Happy New Year and I sincerely hope it is a good one — for all of us. Around this time it is customary for economists to write about what the new year might hold, as if a collective new year’s resolution can have an impact on the economic or business cycle. The economy doesn’t work like that.
The annual forecast should always be taken with a salt cellar because why should we think that the Roman calendar has anything to do with the economic cycle? The economic calendar and the annual calendar are two totally different things.
In fact, there are two distinct times: there is calendar time and there is economic time. They are not the same. The economic time, better known as the economic cycle, can take years (as we know here too well), while the official annual year takes a measurable and pre-ordained 12 calendar months. Consider this recession and the ludicrousness of linking economic time to calendar time. The recession started when people didn’t expect it and it has lasted longer than most people feared. It was not dictated or influenced by, in any way, the calendar as we know it.
As a result, why should we think that because the 31st of December leads to the 1st of January, this transition from one 24-hour period to another has any impact on the economic cycle? Sure, companies make decisions that are based on a calendar year, but the economy only responds slowly and it has never, ever, been the case that a 12-month period has ever accurately captured the ebb and flow of any economy. In economic time, no one fires a gun at midnight on New Year’s Eve.
This is why annual budgets and targets are so risky for governments because they are trying to relate one thing, the economic cycle, to another thing — the Roman calendar.
Therefore, at this time of the year the only thing the economist can do is try to alert the reader to one or two big trends which are already in the ether and might affect the way the economic experience impacts on different people.
Using the word ‘experience’ when discussing the economy in a downturn might raise a few eyebrows but curb your indignation for a second. By experience, I mean the way the ‘economy’ affects people individually. There is no unique economy, nor is there a unique economic experience that we all share. The way the economy plays out and how it affects you is based on thousands of variables, which no one can pre-programme.
This brings me to one of the huge or mega-trends which will affect us all this year. This mega-trend is that things are getting more expensive for poor people, while things are getting cheaper for richer people. Or, more accurately, the things that poor people spend relatively more of their income on are getting expensive, while things that rich people spend relatively more of their income on are getting cheaper. There is deflation for the rich and inflation for the poor and this is an extremely worrying development.
The reason for this is that the world is split in two. There is deflation and recession in the rich world, but there is still a boom going on in the emerging nations, like India, Brazil and, of course, China. Clearly the emerging markets are now suffering the fallout from what is happening in the US, Europe and Japan, but when you have huge demand coming from countries where there previously was very little, the global price of certain items goes up.
The main items affected by the extraordinary surge in emerging markets are food and energy. One thing we do know is that the first thing to change when people get rich is their diet. In emerging markets the demand for meat and milk has gone through the roof, driving up global food prices in certain areas. These are staples for people in this part of the world. So poorer people in Ireland have seen food prices rise because of the demand from the Chinese middle classes for our diet.
One other major impact of surging demand and production in the emerging markets has been the rise in fuel prices. This obviously has had a greater impact on poorer people because poorer people spend more of their smaller incomes on fuel.
This mega-trend will continue even if there is a setback in growth in China (as I expect) because these long-range changes take time to manifest themselves and take years to fully be appreciated.
In contrast, think about very rich people in Ireland who are already wealthy and have preserved this wealth in the downturn. For them the deflation, in very expensive houses for example, is an opportunity. It means that they can buy these assets right now, if they want to, for a song.
They can also buy all sorts of upmarket, leisure gadgets much more cheaply relative to what they were years ago because Chinese competition is keeping the price of these things low and pushing them lower.
So the ‘leisured’ class — the already wealthy — are seeing a fall in the price of goods which they spend relatively a lot of their cash on, while the poor are seeing a rise in the price of the goods that they spend relatively more on.
And this price divergence is being driven by precisely the same dynamo: the two separate global economies.
If this price divergence happens and goes unchecked, things can get very volatile very quickly. For example, we know that higher food prices were one of the catalysts for the Arab Spring, which is reaching a horrible denouement in Syria.
But if you really want an example of how diverging prices for the rich and poor can affect history, spare a thought for Marie Antoinette. When she allegedly declared that the peasants should ‘eat cake’, she was only offering an observation on deflation for the rich and inflation for the poor. Towards the end of the monarchy, Paris as a great cosmopolitan city became a centre for all sorts of fancy bakeries servicing the very rich.
As a result of this intense competition, the prices of fancy cakes were falling in Paris, despite the fact that the price of bread for the poor was rising. This was because the upmarket bakeries were eating into their margins to remain competitive and to increase their market share amongst the very rich.
So it is entirely plausible that poor old Marie Antoinette was only relaying her own experience — not so much with absolute wealth but with relative price movements.
As mega-trends go, this divergence between deflation for the rich and inflation for the poor is extremely dangerous. After all, we all know what happened to Marie Antoinette.
Happy New Year.
Time Machines and Words
Economics – cycles
Science – oscilations
Law – Michaelmas
Fiscal – Tax Year
Astrology – Orbits
Mathematics – patterns
Church/
Religion etc – calendar
and more
Depending on the context man has made words to express their relevant experience top describe a journey from A to B . All of them can be connected if one has the patience to find out how.
