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.
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.
When 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:
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.
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.
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.
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.
The wind-up of Anglo-Irish bank overnight brings an end to Ireland’s “worst” bank.
The Irish taxpayer is on the hook for about €3.1bn per year to service debt incurred in bailing out that bank – that’s a full 2% of GDP or more importantly over 3% of GNP (Ireland’s GNP is a better measure of wealth than its GDP because of the amount of “thin-value” multinational exports flowing through the country).
The Irish government is seeking to replace this “promissory note” that propped up Anglo, with a longer-term bond on more favourable terms.
It is not clear if that bond will change the net-present-value of that debt, but in order to do this there is no doubt that the annual burden on Irish taxpayers would reduce – either through reduced interest rates and/or a longer payback period.
Of course, the poor decision of the Irish state was not the borrowing of the money to honor Anglo-Irish’s bonds, but the decisions to honor those bonds in the first place. As we have said before, the market should have been allowed to do its work quickly and ruthlessly.
Paying billions of euros of bond money back at 100% of face value to junior, unsecured and unguaranteed junk bondholders is financial nonsense and morally unjust.
Paying out bonds at 100% of face value to senior, guaranteed bondholders in what was clearly a failed institution is equally financially suspect and morally unjustifiable.
Remember, Anglo-Irish was NOT a retail bank of any note. Rather it was a commercial lender focused mainly on property, whose actions were often illegal. People who bought bonds in Anglo Irish were “smart” international financial institutions or sophisticated private investors. They neither need nor deserve bailout from the average Irish citizen.
The Irish government has finally admitted, three years too late, that Anglo Irish was a basket case. But not before it saddled itself and the citizens of Ireland with the full financial consequences of the decisions of global private institutions and investors.
That egg could only been partly unscrambled by refusing to pay back the original promissory note – the moral justification being the undue and unfair pressure levied by the ECB on Ireland to protect failed banks in the interest of wider European stability.
It was plain that Anglo-Irish was a failed institution in 2010 – had free market forces been allowed to do their proper work, Ireland would be significantly better off by now.
The question for wider European and global banking is this – how many more “Anglo- Irish” banks are out there, propped up only by government obfuscation?
No matter how many officials praise Ireland for adhering to its bailout terms, the maths still don’t make sense. The country continues to struggle under a mountain of unsustainable debt and the real economy (the one that involves peoples’ lives and livelihoods and not just GDP numbers) continues to go in the wrong direction.
Add to this the considerable risk of internal (mortgage arrears, social unrest) and external (other EU economies, global slowdown) risks and things are far from rosy.
To recap, there was a time back in March 2011 when Ireland’s newly-elected government had a mandate to play hard-ball with the EU/ECB and with creditors in general. Ireland not only had the mandate, but it also had the negotiating leverage – at that point the country was the first wobbly domino in a potentially catastrophic series of EU debt failures.
The incoming government threw that leverage away and has continued on the “model pupil” path ever since. There have been indications of “good news” that may suggest this path could be successful…..the Irish government having gone to the open bond markets in recent months and successfully borrowing at relatively reasonable rates. However, given the liquidity being generated by central banks around the world, and the paucity of investment opportunity in the real economy, it maybe should not be a surprise that this money has to find its way somewhere. Successful Irish bond placements reflect there being few places with the risk/reward profile offered because there is a sense that the government doesn’t have the balls to consider defaulting at any point.
Back in the real world, however, the Irish government is sucking money from the economy to service debt interest, is continuing to repay principal sums to unsecured, guaranteed bondholders in its failed banks and Irish homeowners sit on a veritable mountain of underwater mortgages that have inbuilt rate rises soon to trigger.
The international financial model does little to reward well-behaved chumps, and that is exactly how the Irish government are acting and are perceived. It is hard to know if this is because the leadership is genuinely well-meaning and believe that their primary interest is to save the Euro, or if they are simply being strung along by smarter, more powerful interests in the EU who frankly have bigger fish to fry.
This past week the EU/ECB informed the world that promised relief on Ireland’s bailout terms would be negligible. Despite the insult this presents to Ireland’s political leaders (who staked their reputations on delivering substantial relief) they once again have lacked the courage to respond appropriately.
With a lack of such initiative from Irish leaders, and a strangely subdued and unconcerned populace, it seems that Ireland will only take the necessary steps to threaten debt default when no other option is available. By then the damage to people’s lives and livelihoods will be much more severe.
