On Monday the opposition parties finally visited the oracle on Merrion Street. Things are bad. So bad that even Michael Noonan couldn’t summon a suitable analogy to describe the situation.
This is the same man who on Budget Night was capable of the immortal put down “Wasn’t Pol Pot radical?” when individualisation was being breathlessly and flatteringly described as “radical”.
He is again focusing on the budget but this time he could only muster: “The figure of adjustment published already in the Government plans was â‚¬7.5 billion. With lower growth rates projected, the level of adjustment is going to be significantly higher than that.”
It may lack Noonanesque flourish, but let’s look at that statement for a minute. Growth in the economy is expected to be lower than previously forecast, and yet the solution proposed is to cut more. In economic terms, this option is madness verging on criminal negligence.
At the core of macroeconomics is an idea called the “automatic stabiliser”. This could be described as economic ballast. When the people save money, the government should compensate by spending it and vice versa.
A recession like the one we are experiencing happens because people start, quite suddenly, saving much more of their income. This recession in Ireland is a balance sheet recession — a recession which occurs in response to the implosion of the national private balance sheet. We have a load of debt on one side of the balance sheet and a load of assets (property) on the other, which are falling in value.
In order to get their houses in order, people are saving and trying to pay down debt. This means that they are taking money out of circulation and saving it rather than spending it.
This is easy to see when looking at the figures. At end December 2006, household savings were â‚¬77bn; GNP for 2006 was â‚¬153bn. This meant that national savings equaled 50.3pc of GNP.
By the end of June 2010, household savings had jumped to â‚¬85bn and GNP for the 12 months to June 2010 had fallen to â‚¬135.5bn. This means that household savings are now 62.7pc of GNP.
Taken together, these two developments mean that household savings as a percentage of GNP surged by an enormous 24.5pc in three and a half years. (It is important to note that while the level of savings increased by only â‚¬8bn, or 9.5pc, much of the increase in the ratio has come about because of the fall in GNP across that period.)
In 2006, as you’d expect from the ‘automatic stabiliser’ way of looking at the economy, when the people were spending, the government was saving — running a small â‚¬2.26bn budget surplus which was 1.5pc of GNP. Today the budget deficit is 17pc of GNP. So the swing from government saving to spending has been a full 19.5pc of GNP.
Taking a bit of altitude, we can see that the budget position is doing exactly as expected. This is the way the modern economy operates. It is not the end of the world that the budget deficit has ballooned. I am not making light of what needs to be done, but we need to see some context. Put simply, there is still lots of money in the economy, but people are scared stiff of spending it.
Any big budgetary strategy should be aware of this.
When you draw back and look at policy, it is not hard to conclude that there is a basic failure of economic understanding at the centre of the ‘slash and burn’ policy.
The first thing is that there is a difference between the individual and the economy. If there wasn’t, economics would be accountancy.
If an individual is living beyond his means, then yes, cut back on spending. But a country is not an individual. An individual’s income comes from an external source (an employer, customers or the dole) but a country’s income comes from itself mainly. Because of this, when a country cuts spending, it ends up cutting its own income.
This might sound like a contradiction, but it can be explained by another simple bit of economics called the multiplier.
In a normal functioning economy, when people have money they spend it. The people they give it to when they spend, also spend it, and so on. The money is shunted on throughout the economy.
When you cut, the opposite occurs. The more we cut, the more the economy will shrink because there is in tandem with the cuts a credit crunch — the banks are bust and interest rates are going up, not down.
Ireland is in a bind when it comes to stimulus. We cannot print money to increase the amount of money in the economy. We cannot borrow more from the markets because they, rightly, see our economy as a risk.
So what can we do? We can make sure that the money that is in the economy is used wisely and not wasted on savings or banks, or, indeed, saving banks.
It is time to think a bit. Here is a possible alternative plan to achieve stimulus so that the economy doesn’t unnecessarily contract in the next two years and so that unemployment doesn’t unnecessarily rise.
Currently there are â‚¬107bn of outstanding mortgages in Ireland. Allowing for an average outstanding term of 25 years and an interest rate of 4.5pc, that means that mortgage payments per month in the economy are approximately â‚¬600m per month. Or â‚¬7.2bn per year. There is a stimulus sitting right there.
Why not freeze all mortgage payments for two years? Nobody makes any payment on their mortgage until November 2012. If we assume a conservative multiplier of only 1.4, Ireland would get â‚¬20bn worth of stimulus without upsetting our EU leaders’ rules at all.