What David is pointing to is a Black Hole on the horizon and at that point everything is swallowed up.
I don’t mean to mess with your analogy, but Marie Antoinette was not referring to `cake’ as in Birthday Cake or pastries. The term `cake’ refers to the crap that was `caked’ on to the inside walls of a baker’s oven. Not much of a dessert.
Full Moon
Orbital News
Jan 9th is full moon and the 7th day before the full moon was the day of the recent wind storms .
Drive slowley .Go Slow.
Time to rebel. lets bring in our 5 point plan. 1 Stop spending on everything from lotto ,cars ,clothes,non essential repairs,houses,meals out, indeed anything that the government gets tax from. 2 Do not holiday in Ireland, 3 Save as much as possible but not in an Irish institution 4 Bring a lunch 5 Travel up north for cheaper food in bulk. Do this for three months and force the government to balance its books and scrap that stupid Croke park agreement and silly quangos,and if they dont act continue for 3 more months.Otherwise we carry on with our heads up… Read more »
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David says:”things are getting more expensive for poor people, while things are getting cheaper for richer people. Or, more accurately, the things that poor people spend relatively more of their income on are getting expensive, while things that rich people spend relatively more of their income on are getting cheaper. There is deflation for the rich and inflation for the poor and this is an extremely worrying development.” This debate about the morality of capitalism was raised in the context of the tent people at St Paul’s on Newsnight tonight. The Canon (who was replaced because he supported people’s right… Read more »
David,
I hope you haven’t bought into this ‘Arab Spring’ nonsense. It is nothing of the sort. First of all, that Tunisian set himself on fire because it was a PoliceWOMAN who told him to clear off as he did not have a permit to sell any goods where he was located. He found it hard to take that a woman could be so authoritative, and hence ended his life.
If you call more burkas worn, more church burnings, more anti-Israeli sabre rattling ‘Spring-like’, then God help us for the ‘Arab Summer’.
So do we expect a revolution David? Seems to me that during the boom time the rich were also doing alright and the less wealthy were still being shafted – now they’re just being shafted even more. Perhaps this has nothing to do with economic cycles at all and everything to do with consumer capitalism being one big scam perpetrated by the rich on ordinary people. In my opinion trickle-down economics can never work, for the very simple reason the rich like to hang on to their their money – if they weren’t greedy they wouldn’t be rich – isn’t… Read more »
Good morning all I am calling for A Financial strike for Families and business in difficulty. The Government has imposed austerity on the people,I say the people should now impose austerity on the Government and their Bank Bosses. Do a budget Pay your self first Prioritize family and essentials Slash all Bank/state debt repayments by at least 80% use the savings,if any to protect your family Do not pay any household charge or any other “tax” you deem you cannot afford. If its Austerity they promote,I suggest we should take their “advice” and give THEM austerity. Contact me anytime for… Read more »
Peoples Park
Today a new cafe has opened inside the peoples park in Limerick and the aroma is inviting to tempt. Maybe I might meet Marie Antoinette .I hope the price of fancy cakes are falling today and that there will not be any competition to find a word in her ear some time soon .
Here’s a couple more predictions for 2012. 1. BBC’s (and Newsnight’s) Paul Mason in the Observer http://www.guardian.co.uk/theobserver/2012/jan/01/paul-mason-newsnight-china-novel-interview “I think we might look back on 2011 and 2012 as the years everything changed. And what has happened in 2011 is the nice bit. In 2012, we are going to get economic double dip. That’s the minimum. Combined with all the harsh realities of revolution, at the centre of which is who gets what.” 2. Kunstler http://kunstler.com/blog/2012/01/2012-forecast-bang-and-whimper.html “[in Europe]Everybody will get poorer simultaneously – and if not, there will not just be regime change but civil war and revolution.” And talking of… Read more »
When someone like Paul Mason says he would not have the same opportunity today as he did decades ago, that is a damning indictment. It is a damning indictment of the so called growth of the 90s and 00s. Here’s a question for David and all in this blog. Do you think your kids will have as good prospects as you have had. I believe we work harder nowadays simply to stand still. The other comment by Mason from a Greek who met him on the streets of Athens – I paraphrase: If Greece goes, the rest goes. I think… Read more »
David, This article is one of four in a row, for me, that have been really great in terms of content and direct objective – please keep it up. However I realise that to keep it short you need to generalise and this last article I think suffers a lbit from that. I agree with your general thrust about widening gaps. Taxation policy if it was progressive could help address that. FG have other ideas. I think as a general observation, too, in particular you are underestimating the role that soya production ( for ethanol ) and commodities speculation in… Read more »
There are complex money flows in action. The prices of essentials are going up. Because there is more competition for them from consumers in the newly advancing countries. The actions of certain central banks in reflating the banking system, and this capital then going to investment hotspots in Asia, results in an eventual increase in pricing there which affects the world price. The prices of assets, is going down, mainly as a result of there being less capital available on loan for purposes of speculation. But this is what we should expect at the end of a crack-up boom, after… Read more »
While bondholders get bailed out, and rich owners of banks and trusts get to appoint their corporals to run countries as “technocrats”, life for the ordinary people everywhere continues to be cornered in. There is a clip in the following website, which shows us how people in California, who decide to give themselves an indepdendent lifestyle, out of touch with modern consumerism, are becomming the target of officialdom. Interestingly enough, these people seem to get the type of visit that befits some sort of national security threat or terrorists. Even though, they are pensioners. http://theautomaticearth.blogspot.com/2012/01/january-3-2012-storm-surge-of.html What about the Common Law… Read more »
The greatest lie of all is that this is a Greek problem, or an Irish problem. And we and the greeks are being forced to pay our taxes, to bail out the rich, to maintain this pretence. The whole European banking systme is over-stretched by the interest rate policy that the ECB ran between 1998 (as pre Eurozone launch EMU), and today. Interest rates were too low and that resulted in excessive stimulation for the Eurozone. The whole system is in trouble. The problem is not the Greeks sitting in the sunshine, or our media whipping a real estate euphoria.… Read more »
http://www.independent.ie/opinion/analysis/leaving-the-euro-would-be-carcrash-economics-2981435.html
Discuss.
