There are many ways to describe printing money excessively but the following quote from the Wall Street Journal’s money editor, attributed to a US official, is one of the most memorable.
“It is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.”
Whether the official is overstating the initial enjoyment is really a matter of individual peculiarity, but you get the point.
Now keep this idea in mind and think about what is happening to the Irish bond market because there has been a dramatic reversal of fortune in Irish bonds over the past few months. Has Ireland become suddenly more able to pay all the debts, which the fall in the risk premium implies? If so, it’s happy days.
But if the rally in Irish bonds is driven simply by the ECB printing money, then that’s a different story. If the ECB is swapping bad collateral for real money, giving that money to the banks, allowing the banks and financial speculators to buy up assets of Ireland in the knowledge that Ireland will be backstopped by the same ECB that printed the money in the first place, then we are in the early stages of a bedwetting episode.
If on the other hand, this week’s return to the bond market signals the start of an actual economic recovery, then we can look forward to, at very least, restful times ahead.
This is an important question because if the bond market, which is where the State borrowed money this week, is right and is basing its excitement on “the fundamentals”, then this means the worst is over. If in contrast, the market is wrong, and over-optimistic, all we are seeing is a speculative bubble in bonds – driven by too much central bank liquidity. And, just like the housing and debt bubble, this bubble too will burst leading to another financial crisis.
I am perplexed because I really want it to be the former, that is a real recovery; but I fear it may be the latter – a politics-fuelled bubble.
So is it the case that the financial markets are reacting to real opportunities in Ireland as seen through falling unemployment, proper companies being created, exports expanding and local spending and retail sales ticking upwards? This is what we all want to see, allowing us to look forward to the economy emerging from the torpor in stronger shape.
Unfortunately, the data is weak. We know that exports have slumped in the past few weeks and also it seems now that any improvements in Irish competitiveness reflect the weakness of sterling and the dollar – our two biggest trading partners – against the Euro. If the jump in competitiveness had been due to an increase in productivity, we might be in for a sustained period of expansion, but that’s not the case. Indeed the initial positive movement in Irish competitiveness, seen three years ago, may now have been down to the slump in low-productivity construction employment. Once you strip that out and account for the high-productivity, low employment sectors such as pharmaceuticals, there is no real on-going productivity turnabout.
We know that retail sales fell for the past three months in a row and that the rate of unemployment remains persistently high. Indeed as the Financial Times pointed out this week, there is a good chance that any rises in employment can be explained by the rise in immigration implying that the “quality” of the meager amount of jobs being created is falling. There are more and more part-time, temporary jobs. Indeed the recent rise in the number of people claiming they are self-employed may not be indicative of a new emerging entrepreneurial culture but may be more likely the way middle-income professionals who have lost their jobs prefer to describe their state of unemployment.
In short, there is no real change to the underlying economic picture that pertained a few months ago before the bond rally.
In addition, the moves this week by the government to try to accelerate foreclosures in the buy-to-let housing market might drain the banks’ capital. If the housing market weakens further, the banks might actually run out of capital forcing another recapitalization round.
Taking all this into account, we can see that the reasons for the bond market rally and the high-fiving we saw during the week from bond-spinners on the radio and the politicians desperate (understandably) for some financial market white smoke, might have less to do with economics and more to do with politics.
In the past four weeks, it is clear with the prom note and the ESFS deals, which push Irish debt repayments out for a dozen or more years, that the European elite – the ECB, the EU and the Troika – are underwriting Irish government debt. This will ensure that the poster boy remains the financial equivalent of a Hollister model rather than a real Irishman at the end of the night on St Patrick’s Day.
Eurozone politics explains the conundrum whereby the data are weak but the market is rallying. The market knows that someone else will pay the Irish bill in the short-term. This gives the financial markets a risk-free ride, and why would they not seize this opportunity to make money?
In the medium-term though, such a political strategy means we go further down the road of turning Ireland into a large debt-servicing machine where the willingness to pay these debts at all costs, irrespective of real growth and the willingness of the EU to subsidize such a kamikaze policy becomes the narrow-gauge barometer for economic success.
So the ECB prints money, but this money – as we can see from the M3 money supply graph – doesn’t go into the economy but into the hands of speculators. The economy then doesn’t recover, but the financial markets benefit as prices are pushed up. In terms of just how much of the movement in bonds is related to central bank moves, one of the very best financial market writers David Rosenberg of the Canadian firm Gluskin Sheff calculates that about 80% of movements in bond markets can now be related to what central banks are doing.
This appears to be what is happening now with Irish bonds. The rally is a reflection of politics not economics. In time, the positive liquidity effects of such a rally may trickle down to the economy, who knows? I certainly hope so.