Probably a function of how we are all thinking at the moment, but I bet your first question is ‘What about the banks?’ Well first, we own the banks, so they will do what they are told. The financial regulator has been very generous with bending the rules to allow defunct institutions like Anglo to continue in whatever half-life it currently inhabits, so I’m sure he would be willing to allow Irish banks to carry mortgage debt for two years without forcing them to take write-downs on it. After all, a policy like that would be in the interest of the country, rather than just the interest of banks.
Of course, the bondholders would still want to be paid. And they would be, they just might have to join in the two-year waiting game. Which would be better for them? Get a haircut now, or wait a few years and get paid.
The effect on the economy should be fairly rapid, as the increased spending would lead to inflation. Right now, for Ireland, some inflation would be a good thing. True, some people would choose to save the money, but targeted incentives to bring forward spending could be also applied.
We need to come up with suggestions, which limit the downturn and ease the burden on ordinary people. Isn’t this what sovereignty is all about? The financial markets would be the first to support us, because they want Ireland to grow.
As the economy grows, the risk diminishes. In contrast, the more we become a large debt-servicing agency with falling revenue, the riskier we become and the more likely the austerity drive will hit the buffers.
David Mc Williams will host Ireland’s first economics festival in Kilkenny from Nov 11 to 14. Details at: kilkenomics.com
I still don’t understand how taking money from prudent people capable of managing their finances and giving it to financially illiterate people who bought houses they couldn’t afford is going to improve our economic situation.
David, This idea sounds so simple and workable to a normal person. One lives and hopes…
eh….spend what ?
As Joan Burton explained many moons ago…
“We are in this recession, because we have no money…we have no money….that’s what is causing this recession…this government is not doing enough to get us out of a recession…”
At the time she was on a ministerial pension, expenses, and a TD’s salary, (from what is arguably the most expensive parlaiment in Europe) and her leader had not declared that former ministers pensions should be returned to the exchequer.
When I read the article this morning I was hoping maybe the ‘dudes’ in the dawl would start talking about it by afternoon and realise that what a wonderful world we have and quote dmcw but I forgot that politics only serves politics and not the people like you and me.So that trows us all back into the philosophers of stone. I would like to see it work and bring good news to the young working able people with mortgages.I believe to make it work there would have to be a phasing in in a parrellel financial structure that credit… Read more »
I disagree with the article. If people stop paying their mortgages the merrygoround via the banking system will get even more decepid. Savings are providing solvency for the banking system, and in fact household savings increases are doing a far better job of stablizing the banks that Cowen and the circus in Kildare Street. Keynesian economics regards saving as a problem. Common sense tells us that you must have money saved before you spend it, otherwise you are indebted and trying to catch up. Look, as a result of the ‘manufacturing of consent’ our value system has changed. The multiplier… Read more »
So, instead of dealing with our debt in the here and now, let’s forget them for 2 years, let’s all go party. Rock on! Debt forgiveness from bondholders and debt forgiveness for mortgage holders with mortgage debt written down to current market value; and bondholders debt restructured on the same ability to repay, makes a lot more sense. Throw in a contribution from Corporation Tax up from 12.5% to 25% and we’re getting there. People might get used to not paying up! Or maybe workup a getaway nest egg, mass exodus in 2012 to the Caribbean:) Keep thinking! Slash and… Read more »
I think that David is trying to think out of the box and is at least coming up with alternative ideas. That is a good thing in what some people are now agreeing is a conservative and right wing country that is shot of critical thinking. There is an anti brainstorming culture in this country. As soon as someone proposes something radical they get their heads shot off and labeled as a crank. Sometimes the craziest ideas are the best but in this case I am not so sure. If he is suggesting that the bondholders get paid then he… Read more »
Social Economics v Market Economics Community v individualism. Stimulus v austerity. Humanity v neoliberalism. The Republic v a Plutocracy. Outsiders v Insiders. One Irish American encapsulated it pretty well: “Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product … if we should judge America by that – counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods… Read more »
Folks, the following is off topic but the news is out today and is being ignored by RTE: http://www.cnbc.com/id/39755930 The headline reads: Anglo Irish to Buy Back Subordinated Debt at Discount The headline itself is misleading because the bonds are essentially worthless and it is impossible to buy them back “AT A DISCOUNT”. http://bankermathews.com/2010/07/23/anglos-paper-profit/#comments In reality the bonds are to be bought back above zero, essentially AT A PREMIUM. You will note that Peter Mathews is very restrained in his comments; and I suppose this is necessary in order to get the powers-that-be to listen. They will NOT listen. I… Read more »
Money is a time machine. it merely allows you to get stuff quicker if there is more of it around. If you dry it up, you slow things down and longer term decisons become laced with greater uncertainty.
