In terms of reading the economic tea leaves, last week’s cup of data has left behind a perplexing residue, with some good bits, some bad bits and lots of confusing bits, which could go either way. However, it is a crucial week because the evidence suggests that something very odd is happening in Ireland. The Irish bond market is decoupling from the Irish economy. That sounds weird, but let’s dig a bit to explain.
The news from the financial markets – Ireland being able to borrow again – is unambiguously good. There are a few gripes, like the interest rates, but it would be churlish not to see this as a positive – and indicative of a likely bank deal which will see a dramatic easing in the overall debt position of the state.
Obviously, there is a long road still to go, but the markets clearly believe that the bank debt mutualisation deal hinted at in Brussels last month will be delivered.
So far so good, but at the same time, the data from the real economy was awful, and the news from the banking system, as well as local credit conditions, is equally desperate.
In another development which will form the background music to the next few months, ECB president Mario Draghi has signalled that he is going to take the Germans on and has fired the opening salvos in what will prove to be a titanic battle for the hearts, minds and balance sheet of the ECB. He will buy government bonds directly.
So it has been quite a week.
Let’s deal with the decoupling idea. For the markets to come in behind a bond issue of a country still in the IMF’s emergency ward would usually mean that the patient is making a robust recovery. But this is not the case at all. In fact, the evidence presented last week shows that the Irish economy – the real economy, where most of us work – is still getting weaker.
This should cause yields – the interest rates on our bonds – to rise and the markets to say: “Thanks but no thanks, we’ll pass this time.” But the opposite has happened. How can that be?
Lets examine this week’s real economy tea leaves.
For some years, this column has been making the point that we are in a balance sheet recession. Many Irish peoples’ balance sheets are broken because, on the one side, they have assets – houses, land and apartments – which are falling in value but, on the other, they have debts which are fixed.
At a time when income is falling due to rising unemployment and taxes, this means the debt burden is getting heavier every day relative to income.
As a result, people with savings are saving even more. Those with debts are trying to pay them off. The same goes for companies. Ireland’s savings ratio – the amount the household and corporate sectors are saving – has exploded.
Latest data for the first three months of the year – looking only at the household sector – shows that Irish people are saving more and more, or paying back more and more debt, or both. The savings rate has increased markedly, from 11.2 per cent of gross disposable income in the first quarter of 2011 to 14.2 per cent in the first quarter of this year.
This was the highest first quarter savings rate registered since the figures were published. Just to give you an idea of the shift: in 2007, we were borrowing 5 per cent more than our incomes.
This causes an old-fashioned liquidity trap, where monetary policy doesn’t work and where it doesn’t matter how low interest rates go – because people aren’t borrowing and banks aren’t lending. The liquidity trap is made worse by vicious deleveraging, which is destroying asset prices.
Given that, even in an open economy like Ireland, most of us are employed in the domestic sector, your spending is actually my income and my spending is your income. My income is also the root of my savings. But, as Keynes observed in the paradox of thrift, if we all save at the same time, who is spending. If no one replaces our spending, then demand will fall and fall.
Retailers react to falling demand – retail sales in June fell by a huge 5.5 per cent year-on-year in June – by cutting prices to coax us to spend. But the very fall in prices convinces people that prices will fall further and the bargains will come next month, or next year. So the laws of economics are turned on their heads. When prices fall, demand doesn’t go up, it goes down.
This causes unemployment to rise. Last week, CSO figures showed that over 82,000 people under the age of 25 were out of work in April 2011. This means that 39 per cent of people in the 15-24 age group are out of work. This comes on top of data last week on long-term unemployment, which rose to just under 200,000.
People don’t want to borrow because they have too much debt, and banks don’t want to lend because they have too much bad debt. Yet the deleveraging is destroying their capital base, too.
Again, the paradox is that deleveraging my balance sheet might make my position better, but when we all deleverage at the same time, we drive down asset prices further, demanding yet more deleveraging.