The gun-control debate is not as black and white as we would all like. If we all want to achieve the best OUTCOME in relation to gun violence (surely that would be the least amount of total deaths. including the ability of legally-held guns to prevent deaths) then we need to look at hard facts……
-there are 300 million firearms in the USA, just shy of one per man, woman and child in the country
– around 12,000 people are shot to death by others each year, and around 18,000 people commit suicide using firearms (i.e. self-harm is much higher than harm to others)
– it is estimated that guns are used in self-defence in the USA around 1 million times per year (i.e. when guns exist, it can be a good idea to have one for yourself)
– roughly 18 children are killed by firearms every day in the USA. That’s a Newtown tragedy roughly each and every day. (i.e. why does it take a mass tragedy to move people?)
– gun violence overall in the United States is vastly down from its highs in the 1980s (i.e. things are getting slowly better, but why?)
– however, mass killings of the type in Newtown ARE on the increase (i.e. if we assume guns are “equally available over time” what is driving this increase?)
– the contributions to electoral candidates from gun-makers is about 1% of the total from law firms (i.e. for candidates, guns are more about “culture” than “money”)
The other aspect of US gun control that makes the debate difficult is the “unscrambling the egg” problem. With so many firearms out there, and with gun use so ingrained in the culture, a path forward has to start from where we really are, not from we would like to be.
So, here is my logical path to what can and should be done in the USA – my opinion is that of a relative outsider, but from someone who has used guns for sport.
1. Like it or not, the US constitution (2nd amendment) is now interpreted as specifically allowing individuals to bear arms. That won’t change any time soon.
2. We don’t allow US citizens to own shoulder-mounted surface-to-air missiles, or tanks. So there ARE clear practical limitations to ownership of arms that we all accept.
3. In August 1998, the IRA massacred 29 people and injured 220 others with a bomb in my home town. No-one argued that “bombs don’t kill people, people kill people” as a reason why possession of explosives should not be a criminal offence unless it is a firework or you run a quarry. The same principle is true for guns.
4. On the same day as Newtown, a Chinese man stabbed 22 children and one adult at a school in Henan province. Just because people can kill with everyday objects like knives and sticks or cars is not a reason to NOT ban more lethal weapons. The Chinese man, by the way, didn’t end up killing anyone…
4. I do believe that with so many guns already in circulation, and given the constitutional debate and it’s outcomes, and given the cultural norm in most of the USA, that the Federal government should not interfere with people’s basic right to own a firearm for self-defense, target shooting and for hunting. (States can do what they choose).
5. But I have never come across any person or any circumstance where a high-capacity automatic weapon or a high-capacity ammo clip serve any useful civilian purpose. Not hunting, not self-defence. I have fired AK-47s and M16s at paint tins. It was fun. It was not useful. These sorts of firearms should be banned at the federal level with legislation that can not be easily skirted like the previous Assault Weapon restrictions that were allowed to lapse in 2004.
6. We don’t allow people to buy and to drive cars without producing a form of ID and undergoing a background check of sorts. The federal government should close all loopholes on private sales of guns and on gunshows. Guns should only be bought and sold through a licensed gun dealer.
Ban high-capacity ammo & automatic weapons, end private sales, enforce background checks.
Now, none of that would likely have prevented Newtown – the guns were legally purchased in a state with strict regulations. The best it may have done would have been to reduce the number of deaths as the shooter would not have had access to the one weapon with a higher, faster kill rate.
In fact I am sure it could be debated whether any of the mass shootings in the past two decades could have been prevented with these laws. Strict gun laws didn’t prevent massacres in Hungerford or Dunblane or Norway.
There is also the very very difficult question of whether or not any ban would be retrospective, demanding that people who purchased automatic weapons between 2004 and today turn those in to local law-enforcement.
But I don’t see these steps in the USA being an unreasonable or unconstitutional impediment to the right to bear arms for self defence or hunting (anyone in the USA that thinks they are going to be able to form a militia will have a rude awakening.)
And no-one can tell me why we should not group high-capacity ammo clips and automatic/assault weapons with mortars, stealth bombers and scud missiles in that category of “arms that the army can have, but not the citizen”.
There is not going to be, and there should not be, a roll-back of gun-ownership rights for self-defence, target-shooting and hunting.
The rest is common sense, right?
The online version is available here.
