Good morning and Happy New Year. I hope your Christmas went well and the virtuous resolutions are still intact after day one. This week, let’s have a look at the international factors that will dominate the global economy in 2013 before looking at the main issues likely to influence Ireland. This isn’t a forecast, rather an assessment of the forces that will emerge as pivotal in the path of the economy.
For the first time in a long time we kick off with Japan. For so long the sick man of the global economy, having suffered the missing decade or two following its property crash, Japan will have a disproportionate impact on the world economy via the financial markets this year. The news reflects the impact of political change in Japan and the fact the economy is still in the doldrums.
Unnoticed in this part of the world over the Christmas period are the moves by the new Prime Minister Shinzo Abe, who said this week that he wanted to push up the target rate of inflation in Japan. He wants to generate inflation over and above the rate that the central bank is happy with. Why might he do this? Surely that sounds wrong?
Well, not if the people in Japan are still saving too much of their income because they believe prices will fall next year. As they are caught in a deflationary frame of mind, they react unusually to retailers dropping prices to coax people to spend. Because they believe prices will keep falling, the very act of cutting prices makes them postpone rather than bring forward spending. The only way to break this deflationary psychology is to officially increase the target rate of inflation.
How do you do this? You adopt your own version of quantitative easing to infinity and beyond. So you force the central bank to buy up all sorts of assets from the banks, pumping money into the economy and not stopping until the price of goods in the shops starts to rise, not fall. This is what Mr Abe has said he is going to do.
Now what does this mean for Japanese interest rates and the yen? This is where events in Tokyo have an impact here. As the yen falls because Japan is printing money hand over fist and Japanese interest rates fall for the same reason, the global casino that is the financial markets will obviously want to borrow in yen and then place bets all over the world with this money. The more the yen falls, the less these guys will have to pay back next year because they are borrowing in a currency that is falling. This is likely to lead to another “carry trade” opportunity for investors to borrow at ultra cheap rates and buy up assets outside Japan.
This has huge implications for large infrastructural projects outside Japan and in Europe in particular — and maybe in Ireland, if we have any such projects. So, for example, if our country was to try in the next few years to finance, maybe energy projects in whatever technology we decided was appropriate, a trip to Japan might be helpful in this environment. Thus the global carry trade orchestrated by Japan might have positive implications for large projects in Ireland, if we get the right type of advice.
The next big issue in the global economy is really a less aggressive version of the Japanese carry trade. One thing is almost certain next year and that is that the era of very low interest rates will remain. In the US, Europe and the UK, mega low interest rates will allow the destroyed balance sheets to be gradually nursed back to health, but without economic growth lots of restructuring will be needed.
THIS brings us back to Ireland and the place I term Trackerville — the ticking, financial, social and political time bomb which will determine the next election.
Trackerville is a place that knows no county boundaries. It is a vast swathe of thousands of starter homes financed by tracker mortgages, built at the height of the boom, existing in the precarious twilight world between huge loans that can only eventually go up in cost and depleted take-home incomes that can only decline.
Starting in the early 2000s, trackers spread though the country like a virus. The great Irish tracker pandemic was fuelled by people who were desperate to get on the housing ‘ladder’.
The figures for tracker mortgages are startling. There are about 400,000 tracker mortgages in Ireland. Trackers account for close to 60pc of the €26bn in residential loans issued by Permanent TSB. Just over half of AIB’s €27bn mortgage book is accounted for by trackers, as is a quarter of the €16bn lent by EBS. The prize for King of the Trackers goes to Bank of Ireland: tracker loans make up 62pc of its €28bn mortgage book.
The continuation of low interest rates this year means that hundreds of thousands of Irish people will continue to enjoy subsidised mortgages. But this situation is merely playing tricks on them because they are lulled into a false sense of security about their ability to pay these huge mortgage debts. As defaults rise around them — over 150,000 mortgages at this stage in Ireland — the residents of Trackerville are wrapped in financial cotton wool because their repayments are artificially low.
Over the next few years, as the global economy eventually recovers, the Germans will insist European interest rates are raised aggressively to reward its savers who are being punished now by excessively low rates that are in turn “rewarding” the debtors of Trackerville.
Over the business cycle, or the life of any loan, the pendulum of interest rates swings towards and away from the saver and the debtor at various times. When rates are low, the saver is punished; when rates rise, the opposite pertains.