In the Irish banking system, we can see the paradox of deleveraging mainly via the fact that the ECB is presiding over the lowest interest rates ever, yet AIB has just increased its mortgage rates. The reason for this is that the banks need to raise margins on any new business for the years ahead to accelerate their own rate of deleveraging. The banks have to raise deposit rates to get more money in, and they have to raise margins across the board to make sure they are making money.
So the data from the real economy are terrible, yet the bond market is open for business. Why is this?
A rational conclusion must be that the financial markets see relations with the ECB as being much more important. If the ECB is going to open its balance sheet and buy bonds, which is the logical conclusion from what Draghi said last week, then it doesn’t matter that the Irish real economy is dormant.
As long as the Irish government sticks to the policy of turning the economy into a large debt servicing agency and the ECB gives it permission to do this by suggesting that Ireland will continue to “qualify” for support if necessary, then the bond market will stay open. But all the while the economy is actually getting weaker and weaker – not stronger and stronger, as you might deduce from a bond auction. Bizarre.
Just to mark your card for a scrap ahead, consider this: when Draghi said he would do “everything necessary to save the euro” last week, he signalled that he would take on the German lobby at the ECB because the only way he can save the euro is by buying Spanish and Italian debt directly. The Germans will, to use the vernacular, go ape. The Bundesbank has already issued a statement saying this is “problematic”.
Let’s come back to that titanic battle next week; we have enough to digest for now.
The Joys of ‘thinking’ is profitable and tax free . Long live madness .
Hi, Another excellent article because unlike some previous ones which stated the obvious this one once again gives excellent strategic insight focusing on the cause rather than the symptom. Did the thought ever cross your mind about something else which has decoupled? Let me enlighten you. Since the Dail is more focused on turning Ireland into a debt collection agency and serving the agenda of financial imperialism because that’s what they are doing, they have decoupled from representing their voters, ie us. In a nutshell we now have a financial tyranny in place with a mandate from all of us… Read more »
About time you finally admitted it, is all in the tea leaves there is no science in economics? The past week, tea leaves aside, it does show us that Ireland is been run by the banking systems not democracy. we are been held to ransom by a few people in a ratings agency and/or possibly some 28 year old coke head taking a bet on Ireland, maybe the ratings agency and the 28 year old use the tea leaves too. What will happen when these agency’s run out triple letters to use, eventually all countries will be at ZZZ which… Read more »
“The ‘ART’ of tea”
A few points on the article: 1) Apart from the public service, retail and the professions such as legal, accountancy, journalism, I would suggest that most other people in Ireland actually work for companies whose markets are non-domestic and therefore what happens to domestic demand will not impinge their tax-paying nor saving/deleveraging abilitities. Rather, the more deflation the better as prices will continue to fall as they should as Ireland is still way too expensive; 2) I agree that Mario Draghi will take on the Bundesbank to save the Euro as he has the political support of all the major… Read more »
Hi,
Can we steer clear of the public/private diversion. NEITHER are the enemy. The WIR bank in Switzerland operate as a let’s system. http://en.m.wikipedia.org/wiki/Local_exchange_trading_system
As far as I know it was up to 2005 organised as a not for profit co-operative. Since it is a book keeping transaction no currency/legal tdnder changes hands therefore as it stands it does not come up on the state/revenue radar or contravene any law.
“But, as Keynes observed in the paradox of thrift, if we all save at the same time, who is spending. If no one replaces our spending, then demand will fall and fall.” Savings and Investments are essentially just two sides of the same coin. It is supposed to be the function of financial institutions to keep the money circulation going. The money that other people have no use for at present, they divert to the people who have use for it at present. Clearly that is not happening at the moment so financial institutions, like everything else, are not functioning.… Read more »
The Celtic tiger economy was based on false assumptions and a confidence trick. David these are your own words the only way for asset prices in Ireland to go down.