In short, tax RATES have declined for everyone in the period – but more noticeably for the highest income earners (probably something to do with how capital gains and investment returns are taxed).
But, bear in mind, the absolute income levels for the richest folks in America have grown massively over the past 30 years, with much of that growth happening over the past decade. On the other hand, income of the average American has been flat over that period.
How wisely government spends what it collects is another debate entirely, but in terms of how the economy is benefiting people and who is paying for government the following things are absolutely true and I have never seen any facts to the contrary:
1. The US economic system is “disproportionately” benefiting people who are already well-off.
2. The average US citizen is no better off than they were 30 years ago.
3. Because rich folk earn such a large chunk of national earnings, they do pay a huge chunk of the overall tax take in absolute dollar terms
4. BUT, the share of their income that they pay in tax has fallen sharply, even though their income has grown hugely.
5. AND there is absolutely NO EVIDENCE that increasing tax rates on the wealthy will in any way impact investment and job growth.
6. HOWEVER, simply raising the tax rates paid by the rich is not a great help in raising money.
Bear this in mind, US folks, as you listen to the continued debate about the “fiscal cliff”. Raising taxes on the wealthy is probably the right thing to do. It is important symbolically and will be vital if the Democrats are to deliver on entitlement reform.
But any argument that says “taxing the rich more is a major part of solving our problem” (from the Left) or “taxing the rich will destroy growth because it impacts job-creators” (from the Right) is false at all levels.
The American system is at heart a corp-tocracy. The trickle-down impact of successful corporations to average Americans is reducing as more of the work and wealth flows overseas. The country, and the people who run it, will have to both understand and want to change this if income distributions are to change in favour of the average Joe.
I won’t miss Hostess brands. Not a bit. For those of you outside the USA, the company makes “iconic” foods in the United States such as Wonderbread (plain white bread with nothing wonderful about it) and Twinkies (a sickeningly sweet combination of 38 ingredients – many of which you would not want to eat separately).
The collapse of the firm has had a lot of press in the USA because so many people remember enjoying these brands as they grew up. It has also thrown a microscope once again on the behaviour of:
– Unions (refusing to adjust archaic working practices, not taking enough cuts to help the company survive, insisting on levels of benefits that are not sustainable)
– Private Equity ownership (saddling the company with debt so that the biggest bill is servicing the interest on debt used to buy the firm, refusing to compromise with workers)
– Management (CEO awarded a 300% payrise, being incapable of resolving the conflicts between ownership and workers)
Left and Right-wing commentators and news outlets have given a lot of press to their favoured narrative – whether it be greedy capitalist ownership “asset-stripping” the company and killing it, or greedy backward-looking unions destroying the company with their “unreasonable demands”.
As usual – it is likely that both strands are true. Hostess brands were bought and sold by private money three times since 2004. Each time, the private money added more debt (the interest on which needs to be serviced) and inserted new management. In fact there were seven CEOs in that period. Management was therefore inconsistent and probably incapable of building the relationships needed to get to a deal with an intransigent Union. In the end, mutually assured destruction was a threat that became a reality. When companies get destroyed, the ownership usually get what’s left of the pickings and the workers are left with nothing.
The real underlying problem that helped make this all happen was declining sales. Thankfully some Americans are waking up to the fact that these food products are just not that good for you. Unfortunately the company itself was in so much turmoil that it could not adjust to the most obvious trend in the food industry for the last 20 years – that of “healthy”. It had the assets, the market power and the capability to do so, but it didn’t. Growing companies can tolerate and hide a multitude of dysfunctions. Shrinking companies cannot.
So the company will go into bankruptcy protection. Most of the brands are profitable and most of the bakeries and distribution (and the jobs that go with them) are assets that will be valuable to someone. Maybe they will be bought by a company specializing in healthy snacks, or gluten-free baked goods. Maybe they will just keep selling garbage dressed up as food.
The thing about tectonic shifts in markets (and “waves” of creative destruction) is that no matter how many times you reconfigure a business that is in decline, it will still eventually die. Bucking that trend requires owners with vision, management with talent and workers who believe in the mission (and stand to share in the upside).
The issue of owners, workers and managers who don’t “gel” has been a problem since companies were invented. Yes, debt-fuelled buyouts and Union contracts will have made it more challenging to reach the right balance between stakeholders. But, like the restaurant down the street with a nasty owner, grumpy staff and crap food, the whole thing needs to be put out of its misery.