On Monday afternoon Killiney Hill was full of delighted children, squealing at the sight of snow. Many had never seen snow before. The children screamed as they threw snowballs and rocketed down the side of the hill on makeshift sledges.
However, the most striking aspect of the scene was not the unexpected snowfall and the dozens of children, but the huge numbers of fathers with them.
These men, all in their prime with young families, mortgages and up until recently careers, are the newly unemployed face of middle class Ireland. If something is not done quickly, their number will swell to hundreds of thousands.
While much of the media attention has focussed on partnership, the most terrifying news this week was the collapse in car sales.
In January, car sales fell by 67pc from 47,609 to 25,929. The Irish car industry is going bust. The economy is seizing up. No-one has any cash and companies without cash-flow are going bust. This week alone three friends of mine told me they are going out of business.
While the Government and the social partners play musical chairs in Government Buildings, out in the real world, the Irish economy is moving steadily towards bankruptcy.
No-one in the partnership charade seems to realise that to pay the bills, we have to generate income. We only generate income if we can sell our goods for a profit and with some of this profit pay tax. If this is not happening or if we can’t sell, either at home or internationally, the State runs out of money and we default. This is a process that is well under way here and no amount of interviews with the Taoiseach will obscure this.
Let us be clear what is happening here and why this has got nothing to do with a pay round. A pay round is based on the old economic of inflation.
The dynamic is grounded on the premise of keeping costs down, so that the difference between costs and final prices is sufficient to make decent profit. But this misdiagnoses our problem. Ireland’s problem is that a monumental housing and debt bubble has just burst. This has causing the forced sale of assets which has caused an enormous contraction in the nation’s perceived wealth.
Deflation takes hold and it causes people and companies to go bankrupt which leads to the banking system imploding and the economy moves into a depression. As people feel that deflation is around the corner, they put off spending until the future when they feel they will get a lower price. So how do we get out of this?
The first step in getting out of the problem is realising what your ailment is. Old-fashioned economics tells us that when the price of something falls, the demand rises. Well this is not always the case here. In fact, these days because the country is gripped with fear, when the price of something falls, the demand does too. To understand this better, let’s construct a little picture of what is going on in the economy.
Let’s be trivial and call the dilemma of the Irish economy, the ‘Midnight at the Olympia’ model of deflation. Do you remember Midnight at the Olympia? Cast your mind back to the early to mid-1990s before the pub licences were liberalised. One of the few places you could get a late drink was Midnight at the Olympia where you could pay a tenner and get two extra hours drinking if you could bear listening to the likes of Smokey.
So there you are, pint in hand sitting down happily with a mate. Just then the bloke in front of you stands up. You have to stand up. The bloke in front of you puts his girlfriend on his shoulders and you now have a 14-foot Triffid waving wildly in front of you.
A girl beside you asks if she can get on your shoulders. You now have a complete stranger sitting on you, your pint is spilling all over the place, you can’t see the accursed stage and all you came for was a quiet drink.
I could go on, but you get the picture. The minute the bloke in front of you stood up, you were doomed. He did not realise that when he stood up, he forced you to react. In fact he was totally unaware of your presence at all.
Then you stood up and this had a negative impact on a person two rows back and so on. Deflation works in precisely the same way. You decide not to buy a car because you think prices will fall and, unbeknownst to yourself, your decision affects someone else, who because you won’t buy concludes that car prices will fall further and he doesn’t buy.
This takes hold all over the economy and very soon the price of everything is falling. Like a theatre where everyone ends up standing because of the actions of one person, an economy can experience a reinforcing deflationary spiral as everyone pulls their horns in.
Economic insecurity and uncertainty works like a virus in a creche — once one child gets it, everyone does.
This is what is happening in Ireland and it threatens to overwhelm the Irish banks who will see a wave of defaults this year initially on mortgages but then on credit cards, car loans and all forms of short-term credit deals that propped up the bubble economy.
The problem is that the only way we can prevent the economy from contracting in a deflationary spiral is to engineer inflation by pumping money into society, dramatically easing credit conditions and forcing people to spend.
This means, when our banks are frozen in a zombie-like state, expanding government expenditure. Ireland has chosen to do the opposite and deflate into deflation. Expect more idle fathers on Killiney Hill and every other public space in the country as the Irish economy moves now into freefall.