If that is emotionally not bearable for the property punters in Ireland let’s introduce a domestic parallel currency for this type of stuff. Let’s introduce the punta nua for domestic payments and transactions and keep the euro for exports and imports. The punta nua / euro exchange rate will be a floating exchange rate.
We all know that this government can’t balance the books and to some extent witch suits them they are beening black mailed and if they where to Stand up and do the right thing witch they wont. For the government to do the right thing they would have to look at there own pay and expenses and that’s a no no greed of self and all that. Now who’s going to pay for all this the low payed who have had enough and throw in the middle class,so add these to groups together and between them they should have the… Read more »
Southern Illinois.
[ However, it is a crucial week because the evidence suggests that something very odd is happening in Ireland. The Irish bond market is decoupling from the Irish economy. That sounds weird, but let’s dig a bit to explain. ] It is possible that the Irish banks, under instructions from the Irish government, under instructions from Brussels are buying Irish gilts. I strongly suspect that this is what is going on…. As if the Irish banking system does not have enough exposure already. This is loaded with assumptions, and one of them is that the ECB will ot go into… Read more »
David – that was an excellent article. Top notch.
Tea Leaves From AIB , Bank Center
Missile ONE
Thousands of letters have been received this week already from AIB informing depositors of new constrained notices of withdrawals of their monies and subject to the discretion of the bank .
More confusion prevails as these missives are conveyed to these deposit hoders many of which are old age pensioners .
Demand facilities being withdrawn and in some cases ‘ Breach of Notice Costs ‘ introduced.
Missile 2 3 4 5 etc to arrive from your Irish Banks soon.
I came back from a week in lanzrote while there I was talking to a German girl who worked in a doctors surgery ,
She was telling me what she thought about the prolims in the euro zone ,she said that the Germans work work work and they save save save and most Germans don’t want to bail out the euro zone and why should they she said the problems in the euro zone are not of German making.
F. For L. Lie
I. I. A. About
N. Never. B. Being
E. Ever. O. Of
G. Give. U. Use
A. Anything. R Remember
E. Except.
L. Lies
If Quinn was a candidate in the next general election in Cavan I bet he would top the poll
The moon is full the kettle on for a brew but I cant figure out how t read tea bags
Speculate to accumulate more speculation
David,
What brand of tea do you read don’t tell it that its former Fine Gael TD and Minister for Foreign Affairs Peter Barry tea that you read if so you might be getting the wrong message.
Try Rooibos for the discerning tea-leaf reader
Not appearing in the tea leaves, but continuing calls for bank separation abound. Spiegel Editor In Chief Calls For Banking Separation In yet another case of the {Wendehals} [“About-Face”] phenomenon, this week’s print edition of Spiegel, one of the biggest news-magazines in Europe, carries an editorial by editor-in-chief Georg Mascolo titled “Separate the Banks.” He reports on Sanford Weill’s conversion and says that Glass-Steagall should never have been repealed. So far, he claims, there is not yet enough support for its revival, even if a “smart” German DAX CEO like Nikolaus von Bomhard (Munich Re) also wants to eliminate “the… Read more »
‘The Newsroom’ Explains the Glass-Steagall Act
“You could be Gordon Gekko [tycoon from movie “Wall Street”]or George Bailey [community banker from “It’s a Wonderful Life”] but you couldn’t be both.”