Ireland’s mortgage debtors — particularly those in Trackerville — are right now at a stage where they are being rewarded (although it doesn’t feel like that). Imagine what it will be like when rates go up? A recovery in the global economy will trigger mass defaults here via higher interest rates. This is why a huge programme of debt restructuring should be top of the agenda for the Government’s EU presidency. The Government should reiterate to our partners that the moment interest rates rise, Ireland will be torpedoed below the water line.
Pointing this out when rates are low and looking for a solution is not economic opportunism, rather it sounds more like the height of prudence.
David McWilliams’ new book The Good Room is out now.
Japan – “For so long the sick man of the global economy…” “..they are caught in a deflationary frame of mind” First of all Japan is not in deflation nor it is in a sick state !!!!! Except if you are pure Keynesian and seeing GDP growth as pure measure of economic health ???? Despite conventional opinion, Japan’s economy has not been stagnant; it has in fact been growing in real terms although not in monetary terms. The crucial point is that monetary changes do not necessarily reflect real changes. Japan’s GDP growth has been slow because money-supply growth has… Read more »
I don’t think we will be going to Japan for cheap money, as the article suggests. the TPP is seeking to set up a bond market across asia (i attended one of the discussions), and that’s where any carry trade will / should go. bidding for the bonds from the developing nations in the region will drive up bond prices fast, so i don’t think there’s a good reason to expect that that money will come to Ireland. Frankly, cheap credit in China through a Japanese bond (or internediary firm that washes it of its Japaneseness) will be a surer… Read more »
This is a continuation of the policy adopted by all Central Banks to destroy savings.
Conicidentally I posted yesterday on elements of your post:
http://awakenlongford.wordpress.com/2013/01/02/god-do-you-ever-just-say-damn/
Any rise in interest rates will start a avalanche of default which will make the budget cuts being imposed look like small change.. we are on a hiding to nothing…
2013 will be seismic, and for all the wrong reasons!
My thoughts entirely. If the average tracker holder was using this breathing period to pay down his loan I would say hes laughing, however all the tracker holders I know are interest only at the momemt and the original loan effectively grows in out defaltionary economy.
Forget about Trackerville Kneel to Shinto Sunshine If every home borrower were able to change directly the currency of their home loan from Euros to Yen .They can benefit by : a) The almost permenent low Yen Interest rate ( outside the influence of the EU) : and b) Initially , from the reduction in the Yen/Euro Exchange rate . Invite Japanese Banks to lend to Ireland or insist that all Irish Banks under licence from The Minister to immediately offer to all Home Borrowers the option to change the currency of their house loans to Yen. This avoids the… Read more »
Happy New Year to all of you.
I wish you every success in your important projects in the year ahead.
For a really insightful view of the current global economic/financial quagmire, including some scary facts on Japan.
http://www.youtube.com/watch?v=JUc8-GUC1hY&feature=youtu.be
there is a way forward for Trackerville that fits the pattern of the EU to date and that is a) avoid debt default (mortal sin) b) kick the can REALLLLLLLLLLLLLLLLLLLLLLLLLLLLLLY far down the road (solution!) the powers that be bundle all existing mortages into a superfund that restructures the nominal value of the debt into a really long term bond, so the loans are “paid off”, but in future-time heavily inflated euros. This will be for al mortgages holders who want this “jubilee opportunity” to restrcute the mortage now. reduces the selling price of the house massively, but increases the… Read more »
David: In view of this your latest article do you still think that the Irish Government should press for a 400,000 tracker mortgages debt-for-equity-swap deal with the Troika during its Presidency, as you have repeatedly urged? Are you sure you have fully thought out your debt-for-equity suggestion? Can banks become both lenders and borrowers at the same time? Isn’t that what will happen in such a debt/equity deal? Also, how does a bank foreclose on itself? I am looking forward to your clarification as to how Irish banks, therefore Ireland, would benefit from a debt-for-equity deal when as you say… Read more »
David, 4.25% in July of 2008 was the recent high from the ECB and it has been going down ever since, how high to do you think the rate may go? 5 6 or even 7% or do you think 4.25%, given the lower wages is enough to tip it.
Ive done the math and believe 3% is the new tipping point but would like an opinion if possible.
subscribe.