Interesting article David. But whilst it is apparent that we have talked ourselves into a large part of the “Irish” take on the worldwide recession, what strategies would you suggest to get us lemmings out of it? I am not talking about the high level “expanding government expenditure”. What, in real terms, would you suggest? Going on a major infrastructure building programme? How about freezing prices at current levels to send out a signal that there is no better time to buy than now? Would this start people spending again? It appears to me that everyone is waiting to see… Read more »
Actually, car sales fell by 46% not 67%. The garages that are going bust because they are not selling new cars should turn their attention to hiring mechanics to fix older cars to get them through the MOT test. If that was a s stringent as in Northern Ireland, a lot of old jalopies would be off the road tomorrow. and folks would be obliged to by new replacements.
My initial reaction when I read this article was that is crazy not to believe that we need serious & sweeping cutbacks in the public sector. Then I thought about it, and began to see the deflationary argument that David is putting forward. It kind of makes sense. Now I’m torn. Thing is, Ireland is not like China or the US. Because our economy is so open, it doesn’t respond to giving domestic stimulas in the same way. Putting more money into people’s pockets won’t make too much difference. On the other hand, getting into a situation where we end… Read more »
But, did business owners hedge their bets on the economy only going one way, through over borrowing, and over expanding, did they take their eye off the ball, because many were too busy patting themselves on the back. Is this not why many of them are now folding ?. Where will this money come from, will the IMF have to step in ?.
Thanks.
The only way to counteract uncertainty is to provide some certainty! Obama understands that (and we live in hope that he will be successful) but our government and the UK governments do not. We get the sense they have the same level of fear and uncertainty that we do, so what ever they do, it doesn’t help. So who can give us the kind of quiet leadership that can calm a room of screaming kids? I don’t think it matters where they come from. It could be an individual or a group of people, they could be from business, politics,… Read more »
I’m a father of 5 living in Dublin and commuting to the UK to work but I came home to play with the kids in the snow, I haven’t lost my job yet. This thing about fathers without jobs brings to mind something that was bandied about in the early 80s even before the IBM PC, that was that computers would cause mass unemployment. I heard an estate agent talking on the phone in the snow yesterday, not sure if he was a father. He was talking to a potential client about a house and I wondered what his use… Read more »
Hi All
Just read this, in the Irish Times. I am blown away by the size of Ireland debt in comparison to other large countries like the US and Japan. How could this have happened?. No wonder Irish bonds are the riskiest in the EU. Are we potentially ruined for a couple of generations?.
http://www.irishtimes.com/newspaper/opinion/2009/0203/1232923383096.html
A) We don’t have the option of printing more money, that will require ECB agreement and they are more concerned with inflation, so we cant just inflate away the debts along with savings. Whether they are right or not is another question but hyperinflation cant be too nice as it seems to have left the same folk memory on the Germans as the famine did here. B) Realistically how much more can we borrow and for how long and where would that leave us.. They are not great options are they? At this point, it would be nice to be… Read more »
The Lucey-Gurdgiev article in the Irish Times yesterday gave the figure of 790billion for personal and corporate debt, excluding financial. Include financial and debt rises to 1594 billion. Government debt is 77billion, but all the media focus is on government. There is 300billion due for payment by July. The hard figures from the IMF tell the story. The Irish debt is one sixth of American debt, it is greater than the debt of Japan but Alan Ahearne believes we can restore competitiveness by cutting incomes so we will export our way out of this pit when the upturn comes, whenever… Read more »
Unemployment increased by 36,000 last month!.At this rate there will be 600,000 on the dole by year end.Iceland is in much better shape!.How come unemployment in the 6 counties is only 40,000?.At this rate there will be more people unemployed in Ireland than Australia (population 21 million).This is madness.WILL THE LAST PERSON TO EMIGRATE SWITCH OUT THE LIGHTS?.Cheers.
David, With 33,000 added to the Live Register in January, the news is very grim. That is the monthly equivalent of 2.5m in the US, which would create a firestorm. http://www.finfacts.ie/irishfinancenews/article_1015863.shtml As for ramping up public spending, before reforms and paring costs to sustainable levels, wouldn’t it be akin to giving an alcoholic a crate of whiskey on condition that he stops drinking? Besides, who is going to fund it if we lose the confidence of int. investors? Pressure should be put on Gormley to force a general election in order to bring focus to the political debate. It would… Read more »
Why no apology from fitzie?.
