposed. In the meantime, the atrocities will mount and more innocent people will suffer.

A strike will make us feel better and our leaders can talk about how Assad has been punished – but the action will lack legitimacy under international law (no UN mandate). Even if it was the “right thing to do”, democratic bodies such as the UK parliament have said they don’t wish to be involved. Even if it was the right thing to do, we don’t know what the consequences will be of unilateral action.

Ask those who say we must act now with limited strikes: “What next? What if the strikes lead to an escalation in atrocities? What if the attack prompts the regime to release more chemical munitions and claim US bombs mad it happen?  Again, tell me what happens next?”

If the true humanitarian measure of our impact is the least number of civilian deaths over time, then it seems to me that it is impossible to judge whether targeted missile and air strikes will make things better or worse. Indeed, the “rapid regime change” option that was exercised in Iraq might actually be the correct solution. But it is a political non-starter. Thanks to our misadventures in Iraq, the people and lawmakers in the West are never going to exercise that option.

And that leaves us at “active neglect” or “hand-wringing” or “standing back and doing nothing”. It means we are admitting that we are powerless to make a positive difference. That we think that letting matters take their course is the one that will minimize casualties. For the poor suffering people of Syria, living there by accident of birth, that is little comfort. For their sake, we all need to reach clarity as soon as we can.