Well this is good.
Here we have Brian Hayes, TD, and Junior Minister for Finance. He brought that absurd statement “we have reached the bottom of the bottom, ot the housing market” (dated April 2011). All these bottoms, and the arse has still not fallen out of the market.
And he seems to know more than either David McWilliams or Bruce Arnold.
http://www.independent.ie/opinion/analysis/leaving-the-euro-would-be-carcrash-economics-2981435.html
This is the real Brian Hayes. Making statements that were not based on fact. Complete spoofer.
http://www.youtube.com/watch?v=UyKzzpW5O7s
Happy New Year David, You said: “So the ‘leisured’ class – the already wealthy – are seeing a fall in the price of goods which they spend relatively a lot of their cash on, while the poor are seeing a rise in the price of the goods that they spend relatively more on. And this price divergence is being driven by precisely the same dynamo: the two separate global economies.” I just cannot grasp your points here clearly. Both poor and wealthy need to eat and both poor and wealthy are buying gadgets. The pricing is mainly driven globally by… Read more »
Ballyhea makes the international news.
The Irish village that said ‘no’ to austerity (the Guardian)
http://www.guardian.co.uk/world/2012/jan/05/irish-village-ballyhea?commentpage=last#end-of-comments
‘Afternoon David
I see the most recent pol to you have you in their crosshairs is Brian Hayes [today’s Indo].
Brian Hayes?!!!!! I can’t seem to remember any decent commentary from him since he was elected. No pearls of wisdom there. Maybe I missed something.
CAMA
I believe if the proposed Citizens Asset Management Agency were formed it should apply for a banking licence and lend monies at cost from ECB plus a handling charge . This would be a Super Credit Union on par with the enemy of the State namely the Banks.
That would rule out any proposed non payment of mortgages as the new lender would be a community service.
Any ideas?
http://www.youtube.com David’s Late Late Show appearance in 1999.
Fascinating article on the “1%”.
Pass it along.
http://readersupportednews.org/opinion2/279-82/9203-beware-corporate-psychopaths-still-occupy-positions-of-power
Interesting article in UK Sunday Times today. Propsing that people on welfare benefits have to provide community service after a certain period of time. Why would this not work in Ireland? It incentivises people who are abusing the system to seek work, it motivates people and perhaps adds to a skill set for others, and with the cutbacks in govt spending perhaps some of the unemployed could start making a contribution to the state with skills they had from previous employment.
Well this is an interesting proposal.
http://www.telegraph.co.uk/news/politics/david-cameron/9000601/David-Cameron-give-shareholders-vote-to-rein-in-executive-pay.html
The boys having a round of golf in Straffan, must be aghast at the thought.
Should we start a campaign to have such a law introduced here, just to undermine the cliques : ))))
Interesting headline in Handesblatt [German ‘Commerce Paper’] today Sun 120108. ‘If one wishes to buy a house or an apartment; one shouldn’t wait too long. Finance for construction is still cheap at the momentAnd the price of property can rise further….. ‘ [Wer ein Haus oder eine Wohnung kaufen möchte, sollte nicht mehr lange warten. Noch ist Baugeld billig. Und die Preise für Immobilien dürften weiter steigen…] Recognise a pattern? Caveat Emptor to those wishing to purchase German property in the current market. It may have been good value in recent years but: – prices have risen sharply e.g. in… Read more »
Lisbeth Salander
She might carry out the appropriate actions needed.
Irish Young PENSIONERS earn the Highest
Former PM Brian Cown who receives a very high pension will be 52 on tuesday.
And we all thought French Railway Strikers were greedey !
Cameron offers billions to ECB to assist Europe.
This mornings F.T
Financial strike now.
C.A.M.A
RR6