Glass-Steagall revolution begins with HBO broadcast.
http://videos.nymag.com/video/The-Newsroom-Explains-the-Glass;search:section-news#c=VQ23TM0DJL9CTHRS&t='The Newsroom’ Explains the Glass-Steagall Act
Some of the blogs here show how much of a mess we are in that we do not know whether something is good news or bad news. We have a mini celebration that a civilservant can buy a house for 84,000. If we look at that including vat probably 25k – 30 k of that price is going to the state through vat and local authority charges. These monies are of course now being soley used now to pay public service and wages. The professionals will get their paws on another 5 k because a Bank is paying. The Bank… Read more »
I agree with David in that to a certain extent people save more during a recession and it can feel like there’s less money is circulation as a result. However a far bigger contributer to there being less money during a recession is that once a debt is settled with a bank the money no longer exists. When processing a loan repayment banks lower the debtor’s current account and lower the debtor’s debt to them. In doing so they lose both a liability and an asset. Their balance sheets contracts and the money just doesn’t exist anymore. One way to… Read more »
While economists, probably the most superfluous choice of studies one can sign up to, are center stage for the fools to hang to their lips, these leader who appear to be in charge, they have to follow scripts written by others.
Period
.
Pithy explanation of the financial crisis. Mature audiences only.
http://www.youtube.com/watch?v=GXcLVDhS8fM&feature=player_embedded
Good article. Real good So basically no one has a clue. This is why economics will never be regarded as science People with money are surruonded by cosmic darkness and looking for the faintest light. Like some of your posters who are trying to convince us that ‘everyone’ is talking about property. Erm no they are not and ‘most’ people don’t have savings Some of your posters have never lived in the real world my friend and they are unintelligent and far from becoming well rounded individuals. Some of of them can’t even spell. Others are normal people with big… Read more »
Why would David say ‘Reading The Tea Leaves ‘ when we do not have any. Tea Bags are the norm today .Tea was put into a bag so we could never read any tea leaves again. Leaves of Tea must feel free to think to communicate and not be incaccerated like battery chickens as Irish Citizens feel today in our incumbent society . The Joy of Tea is now a memory so is the code it creates that enables the drinker to communicate in a parallel life denied to the ordinary senses.The Joy has been replaced by a void of… Read more »
Could someone define “The Elites” as it is used here on this blog?
Update from Spain.
http://globaleconomicanalysis.blogspot.ie/2012/07/100000-workers-in-spain-will-not-be.html
This is getting like Eastern Europe after the end of Marxism, with a bankrupt government, and state employees waiting for montsh of backpay.
On the margins, some canaries in some coal mines. Soone they will sing loudly. 1) The US Treasury market – currently being proppoed up by Oil money from the Arabian Gulf, and invested via London. http://www.marketwatch.com/story/doug-kass-favorite-short-for-the-next-decade-2012-07-31?dist=tcountdown It is faciltating lower US interest rates, a stronger dollar, cheaper raw materials for the US, and the entire range of currently installed US stimulus projects. 2) Facebook is decling further. Now this is a big problem for Ireland, because we are seeing a dot com 2.0 bubble with respect to social media It investment. And lets be honest here – the business model… Read more »
+1
firedamp risk, is explosive at methane concentrations between 4% and 16%, with most violence at around 10%, and caused much loss of life in coal mines,
What’s the explosive ECB interest rate policy?
DMcW well knows it, that extreme moves and flailing of the bankers to save their hyperinflated rumps are underway. A devastating attack on Draghi came yesterday from Thorsten Polleit, chief economist of the Degussa gold-trading firm, in an editorial in the {Frankfurter Allgemeine Zeitung}, in which he wrote that the ECB’s monetary expansion policy is out of control, enhanced by the Target 2 program and extra money-printing. And now, the ECB under Draghi wants to buy up ever more sovereign bonds, which is nothing less than a “monetizing of state debt, which happened very often in history.” This will lead… Read more »
As this article arrives at Dusk soon it must not be forgotten of he importance of being ernest in politics .Displaying a sense of infusion and taste and a command of flavour The Prime Minister of UK in early 1830’s favoured the principles of the Magna Carta returning the rules of law to the mass of people thus making the reform of the feudal system and of what was left of it more durable without having to endure the heavy costs that the French Revolution had to endure . This Prime Minister was a Whig and his name was EARL… Read more »
Time Machine
There is a difference between coffee and tea after the water has been added .With coffee it becomes instant and with tea it beholds the art of infusion and with time to determine the satisfactory taste to the consumer .So tea can have various taste for the consumer depending of the level of infusion they chose .Maybe our economy will now return from Coffee Houses to Tea Houses .