All DMcW is saying is create greater certainly by stalling the rate at which cash is drying up in the shorter term to put ourselves on a better level at a future date. But it demands prudence or we are back to Celtic Tiger lunacy worse than ever before.
David, I nearly always agree with you (except for the Keynesian bits), But giving the government the use of all our ATM cards is not going to help. It’s pure totalitarianism for the state to say, ‘you ignorant peasants are saving your cash? Well, we’re going to spend it because we know best’. I agree with Uncle Fester and then some. Giving money to the same irresponsible oiks who blew their boom allowance on magic beans is sheer lunacy. Why, when it comes to “stimulus”, is the government miraculously expected to know what to spend it on? As Deco says,… Read more »
Shouldn’t corporation tax be left well alone… ?
… otherwise wouldn’t a pile of multinationals will leave Ireland?
… woudldn’t Ireland will see a well-paid tax-paying citizens losing their jobs otherwise (which won’t help replenish the coffers).
BUT — out of the BOX thinking well reccommended. Good to read something original.
Too many ideas overlapping.
The economic system is split.
There is an underlying free enterprise system generating the wealth and a boil.
One can tinker around with multiplier effects and liquidity irrigation lateral thinking and brainstorm into reality what exactly.
What is it the article is concluding is the sourced outcome here.
A rebound economy? What for! Why?
The economy and its boil will still be there putting all wealth generation under threat like what has just happened.
Is this not obvious at this point.
The clockwork on which the economy ticks is cuckoo.
David, you still don’t get it. The government would only do the things you have been talking about if we lived in a democaracy. But we dont live in a democaracy we live in a dictatorship which controls the people because the elite gansters at the top of the Irish dictatorship have control over the media, the instuitions(courts, police etc) and have control over most of the political parties. We only have an illusion of democaracy because the same big business funds and owns all the major political parties. They are doing what is best for themselves, that is killing… Read more »
2008 Irish NO to Lisbon treaty During a meeting last week in Germany, Merkel and Sarkozy together agreed on how they would respond if the Irish rejected the referendum. But neither really knew what they should do. Capturing the sense of helplessness both felt, Sarkozy said, “Whatever happens, we will offer a joint German-French response.” No matter what, the two said, the ratification process should continue, and an exit clause could be provided for the Irish if they weren’t willing to hold a swift second referendum on the issue. 2009 Irish YES to Lisbon treaty Big Ignorant Fucker From Offaly:… Read more »
Completely off-topic, but there’s beauty in simplicity:
I’ve got two problems with this line of reasoning: Firstly, as far as I understad it, savings are not necessarily dead money, assuming it’s savings in the bank rather than under a mattress. A bank can lend 10 times it’s capital base, so â‚¬1 offers â‚¬10 in possible loans. Secondly, if 2 year repayment holiday was made, what would happen to the money? I just can’t think of any reason that the Tiger wouldn’t arise as a phoenix and delight all the importers. When it was over, the banks would just have more massive problems (these 2 years would have… Read more »
Noonanesque : The Village Schoolmaster in the class , the Local Garda in the village and the Parish Pump Pariah in the pub : all of the above summarises this charachter who consistently attempts ‘to fake economics’ ‘without experience’. Wordsworth never used economic jargon neither did Padraic O’ Conaire yet this is the very school soap box that he stands up on ‘to speak through the chair ‘ what in effect he is faking and does not realise it .He dismal attempts to quote some taxation basic rules as though he was claiming his own court and council with a… Read more »
I have read and listened to sound and insightful observations and explanations from Mr McWilliams, Prof. Kinsella, and others who know what they are saying; I have seen intelligent and innovative proposals to spur growth and employment, from unions, industry, and other sources, over the past two years; & there have even been a few bright ideas put forward by opposition parties. But the government has not & will not the heed these wisdoms or warnings outside the doors of Merrion Street, except what they receive from Brussells, the Central Bank, and those invisible few who do not communicate on… Read more »
@ bob – notYourUncle No, it shouldn’t! No, a pile of multinationals would leave Ireland. Why would they? Look at all the infrastructural money spent on roads, education, health in Ireland over the past two decades – too little I know, but enough to take us beyond states such as Bermuda in the Caribbean, or even Montenegro closer to home. We’ve a highly educated population and we are established members of the EU – Sofar:)We’ve a lot to offer multi nationals ‘going forward’. Its part of a sacred cow Irish mentality that speaks inferiority complex to approach CT as if… Read more »
David and followers of Keynes; THe multiplier effect is rubbish.