Growing Debt , more unemployment, reduced wages, increased indirect taxes ,No lending to business , Immigration.A Government still promoting a failed policy of austerity,Banks now clearly in charge of Government policy in relation to how Bankers operate..with immunity.Reduced workers rights,Bankrupt Health care system,questionable Courts system in dealing with debt for private citizens. This years will be held in October…2 months earlier than usual , reducing Government “income” figures. Spiraling private health care costs.. A massive derivatives market with massive debt “floating” around the World…..America with no real solution to the “fiscal cliff” Our and many European Countries economies to contract… Read more »
Continued….Sorry..This years budget to be held in October, 2 months earlier than usual reducing Government income figures. Massive debt bonds due for renegotiation around Several Countries in Europe.Solving Debt with more debt….still impossible. Spiraling private health care costs So with a economy in recession…a falling workforce with reduced wages and increased costs..reduced exports.Recovery..! next year or the year after..? FFS A mortgage crisis spinning out of control & many S.M.Es to close between now and March…let me be clear..THEIR IS NO RECOVERY..NO SOLUTIONS PUT FORWARD TO BRING ABOUT RECOVERY…….What about the bubble that is the bond market..? Eamonn Gilmore interviewed… Read more »
Very informative and interesting article David. From an Irish perspective, the key phrases for me are: “if we get the right type of advice” and… “Pointing this out when rates are low and looking for a solution is not economic opportunism, rather it sounds more like the height of prudence”. You are well qualified to give the right type of advice, as are several others and you’ve been pointing out the bleedin’ obvious for years on end with no notice taken, except for one shameful occasion when you made a useful suggestion which was bastardized for the benefit of the… Read more »
I have read the article. And I disagree on one assumption. The assumption that interest rates will remain low. In his book “The Ascent of Money”, Prof. Neil Ferguson, makes the point that underpining the entire financial market iss the bond market. It is much larger than the stock market. And it funds state borrowin, and loans to perceived stronger entities. The bond market, makes an assessment of risk, and this influences the interest rate that it settles. The central bankers are setting prices in concert. This means that their primary objective has consensus approval. And that approval points to… Read more »
An article from John Gray that is a few months old but still relevant, pertaining to the Euro, other currencies, Europe, Asia, social unrest, extremism and inflation etc.
http://www.guardian.co.uk/commentisfree/2012/oct/17/europe-sinister-currency-elites-eurozone
“However one views the nation state — and I am no great fan — it has proved to be the upper limit of democratic accountability”
Premier Shenzo Abe is to spend up to one trillion yen buying up factories and machinery, which are in trouble, in order to force the pace of investment. They will then be leased back to the firms. It may even violate World Trade Organisation rules on subsidies He has also set an exchange range target of 90 yen to the dollar, instructing the Bank of Japan to drive down the yen with mass purchases of foreign bonds along lines pioneered by the Swiss. Yen devaluation is a complex story. It appreciated by over 25pc against the dollar between mid—2009 and… Read more »
Buying up toxic assets, loading that debt onto the physical economy is what the ECB and FED are doing. Both have failed utterly. Trichet lets the cat out of the bag: Two Years Later, Trichet Admits that EIR Was Right: The ECB Is a Bad Bank Jan. 2, 2013 (EIRNS) — Former ECB President Jean-Claude Trichet warned in an interview with CNBC on Dec. 21, that the ECB and other central banks’ balance sheets are “profoundly abnormal.” Thus, Trichet has admitted what he officially denied on at least two occasions while he was ECB president: first, in January 2010, answering… Read more »
Enterprise Ireland spokesperson on 6.01 news…”Ireland is now a growing economy,job losses falling,Companies now investing in Ireland…even said we have turned the corner”………
David davenpower on RTE News just said deficit down because Government did not have to pay “big promissory note last year”………….!!!
Interesting article in many ways. Firstly we have the theme that Japanese people are suffering from a “deflationary psychology” which prevents them from purchasing goods because prices are falling. But is this actually the way consumers actually behave? If we look at the high technology market of mobile phones, laptops, mini pads, tv’s etc this does not actually seem to be the case. Every year the prices of these items fall yet people still are spending heavily on these items. When the IPhone 5 recently came out the price of the IPhone 4 dropped by 100 euro straight away. Yet… Read more »
In March of 2012 the government announced a deal to defer the payment of the 3.06 billion promissory note due to bondholder . The promissory note was swapped for a long-term government bond which was funded initially by the national asset management agency, before it was cleared by Bank of Ireland shareholders , the promissory note was changed to a long term government bond. This was cleared by a general meeting of the B of I . We the people, who are told to pay for this were not consulted. My understanding is that the interest rate on this NOW… Read more »
Its a bit off the point, but the bank bailout cost the state 40% of GDP and the banking system “paid” for this guarantee for 4 years with fees. Now they are coming off the guarantee in June and will stop paying fees. I can’t understand why are they not going to pay penalties for decades to come. Otherwise it seems like a slap on the wrist. Are the banks and the state interwined? Even an ordinary Joe Soap can see through this game of charades. Personally I think interest rates will need be kept low to avoid a mass… Read more »
Thanks paddythe pig,
Glad to get that info.