Tea prices have been failing for the last year or more But look at what has happened since David’s above piece was published…
{{{“July 30 (Bloomberg) — Peet’s Coffee & Tea Inc. has investors wagering rival bidders will attempt to top a $1 billion takeover offer that’s already the most expensive U.S. beverage deal.”}}}}
I am thinking opening a franchise called soothsayer tea, the first outlet will be on wall street.
More on the wir bank in Switzerland. Important to get familiar with its modus operandi. Instead of talking through our asses about muppets in the Dail, banks, markets etc let us focus on something we CAN control which is the establishment of something similar in Ireland. It’s going to be vital because the floppy haired one who must be obeyed said in an article some time ago that he was certain that the euro zone would break up. When we get pushed out it is only we ourselves who will save ourselves not some asshole politician or bailout pusher! Enjoy.… Read more »
I have been told that in the US, because of rising costs of meat, and squeezed budgets that pet ownership is getting the squeeze….the latest trend is not to get a pet unless it is necessary…or to have a vegetable garden instead.
49 Million on foodstamps and increasing.
I wonder will it reach the point where people in Europe buying sports fan wear or sports event tickets ? (major forms of discretionary expenditure).
Can it ever be fair?
http://www.newscientist.com/article/mg21528753.400-an-appeal-for-fairness-in-society.html
TEA PARTY
Before this page dissapears lets pay homage to our host David and raise all our cups to celebrate his birthday season
Happy Bithday David
TEA PARTY
Before this page dissapears lets pay homage to our host David and raise all our cups to celebrate his birthday season
Happy Birthday David
This article was a great tea party it was a pity that Molly did not stay along .
{{{“Draghi faces leadership test over pledge to rescue”}}}
eurohttp://www.irishtimes.com/newspaper/breaking/2012/0802/breaking11.html
his longest day
Em…. for heaven’s sake…this is mayhem. ok so all of the people here are asking what they should do with thhe €500 or 15€m…whatever. Now I keep sayineg the money they thimk they have is …..long gone…udo spent that money [unbeknowst to himself] in 2006.
Now: Am I wrong?
David
You know where that money went. I do also.
It seems that Fritz is the bad guy again and this is a sentiment often expressed in these esteemed boards but I don’t buy it. Now that the Italians and Spaniards are showing their teeth Fritz does not look so invincible. In fact to me looks like he is there for the taking and he knows it. He is wetting himself because that others have the power to keep him in check In this age we are seeing thousands of Spanish miners marching to Madrid just like the Jarrow marchers of the thirties and their defiance reminds us that ordinary… Read more »
France becomes the first in Europe to levy a transaction tax
http://www.independent.ie/business/european/france-becomes-the-first-in-europe-to-levy-a-transaction-tax-3187949.html
James Turk points out that the the Fed is becoming irrelevent. Trillions of stimulus and we are still in the “great recession”
ditto the ECU and stimulus packages.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/1_Turk_-_Gold_To_Explode_Higher_As_US_Debt_To_Be_Downgraded.html
News for The Tortoise and the Hare Jeff Nielson
ETF Daily News (blog)
The Tortoise and the Hare
TheStreet.com‎ – 9 hours ago
By Jeff Nielson 08/02/12 – 01:39 PM EDT. Add Comment … We had a Great Race between a quietly confident Tortoise and an arrogant, condescending Hare.
Why Precious Metals Are The Most Under-Owned Asset Class On The Planet
ETF Daily News (blog)‎ – 6 hours ago
Song for the Irish Brithers
http://www.youtube.com/watch?v=MSiWRFjA8S0&list=4CC5C2CD317283A3