However, right now, the warm trickly feeling we are experiencing is much more likely to be middle of the night, financial bed-wetting than any economic new dawn.
Snap, where is Adam subscribe?
That’s my third time as 1st comment, Woo hoo!
Nice article David, as you neatly summed up our fears that that we are merely in the eye of the Hurricane.
There should be rules that state that when a country returns to the bond market at least some of that money trickles through the system for a start. The private sector should be monitored like a patient in intensive care, let’s face it the banks act as it’s pharmacy. Bailouts are all very well but useless without a direct benefit to the small business.
Good article – lays it out very clearly. It seems rocky times are ahead. David was very skeptical on Twitter yesterday about the actions in relation to Cyprus. I guess he might expand on that in the next article or two.
David,
In relation to the bed wetting affect, the ECB swapping bad collateral for printings money will affect the value of the currency itself but Is the major effect the further decrease in purchasing power which will avail as of the increase in money supply? Further down the road this will reduce the incentive to invest plus increase saving. hence, growth at a stand still. your thoughts?
This article from IT reports the Irish Government welcomes the raiding of Cyprus savings accounts by the IMF.
This tells me they will probably raid Irish savings accounts sooner or later.
http://www.irishtimes.com/business/economy/ireland-welcomes-bailout-deal-for-cyprus-as-positive-1.1329388
Anyone with savings in European banks must be worried.
Hopefully the reducing investment effects that will seal another dent in Cyprus after the raiding of the savings accounts will seize the IMF from doing so in Ireland
Well worth reading this from Joseph Stiglitz:
http://opinionator.blogs.nytimes.com/2013/03/18/singapores-lessons-for-an-unequal-america/?hp
David,
Well done on an excellent article. The Sunday Business Post is worth 10 Euro to anybody who reads that article alone. It literally could save working people who study it carefully, a fortune.
Everybody should read it.
thanks,
(old) Deco.
Private property stolen by the state.
no due process of law.
= tyranny
http://www.zerohedge.com/news/2013-03-17/rape-cyprus-european-union-imf
The ability of Ireland to successfully enter the bond market is an essential part of the Euro recovery. That is what is driving the Irish bond rally not the ECB printing money in order to simulate a false dawn. The bond markets want a healthy Euro. The latest news from Cyprus effectively ends the day of the bailout. The markets will have to figure this out on their own. No Euro member can ever again countenance a Troika bailout after what happened in Cyprus. Depositor confidence has been shaken to the core. And all because money laundering has polluted the… Read more »
Nice article on the financial system and its bag of tricks – legalized gangsterism –
The committee that Noonan chairs at EU level voted for the theft of private citizens money in Cypriot Banks.
Any “levies” like this are robbery,call it as it is ..pure theft..
Now their are reports that Cypriot Banks will not reopen till Thursday..!!
“Irish Government welcomes Cyprus Bailout” in Today’s Irish Times
So Government reaffirms its commitment to Theft..fuckin incredible..!
How come media cannot call it as it is..Theft..If EU/IMF/ECB Cypriot Bailout is so honest & upright..Why doesn’t the Cyprus Government OPEN THE BANKS and trust their people..!!!
Good article David.never seen one overshadowed so quickly by events in EU.
http://campaign.r20.constantcontact.com/render?llr=n7vdaxbab&v=001-uqe82qIMgm1fDpnCQ7cVmj4tM3GP1J_6q1q6Ua04lMo7tYLGKlIvirmqs_TAq1uFPw7uRCe5WoN_FL0sJTwHvPoUwPDrz-ZpsROehB3s0WinYpMBzENpd33C7SvtQop
A couple of hours of reading. A selection of financial commentary assembled by Miles Franklin.
GOLD IS MONEY…
EVERYTHING ELSE IS CREDIT
– J.P. Morgan
Looking more and more as if he was/is correct.
It seams only Ireland did not burn bond holders,if this is the case why o why.
So David, just to clarify, you are saying that the traditional barometer of the Bond market is now gone, one less method for the ordinary folk to measure the state of the economy.
David is Ireland the only country in Europe not to burn bond holders?
Taoiseach Enda Kenny declined to cast judgment on talks to impose losses on senior bondholders in Cypriot banks as part of the country’s imminent bailout, a path barred to Ireland by the EU authorities.
This smells of scandal and bank protection.
The Cyprus bank raid is more like a Robin Hood than it is the black sheriff Merrion Street.