Just a slight correction on the description of how the money supply increases. If the Bank of Japan wants to increase the money supply it will ”buy up all sorts of assets from the banks, pumping money into the economy” but this is too simplified a description of what happens. First of all, the Bank of Japan can only create reserve-account-money which is the type of money that banks use to settle payments between each other. The banks can’t lend this money or use it to buy anything from anyone other than another bank. For money to enter the economy… Read more »
Happy New Year David and same to everyone This article is far too technical for me and I am out of my league but I have a couple of point to raise The population of Japan is reducing fast. Any ideas to reasons why? 85% of Japanese people want nothing to do with nuclear power yet the world’s media would have us believe the complete opposite The Japs might have a lot of savings and balls but they were given a hard lesson on the sands of Owo Jimo Personally I don’t like the bastards one little bit. Some of… Read more »
Japan Times
Realizing the national condition
http://www.japantimes.co.jp/text/rc20130103a1.html
Report from http://www.lemetropolecafe.com
Is the German economy this good? If so will Euro zone interest rates start to rise to cool the German economy?
Germans optimistic about 2013: The FT noted that despite the spillover effects of the Eurozone debt crisis, the latest poll from Ernst & Young published on Wednesday showed that more than three-quarters of German consumers feel optimistic about the coming year. The paper said that confidence in the German labor market (where unemployment is at the lowest level in 20 years) was the main driver behind the bullish sentiment
http://vimeo.com/55128811#
This is one of the reasons RR6 is misguided by saying the USA is walking the green mile.
Trackerville on the other hand may be doing the green mile, as is this current Gubmnt.
Check it out and get inspired.
Latent Chaos
http://www.independent.ie/business/irish/central-bank-finds-major-problems-with-stockbrokers-3342278.html
Where does money come from?
http://www.youtube.com/watch?v=o-PXRkJxV3A
This is the game the ECB and Japan are obviously being “invited” to join : Helicopter Money : Just look at what the Federal Reserve under Bernanke is doing. At the last FOMC meeting, Bernanke announced QE4. The Fed is now purchasing $85 billion a month in U.S. Treasuries from the banks, and an additional $40 billion a month in asset-backed securities. At this rate, the Fed is bailing out the too-big-to-fail banks at a rate of $1.5 trillion a year, using new helicopter money with nothing backing it up. After four more years of Obama, this alone would add… Read more »
The Pecora Commission in the 1930’s opened the door for the Glaas-Steagall reform. More Pecora Potential in Germany; Lawsuits Against Transatlantic Mega-Banks, Filed in New York State Jan. 3, 2013 (EIRNS)–DZ Bank and HSH Nordbank have gone to court against several top banks in the New York State Supreme Court. On Friday, Dec. 31, 2012, DZ Bank sued Citigroup and RBS for fraud in selling mortgage securities in the range of EU485 million. HSH Nordbank AG filed suit against UBS AG and RBS, related to mortgage securities in the range of $204 million. Both plaintiff banks said that credits, which… Read more »
So where does money come from anyway?
http://www.newstalk.ie/So-where-does-money-come-from-anyway
Money can only be about trust Basing money on earthly corpus stuff is nonsense’s – if the Maldives suddenly finds 100s of tons of gold this small island then dictates to the world and the result is inevitable… it won’t just the Argentinians that will be claiming the Maldives Money based on stuff breeds insecurity, insecurity beads fear – fear breads wars Tracker /yields /bonds /hedges /pensions/paddy power… this is gambling – never give money to alcoholics or gamblers- – the likes of George Soros calls himself philanthropic, he takes money by gambling on other peoples lively hoods and directs… Read more »
Malvinas Argentinas not the Maldives
“Paul Krugman Finds Tim Geithner’s Resignation ‘Reassuring'”
Professor Polleit explains why fiat currency systems produce ‘collective corruption’ Submitted by cpowell on 05:02PM ET Friday, January 4, 2013. Section: Daily Dispatches 8p ET Friday, January 4, 2012 Dear Friend of GATA and Gold: An interview done this week by GoldMoney’s Andy Duncan with the German economics professor Thorsten Polleit, in which the professor explains why fiat currency systems lead to “collective corruption,” delighted your secretary/treasurer because it reminded him of something a high school graduate said at GATA’s Washington conference in 2008 (http://www.gata.org/node/6242): “The problem with central banking has been mainly the old problem of power — it… Read more »
http://www.tonybrogan.com/wp-admin/post.php?post=14&action=edit
If you are not buying Gold and Silver, Don’t blame me by Mark Lundeen
Very insiteful essay with supporting graphs.