With the economy the way it is and the weather we have been having it is looking more and more like Iceland everyday. To date, it appears that everything that has been attempted (mostly in a lack-lustre fashion) by the government has not contained the problem. It is time for a government of national unity that is not led by members of a select grouping of parties but instead draws-upon the best talents of all our people. It is time to have the likes of David in this government, taking the decisive actions needed to address this serious situation. We… Read more »
David, after being amazed by your ability to try and find silver linings in this mess, in a number of your articles, it seems, by the tone of this article, you are seeing no light at the end of the tunnel. It appears that this governments stupidity has killed the last sense of hope you had. I think your next article should examine what actually happens when the IMF pull the plug on us? Will the money we have in our bank accounts now worthless? Should we turn up to work the following morning after this country is announced to… Read more »
To any impartial intelligent observer The “Celtic Tiger” essentially was 1.A Credit fueled Housing/Construction Facade 2.An Unprecedented expansion of Public Expenditure with disproportionately lower returns for each tax euro spent 3.Export of multinational products that were shipped/value added through Ireland. 4.Expanded Service Industry supporting all of the above activity. Ireland 2009 Economic Vacuum in Place of 1. Severe Contractions in place of 2, 3 and 4. Unprecedented Job Loss’s as a result of all the above activity. Any independent intelligent observer can see that the Government are responsible and should be held responsible for 1 and 2 above. Unfortunately due… Read more »
Its over lads we are finished the IMF will have to be called. did any one watch pimetime last night did you hear dermot ahern this man has not got a clue. did anyone see mansergh on TV3, a bizzare youtube moment the irish people will watch in the years to come in london bedsits we are finished the cuts that have been made will soon be wiped out by a rise in the social welfare payments But there is more, much more to come we have only now reached the start we are FUBARED Ireland could end up like… Read more »
I saw Ahern on Primetime, he made no sense, and left me very down at the end of a pointless program. I realised just how out of touch with reality the Government are. But, I missed Mensergh on TV3.
Cowen says 400,000 signing on by year’s end, and considering his record of projections we can add 15% to this, and watch the malign cycle spin at 50,000 euro per second down the toilet as revenues collapse and expenditure rockets for social welfare. Long term, indefinite term, post apocalypse term. The private debt of 1594 billion is sinking the country, not government debt, not yet, and it won’t be allowed as no one will lend to the government or the banks for years until the globe adjusts to the post Anglo-American investment banking model. The new realities of the BRIC… Read more »
David, Hello from New York! I just finished your book “The Generation Game” this morning and it made for great reading. I’m a little late in reading it I know. Upon finishing the book I was left with a great sense of optimism which I’m afraid has been slipping bit by bit from your weekly articles. What a difference two years can make, eh? From what friends tell me at home, what I see in New York and the tone of your most recent articles I have become somewhat pessimistic. Many Irish immigrants in New York tell me it’s worse… Read more »
1744euro per second for a year is 55 billion, that’s a lot of people throwing cents into the wishing well. As much hope as we have, and by similar magical thinking. Over 150 million a day at that rate. Department of Finance and analysts calculating Ireland’s prospects know the variables in the storm of unemployment, rising Government liabilities including guarantees to banks, and the protectionist retrenchment of the global economy. Bad news at Blackrock, where is Spencer Tracy when we need him?
barack obama is to announce today that the CEO of any bank getting bail out money is to get compensation, ie salary and pay of no more than 500k USD a year, thats about 400k in euro. As the government has bailed out the two untouchables in AIB and BOI , lets forget about the Titanic on Stephens Green (Anglo) Will Cowen enforce such restricitions on the pay on these boys. AIB Capital Markets paid out bonuses to staff on friday and no word yet as to what the top cop Colm Doherty was given , last year he was… Read more »
update: Obama hits the boys on wall street , like the way the market has hit bank shares, knocked their pay down by 75-80% The boys on Wall Street will have to formally disclose every little perk they get… The American tax payer is going to see where its money is being spent. In good auld Eire, were we back slap each other and put our heads in the sand and do the three monkeys, see no evil, hear no evil do no evil. Good auld Big Bad Brian Cowen wants the Bankers to take 25% cut…. Yep, he isnt… Read more »
I understand what you’re saying about deflation. Interestingly Philip Lane (TCD economist) has suggested that a fall in prices in Ireland will constitute disinflation rather than deflation due to our membership of the euro. His http://www.irisheconomy.ie blog is useful on this. I think we need a devaluation and that can only come about through a fall in prices and wages, wages first!
David, I don’t suppose you’ll lose much sleep, but having read todays piece I am considering unloading your RSS feed from my list. I am not a economist, which is why, up to now, I have read your pieces with great interest, they spoke sense. However, even my risible level of economic knowledge allows me to understand that the present crisis will ENSURE that people in Ireland won’t buy things, especially cars. Why? a) because they are overpriced and b) in the crisis ambience it is a ‘put it off’ item, especially if it is a company vehicle (except of… Read more »
The experts ….
http://www.flickr.com/photos/woesinger/2315930914/in/set-72157594452823682/
Do I take it from this Article that there is no longer a Midnight at the Olympia? I used to have great fun their.