Another of Ireland’s sacred cows is DoF. Lenny has been taken on a tour of cross roads and corner turns every few months and making a fool of himself in the Dail on foot of their predictions. David uses the moniker ‘the oracle’ in his article above. When is someone going to say: ‘You’re fired, everybody within 2 tiers of the toop responsible for budgetary predictions, NAMA, economic forecasting, Go’ Let Karl Whelan in with a team of PHD level expertise, use the former team as consultants, and run the place efficiently and professionally. DoF economic performance over the past… Read more »
Not the best article from David What David is actually proposing is to show two fingers for foreign financial institutions, which subsidized fake growth, based on property bubble through Irish banks and delay inevitable collapse by excessive spending it is like prescribing pain killer instead of surgery Ireland is not self sufficient country and spending too much on buying foreign goods Even if export is higher then import, Ireland still have negative balance with rest of the world, due repatriation most of profits by MNC’s Consumption must be reduced Now we have GNP at about 100Bn. If we will subtract… Read more »
You might find a few insights here:
David Support for your general approach from the Observer: http://www.guardian.co.uk/business/2010/jan/24/mervyn-king-quantitative-easing-keynes Extract: Which brings me to the vital importance of macroeconomic policy. I fear there is a gulf between those who grasp the importance of macroeconomics and those who don’t. Economists are easy targets these days, partly because they have allowed themselves to be judged too much by their forecasting abilities (which leave a lot to be desired) and partly because a particular branch of the profession took a wrong turning and contributed, with certain ill-founded theories, to the financial crisis. But give me economists every time to the kind of… Read more »
I recommend Austrian Economics for the cast of Keynesians.
“Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem.
I think its a good idea . I recieved a cheque from the Australian government for $900 and so did every Australian during the GFC . However people are saving / hoarding and paying down debt out of fear and a total lack of faith in the political establishment . There is no leadership and nobody that even seems to know what they are talking about . That bizare event between Peter Mathews and Frank Fahey was like something out of father Ted . These guys are just completly out of their depth . There is not even one of… Read more »
Re tax individualization, the rebound happens when one of the couple loses their job.
DMcW is really scrapping the bottom of the barrel here. Spending more …save less , well I am a saver and it is the one thing that makes me sleep well at night. Saying we must spend more to get out of this mess is just stupid. We must deleverage yes spend less and pay down the debts they won’t just go away. DMcW is becoming increasingly desperate in his ideas to solve our financial mess. We are like a company making losses and with big debts. We must cut costs to make us profitable again and then pay down… Read more »
David, I’m considering voting Sinn Fein in the next election, and this is something I have never even considered before. Why? They are the only party with a pair of cochones who do not sign up to the cosy consensus of a reduction to 3% by 2014. Why don’t we tell the ECB to go stick it? They know it took 2 to tango, they lent the money to us in a very irresponsible fashion. Why should we just lie over a barrel and take what punishment they think is necessary? Here’s my brief analysis of how I will vote;… Read more »
Increase taxes and you decrease Economic activity.
NEWS JUST IN
Every household in Ireland is being billed today for c. â‚¬300 for the continued Anglo bailout.
Probably RTE will report after the event.
Regardless of your feelings towards free market economics, to cushion the consequences of bad decisions or insulate risk takers from negative outcomes amounts to giving that particular economic system a lobotomy. All the systematic intelligence resides in the pain aversion. This could account for the almost unbelievable lack of intelligence displayed by our key market participants during the boom. If you know you can’t really loose why should you put any effort into the bet selection. Just get them out there as large and as fast as you can. All that being said radical and lateral actions such as those… Read more »
Elsevier in Shannon : This company has announced it is closing after 30 years trading .RTE interviewed the Managing Director and World Group Operation Director of Reeds Elsevier ( stock quoted company )and what he said would embarass the government .It was not broadcasted …so more censorship in our national media system.
Folks, Have a look at this; I did not see or hear anything in the news today about it:
“Anglo Irish Launches Exchange Offer: Sub Debt Holders To Receive 20% On Existing Holdings”
Here we go. Quit the yapping. All the crew are at this and it will be big. It’s a big ask to attend the full show but we need to be here at some point. Study the logistical implications and decide when would be the best night for a “sleepover”. High time we all had a pint together anyway.