David. Question: Is Money Creation at Source covered in economic texbooks? To answer my own question I bit the bullet and relunctantly read ‘Principles of Economics: An Irish Textbook’ (3rd edition) by G&M. A 650 page door stopper. For this book, the answer is NO. It covers every other ‘monetary’ aspect you’d wish to know EXCEPT how is money manifested into existence at source. Is this oversight common in economics literature? I’ve often wondered why the ‘Money Creation/Issuance’ subject is never discussed in the mainstream by commentators and economists. Is it because they are simply not aware of it? Had… Read more »
Is it not better to tax fat bank accounts than tax the average struggling worker at source who is contributing to the economy?
Are the Cypriot government not doing what many here have been crying out for, a tax on the rich and their overseas accounts?
Well Cyprus is overseas and do they not have high proportion foreign owned accounts- money works best when it’s moving and not suck in a fat bank account.
Why should euro workers taxes increase when there is plenty of money sitting in fat bank accounts?
If only they had did this here in Ireland.
.
Sinclair: “Taking Russian money is very foolish. You have to understand the culture of the people you are dealing with. The government leaders in Cyprus have no ability to protect themselves from the retribution of the former Russian KGB agents, including Putin himself.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/18_Sinclair_-_All_Hell_Is_Breaking_Loose_After_Cyprus_Catastrophe.html
The government leaders in Cyprus are trying to back-pedal right now in order to save their lives. Let me say it again, they are trying to save their own lives. Remember, ‘revenge is best served cold.’ This means the revenge never comes at the moment of the miscreant act. But it will come in time
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/19_Sinclair_-_Cyprus_Disaster_Is_Much_Bigger_Than_Being_Reported.html
The grab of deposits is a greater deal than recognised. Involved is 100’s of billions of russian money.
That money will now be diverted into physical gold to the detriment of western bankers who hold a lot of paper promices for gold that will never be delivered.
It is important to read the interview of Jim Sinclair.
Ben Davies of Hinde Capital makes interesting points on the Cypriot crisis
http://www.hindecapital.com/blog/cyprus-oh-the-irony/
Cyprus – Oh the Irony!?
March 18th, by Ben Davies (Co-Founder and CEO)
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100023466/daylight-robbery-in-cyprus-will-come-to-haunt-emu/
Daylight robbery will come to haunt the EMU
A Cypriot Lesson: Glass-Steagall or Suicide
Friday’s EU Council meeting, was shamefully presided over by Ireland, which holds the rotating presidency of the EU Council, took austerity to a new depth.
Who’s next?
YAKUNIN: `DAMAGING TO RUSSIA-EU RELATIONS’ March 18, 2013 (LPAC) — Russia blasted the Cyprus deposit robbery today, as estimates were that Russian and Ukrainian depositors alone would lose billions of euros they had in Cypriot banks, and investment of these funds back into Russia would be affected to an even greater degree. President Vladimir Putin told a meeting of officials today that the EC scheme ws “unfair, unprofessional, and dangerous.” According to Finance Minister Anton Siluanov, EC and IMF leaders did not even consult Russia before announcing the Cyprus bank robbery, and that although a EU2.5 billion Russian loan constituted… Read more »
Great article. Nothing to be challenged there. Someone above said we are in the eye of a hurricane. Very very apt. So the EU has managed to pi$$ off the Russians. I’d love to get a better view of what is really going on there. I know stupidity abounds in bureaucratic circles, but this stupid? Question? Were any Irish Bondholders Russian? Anyway, that’s another story in the making and I cannot help feeling that the Euro is now moribund. Germans will pull the plug on this one. Back to the article. Growth has stalled…indeed everything is stalling no matter that… Read more »
Cyprus is tax haven a tax avoidance scam for the rich, I say down with that Sort of thing, why should the Irish / EU tax payer bailout tax evaders in that Trojan Donkey.
Why should the Irish sponsor the rich by way payments into the universal social fund it’s like?
Cyprus a is tax haven, a tax avoidance scam for the rich, I say down with that Sort of thing, why should the Irish / EU tax payer bailout tax evaders in that Trojan Donkey.
Why should the Irish sponsor the rich by way payments into the universal social fund and it’s like?
Time to stop to the money hoarders and raid all bank accounts where is robin of the hoodie when we need him.
Why should we bail out the rich, the gold hoarders, the money hoarder, the miser, let the fear mongers run to their bomb shelter off now down into your rabbit hole with your tins of beans, your gold and don’t forget those out of date Joe Jacob iodine tabs, fear is easy pill to swallow…
The wildebeest are on the rampage again…
These people need a climax to clam them down…
Banks will get there just deserts what goes around comes around,for to long banks have had it all there way,its heading in the direction of people just won’t put there savings into a bank.