I was reading Paul Krugman’s blog recently (Winner of this years Nobel Prize for economics), and inspite of lip service paid to ‘structural issues’, it seems to me that the entire effort is in looking for a cunning slight of hand, that will set us all in the road to riches. Do we reflate, or do we deflate? The arguments are raging. We hear about Keynes’s ‘paradox of thrift’ – David describes it very nicely above – if people stop spending, then people lose their jobs as a result, so in turn stop spending, and so on, and so on.… Read more »
I wonder what PS workers feel about this:
http://www.independent.ie/national-news/false-claims-help-bill-for-asylum-seekers-to-hit-8364300m-1366632.html
David, You say “So there you are, pint in hand sitting down happily with a mate. Just then the bloke in front of you stands up. You have to stand up. The bloke in front of you puts his girlfriend on his shoulders and you now have a 14-foot Triffid waving wildly in front of you.” So the problem starts with the guy in front of you. What should you do? Tap him on the shoulder and tell him to sit back down again. Problem solved. If he refuses, explain to him the consequences for everyone. If he still refuses,… Read more »
Increasing public spending so that Ireland builds an infrastructure to last sounds like a great idea in theory, but the money would most likely go through the usual black holes. And who would lend it to us? What people looking for a national executive need to remember is that for every Beverley Flynn or Michael Lowry there are tens of thousands of people voting them in. Even if Ireland were to have a national executive, do you think these people are going to vote for a party which works for everyone or the party which works for them? Local politicians… Read more »
I am afraid Brian Cowen does not have the balls to do that which needs to be done. He is fiddling while Rome burns. Obviously Government spending is massively out of sync with revenues and equally obviously if we do not reduce spending our creditors will think Ireland is a risky bet and may stop lending to us. Let us compare what we ‘give’ ourselves vis-a-vis the UK Unemployment benefit for a single person is about 210 euro — in N Ireland it is about £60 If you have 5 children in Ireland you get €941 per month in children’s… Read more »
I am a dreaded public servant. I joined at a salary which I could not negotiate despite over 10 years’ private sector experience (value for money at least for the public, way-hey, but hardly of the private sector spirit!). A school leaver would have got the same rate but probably not got the job, it was my decision to go “public sector”, so no regrets! The consolation was in a few years in the job, with increments I would be at a credible level and by retirement I should have been ok. I base this on buying back years (AVCS),… Read more »
Furrylugs, recant and return, please. We need you.
begekel and Lesley: You are welcome. Your contributions based on fact, observation and experience, with only minor grumbles about the government, provide insights that brings this blog to life again. Those who have lived through the last 15 years in Ireland have marveled at what was happening, and wondered who was paying for it all, because it was patently obvious that it wasn’t money generated by the local economy. Yet a huge array of good quality houses, motor-ways and other permanent assets were built. They are a credit to all concerned and we should never forget that. Of course we… Read more »
36k joined the dole last month, but the media still put spin on it that’s it’s only 9% (of what!). That’s 320k people ! Not long ago this country employed 1 million. Brian Cowen said we still have ‘alot’ in employment. He announced today there is 1.8 million people in work, that’s down 15% from the high of 2.1 million! I believe this will head back towards 1.4 million workers as the economy is no bigger than the early 1990’s when you take out debt and big MNCs. There could be upwards of 500k on the dole very soon with… Read more »
ah Killiney Hill that brings me back to my days strolling through ould Dalkey but David I think your trips into the choclate factory and all those late dinner speaking events you have attended over the years is now in your latter years begining to affect your eye sight as the fathers you saw playing with the children were the public and civil servants who just took the day off under the excuse of the Heavy snow fall nothing to do with the melt down now happening out side of Dublin suburbs. Your allergies and smilies are becoming part of… Read more »
David > This is what is happening in Ireland and it threatens to overwhelm the Irish banks who will see a wave of defaults this year initially on mortgages but then on credit cards, car loans and all forms of short-term credit deals that propped up the bubble economy. This is becoming the problem that dare not speak its name. It was highlighted by Moody’s last week when they put us on credit watch and I’m sure it will be brought up again by which-ever rating agency decides to actually downgrade us in the next couple of weeks. So is… Read more »
Just when you think fatigue set in ,its time for a simple formula,and here’s one we prepared earlier. yd=C+I+G+X-M where yd is the national cake,aggregate demand gdp call it what you want. Its made up of (C) consumer spending/consumption whatever. (I) is private investment in buisness of all sorts. (G )is government spending from its tax take on various things. (X-M )is the difference between exports X and imports M. Now if I had a magic wand and made yd bigger what would it mean?. If i spread the money evenely accross all,consumers(C) would have more,there would be bigger investments(I)… Read more »
I’m starting to bore myself, but I’ll say it anyway: Then what? So, we get a bail out, adjust debts (without bankrupting the lenders), we get Merlin to magic away our financial problems, for the moment, I care not how. Then what? I could only find UK figures, but since 1999, full time retail employment has grown by about 3.3% a year, and part-time quite a bit faster. That means that the number of people working in shops has risen 40%+ in 10 years. Forget the executive nose massage companies, and the seething hordes of interior designers and freelance photographers,… Read more »
[…] David McWilliams has expressed concern about the risk of deflation in Ireland and recommends that we “engineer inflation by pumping money into society”: you can read his article here. […]
The government could use the taxpayers billions more fruitfully by offering free flights to the tourists to come to Ireland for the summer. At least it would generate some employment in the tourist industry and garner some taxable income.