Did anyone just watch the farce at the end of Prime Time? 8 billion on a transport project that will benefit a few hundred thousand people? Have they lost the plot, cut that one project, take the money and you have your 6 billion in cuts and 2 billion for employment stimulus, does Dublin really need a metro? Paddy Power are betting that construction on Dublin’s Metro North will begin on schedule next year and offer the following on the end cost: Metro North final cost 9/2 Under â‚¬5 billion 15/8 â‚¬5 billion to â‚¬5.99 billion 11/4 â‚¬6 billion to… Read more »
In its 10 years in operation, the Office of the Director of Corporate Enforcment (ODCE) has never secured a conviction.
“”A field study by the Department of the Environment, Heritage and Local Government has found 2,800 so-called Ghost Estates around Ireland amounting to around 179,273 partially built or unoccupied homes lying idle. There are 78,195 dwellings in the developments surveyed that are complete and occupied and 23,250 dwellings are complete and vacant, the survey found. The survey found that there are 9976 dwellings that are near complete and 9,854 dwellings are at various early stages of construction activity from site clearance, foundations up to wall plate level. There is planning permission for a further estimated 58,025 dwellings that have not… Read more »
Sorry if that has been posted already, no time to read entire thread at the moment.
The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.
Of course, beyond any doubts, not a single irish politician and/or servant could possibly have known about this and a ton of more scams…. of course!
Great performance by Sommerville tonight on Vincent Browne’s show tonight. Yeah, that conference call by Lenny a few weeks back to an audience of 250 bondholders, Lenny was asked how will Ireland prevent foreign depositors withdrawing their money from Irish banks? His response is, they won’t, Ireland’s an Island. Now, Lenny, the time for cracking jokes has long passed. Does Lenny think Northern Ireland no longer shares a border with the Republic? Does Lenny think Electronic Fund Transfer can be shutdown by the Irish Government? We’re in the shit because of you and your fellow FF shysters! Do the decent… Read more »
Are the youth of Ireland much better off as compared to the French youth, even though there are nearly half million unemployed. Why are they prepared to take so much crap. Anyone got any views.
I think you missed my point, or perhaps I didnot put it well.
I mean the Irish youth at home put up with more crap than their French counterparts, regarding their treatment by the Irish Government. If you look, the French did not put up with raising the pension age.
I see no discontent in Ireland, where fare worse is happening to their future.
Its because the Irish are indentured peasant slaves to their gombeen masters and protest only occurs where people believe they can bring about change.
The subjugated lemmmings in this country never had that, it was indocrinated out of them by the catholic church and the gombeen slipmickery of the Fianna Fail ruling class.
Who have created one lemming run after another including emigration for those who question or want to think for themselves since the foundation of this Banana Republic Septic Isle
plus Ã§a change, plus c’est la mÃªme chose
What frightens me the most in recent weeks is the big come down many leaders in Irish society have communicated relating to the irish economy , budgetery expectations , various failures in government policies , the pontificating ministers genuflecting in front of cameras , the greater sense of anger and dispair from Irish programme presenters on rte and sniffing the interviewee ,the recent ESRI come down of economic performance expectations ( gov puppets) it is just a Free Fall as I see it now . No one absolutely ….NO ONE KNOWS what is going to happen next or Where we… Read more »
David had a similar proposal back in Jan 2009: http://www.davidmcwilliams.ie/2009/01/28/a-mortgage-plan-that-will-save-a-whole-generation I think people might be tempted to think that he is rolling ideas off the conveyor belt but I think his position has been pretty consistent. While I think I’ve learned a lot over the last 3 years or so about economics and I can now follow all the economists’ arguments pretty well (and see the flaws in those coming from some politicians and journalists) I am far from being able to critique them, so I can’t really say much about the practical end of what is proposed. I just… Read more »
Someone else isn’t happy………
“O’Connell was a Promethean figure who changed forever the way civil rights could be achieved. He was no coward and he was no cheap imitator. Sadly, the same cannot be said for RTÃ‰.”
A good article which points out the lack of thought in the “slash and burn” policy. Unfortunately, I still believe it all comes down to the Euro. We can’t fix problems that originated with joining the Euro without going back to our own currency. Currency is in short supply and will continue to be so long as we have no control over it. Even if this solution were to somehow recover some growth it would only be temporary because inflation cannot be controlled. Runaway deflation would be turned to runaway inflation (where we were in the boom). The problem starts… Read more »