Posted at http://www.tonybrogan.com
The Central Banks by the Daily Bell posted at
http://www.tonybrogan.com
Submarine Torpedos This article is written with a pecerption viewpoint located under water .Its scope can rise when near the surface and only then can it see what might be moving nearby .Even that is limited because it is scared sh*t going to the surface doing so in case it encounters opposition. Its already too late if that happens and the remaining life of the occupants is where they are …’underwater’. Getting to the surface unscathed is an extraordinary achievement and being able to locate an enemy is just egg on toast .This experience is quiet often hugely under-valued and… Read more »
Good Morning
A quote…….”The doors of the nations which are closed must be battered down………..Concessions obtained by Financiers must be safeguarded by ministers of state , even if the sovereignty of unwilling nations be outraged in the process”….unquote
Princeton University President & former governor of New Jersey Mr Woodrow Wilson in 1907.
Elected President of the United States in 1912
thoughts ?
RR6
Bad Day for the Banksters and Their Fellow Travellers Despite the seemingly unlimited human sacrifices willingly offered to the banking gods by stupid and morally bankrupt governments, notably our own, the banksters and their fellow travellers continue apace with their gambling and wanton criminality, bringing us ever closer to a complete financial and economic collapse. Three news articles from the past 24 hours illustrate the point and make clear the need for an immediate Glass Steagall implementation across the entire trans-Atlantic financial system. A new Pecora Commission is also urgently needed and that body will certainly have its hands full… Read more »
Bill Gross making commentary concerning the Bond market
http://www.chicagotribune.com/business/sns-rt-us-investing-pimcobre9020gs-20130103,0,6384605.story
The bond market is getting nervous.
Japan, kicking the can down the road, and now running out of boot to kick the can.
http://www.spiegel.de/international/world/massive-japanese-sovereign-debt-could-become-global-problem-a-875641.html
The promissory notes are an accounting instrument adopted by an insolvent country as a means of getting the sufficient funds to bail out an insolvent bank. These notes have been the subject of a massive amount of misinformation and spin. This is an attempt to excuse the inexcusable. Example one – Despite prominent politicians suggesting the notes were not paid last year the truth is that they were paid. http://brianmlucey.wordpress.com/2012/12/17/are-ministers-deceiving-themselves-or-deceiving-us-on-the-anglo-promissory-notes/ The notion of the “true cost” of the bonds is laughable. Who knows how many twists and turns are left in the sorry tale of the promissory notes.However this much… Read more »
Bad Day for the Banksters and Their Fellow Travellers Despite the seemingly unlimited human sacrifices willingly offered to the banking gods by stupid and morally bankrupt governments, notably our own, the banksters and their fellow travellers continue apace with their gambling and wanton criminality, bringing us ever closer to a complete financial and economic collapse. Three news articles from the past 24 hours illustrate the point and make clear the need for an immediate Glass Steagall implementation across the entire trans-Atlantic financial system. A new Pecora Commission is also urgently needed and that body will certainly have its hands full… Read more »
David, The Irish Government are gonna do diddley squat. They prefer to do nothing. You have to get to grips with this mentality. Helping out young people goes against the grain of middle aged middle class Ireland. Young people are there to be despised and burdened and lab rats to undergo as much suffering as possible – that’s the view from Official Ireland. You have a lot of patience to be still living and working in Ireland. Lunatic Asylum comes to mind when I think of a description to describe the place I call home. Having said that, the pubs… Read more »
Good article for marketers
“so few websites aggressively moderate their comments threads, it is in their financial interest to have as incendiary a thread as possible, all the better if the original article is relatively innocuous as that allows the website to say, “hey, don’t blame us for lowering the tone, it’s those damn internet users and their trollish behaviour”
http://www.boomingback.org/2013/01/the-true-value-of-john-waters.html
Hi Tony, No need to apologise. I don’t think either of us are going to convince the other so I’d imagine we’re going to conclude with a mutual respect for each other’s dislike of the current system. That being said my responses to your points are below. NO VERY LITTLE. MINING PROVIDES LESS THAN A 2% INCREASE IN SUPPLY OF THE AMOUNT HELD BY CENTRAL BANKS. AND AROUND HALF A PERCENT PA OF THE TOTAL AMOUNT OF GOLD HELD EVERYWHERE. I accept point 1 above is weak when the commodity in question is gold. The amount of it can’t fluctuate… Read more »