My Midnights at the Olympia were altogether different David. I preferred the woman beside me to do her sitting on me *after* the gig, if you catch my drift. David> The problem is that the only way we can prevent the economy from contracting in a deflationary spiral is to engineer inflation by pumping money into society, dramatically easing credit conditions and forcing people to spend. Deflation can, if rapid, cause further stagnation as you point out. However, we do need the excessive costs to come out of our economy, and this, even if painful, IS whats needed to be… Read more »
Yeah Lorcan, Debt is the problem, it always has been and it always will be………. both for the individual and for a country… Sure credit is fantastic, but its a weapon that has to be handled very carefully. I know f all about economics but 2 things are very clear to me.. 1) the speed of our reaction to the downturn was dulled by excessive credit… Those in the know knew the game was up in spring 2006. ECB rates rose, banks did sell and leaseback deals, houses started to take a little longer to sell. But because credit was… Read more »
I agree with David about the fact that we are all standing up in the venue, but I don’t agree that it is necessarily because one man somewhere in the middle decided to stand up. There is definately a “let’s kick the cat” menatlity going on in Ireland at the moment, especially in relation to the motor industry. There is some kind of a perverse joy being taken by a lot of people when they hear of a business going under and in particular when that business happens to be a car dealer. I think the “them and us” undertone… Read more »
Goodness I had some of my best night’s ever at Midnight at the Olympia… I remember working at ‘Christmas Rocks’ and being on stage with Something Happens… and clapping my eyes on either the lead guitarist or the bass player…. me in a brief moment of groupiedom!!! And then another night watching the wonderful Crowded House… one of the best gigs I was ever at…. Ah Halycon days… or Hailikon Days as my dad heard a taxi driver say to him once….
Furrylugs have you abandoned us?
D
Furrylugs – a search party is looking for you ……we are unable to stitch a sentence together since you left on your space craft ……….have you lost your dun aengus readings ?
DMcW: “The problem is that the only way we can prevent the economy from contracting in a deflationary spiral is to engineer inflation by pumping money into society, dramatically easing credit conditions and forcing people to spend.” Well, there appears to be more than one way to skin that particular cat: http://www.independent.co.uk/news/business/news/entrepreneurs-seek-to-set-up-new-bank-to-bypass-crisis-1522242.html Although this kind of thing won’t help with the general economy, it has the potential to encourage exactly the type of entrepreneurship that the economy desperately needs in order to conduct a recovery. There is rather a lot of comment about what should be done, what could be… Read more »
Take a look at Mary Coughlan’s eyes in the latest picture from today’s Dail debate on the economy:
http://www.irishtimes.com/newspaper/breaking/2009/0205/breaking1.htm
I get the impression that there’s ‘nobody at home’.
That’s not good enough, Mary, you’re supposed to be helping get us out of this mess.
I for one see a bright side to this. This is an FF killer. It is an ould Irish attitudes killer. There is no emmigration escape valve.
The cold weather has another few weeks to go. Spring weather may bring a new growth of freash ideas.
Sorry I cannot be more concrete or helpful than that. The reports, news and analysis are now confirming THE worst fears.
BTW, who to say that the IMF will have any ability to do anything for us – we’ll just have to take our place in the queue.
Europes Growing Crisis Puts The FEDS at RISK
check the following now :
http://by106w.bay106.mail.live.com/mail/InboxLight.aspx?n=454960360