Once trust breaks down the end is near.
unconfirmed reports that the Cypriot Finance Minister has resigned..will update later
http://on.rt.com/oysvrf
RT News Cypriot finance minister resigns
Is Europe’s bluff about to be called with a rejection of Bailout in Cyprus..?
“””Bank of Ireland CEO Richie Boucher received a total package of pay and benefits of €843,000 last year.””””” (RTE)
Let do like they do it in Cyprus-raid his bank acount
“”””Establishing a banking union in the eurozone area has taken a significant step forward, with final agreement reached on what is called the Single Supervisory Mechanism.
The deal between the European Parliament, Council and Commission was signed off this afternoon.
Under the plans, the European Central Bank will have direct oversight of eurozone banks.”””(RTE)
Welcome to the Real Euro it hasn’t gone away you know and it ain’t going away.
If we are in the euro we need clean banking system the EU is right on this point.
With the end of cash every cent you spend can be policed it also means you don’t control it and soon your bills and taxes will be deducted at source. The Irish people voted for this and those that don’t vote let others make their decisions for them so by default those that did not vote supported the euro the result is the Irish got what they asked for the Euro is here to stay but it is less likely to be in the form of cash. Bit Money is on the way with 8 bits in Byte 1 euro… Read more »
Cyprus adjusts theft rates to baypass the lowest 20,000
Canadian bloggers on this site see the deal as theft.
http://www.ctvnews.ca/world/cyprus-revises-bailout-terms-proposes-no-levy-on-small-savers-1.1201428
“Cyprus MPs reject EU-IMF bailout tax on bank depositors” ( BBC) really gosh would not have expected that! after all the country makes money out of been a tax haven for tax evaders. corruption rules – so what next?
What can the Russians and the Cyprus come up with and who will own Cyprus now – I hope it is the Cypriot people and that they follow Iceland example but sadly that is unlikely?
Iceland shows yet again how to do the necessary : Icelandic parliamentary committee unanimously passes bank separation motion 19 Mar. 2013 (EIRNS) – Last night, the Economics and Trade Committee of the Icelandic parliament Althingi, voted unanimously to pass bank separation motion 239, which reads: “Parliament resolves to entrust the Minister of Economic Affairs with the task of appointing a committee which is to revise the framework of banking services in Iceland in order to minimize—through the separation of commercial and investment banks—the risk of disruptions within the banking sector for the national economy. The committee is to examine the… Read more »
I guess we should be lucky that our governments are introducing taxes to raid us so it looks less abrupt. Our government had the time to slowly introduce taxes and austerity. In Cyprus – This is the first time that the concept of raiding peoples innocent savings with immediate affect. It may or may not go ahead but the precedent of the concept has been set. There is obviously no time to introduce austerity measures. Pension payments in Ireland will end up in vouchers. Soon we and pensioners in particular will have to pay a heavy tax if they opt… Read more »
Anybody with some savings should be prepared for things to happen soon. In the last few years people have been saving like mad as they are afraid to spend their money on anything. And RIGHT they are to do so.
I was lucky enough last year to travel through Asia. I was prepared to be screwed at every corner but I was screwed only for a couple of euros everytime. The tuk tuk driver, the old people selling you stuff on the streets, the shops, customs officer, etc. But nothing like the biggest rip off by the embassies in London. The difference is that you are in a position to look someone in the eye and you just know that you are being screwed. Anyway it is only a couple of euros everytime. Then after some time you just accept… Read more »
Dave from Denver:
“Looks like the bail-in vote will fail, which means Cyprus goes belly-up, which means Greece goes belly-up, which means the trigger is pulled on the massive U.S. bank off-balance-sheet OTC derivatives exposure to the southern European sovereigns and big banks.”
Great analysis. you probably know my gripe with it at this stage though. It’s so misleading to talk only of the ECB printing money. Even if this is an analogy for the creation of electronic reserves the analogy has to end at banks using this money to lend on to SMEs because this is a different type of money to that which the banks create through lending. Brendan Keenan and Mario Draghi made this related point. The liquidity (loans) given to the banks by the ECB is used by the banks to lend to and borrow from each other. It… Read more »
A pure piss take. You guys are laughing all the way. Can’t beat some old fashoned disaster capitalism to turn you on and turn some buck can you? Sad shameless blood sucking tape worms with brains the size of planets and hearts the size of a pea As long as you get scraps from the table you are like little boys in wonderland. To make tory boys laugh all you have to do is rattle off some toilet jokes. They love that sort of thing. Crap jokes that only a simpleton could laugh at Unemployed people should be given ‘vouchers’… Read more »