The other night, in Cork, I was chatting to a woman from Mayfield. Let’s call her May. She works in a clothes shop on Patrick Street, Cork’s main shopping street. Last Sunday, she worked all day on this prime retail thoroughfare, and guess how much she took in the till during the whole day? Well, a shop like this should be – andwas in the recent past – taking about â‚¬1,800-â‚¬2,000 on Sundays, around â‚¬6,000 on Saturdays and anywhere between â‚¬1,200 and â‚¬1,500 on weekdays. Last Sunday,May took in â‚¬60 for the entire day!
Although this example might be a tad extreme, the reality for retailers all over Ireland is one of collapsing demand. Strolling down Patrick Street last Friday morning, it was clear that everyone was struggling.Every shop I counted, from the top of Washington Street to the English market, had either ‘for sale’or ‘massive discounts’ signs on the window.This is what happens when the economy slumps.
The question that worriesMay is: what happens next? Whenwe discuss where the economy could go over the next five years,much of the discussion focuses on one of two possible outcomes: the economy will either growor it will contract.But there is another possible outcome.The economy might not growor contract; it might well stagnate. With the financial markets in turmoil everywhere and growth slowing massively all around the world, economists are mentioning the stagnation experience of Japan between 1990 and 2010 as a possibleblueprint for thewesternworld in the year ahead.
Having grown dramatically since the SecondWorldWar, Japanwent on a credit binge in the 1980s and then, following a dramatic property crash and asset price crash that destroyed its banks and its national balance sheet, Japan stagnated for a generation.The economy flatlined and the national debt exploded. One of the interesting things about the discourse among economists is the sense that what happened in Japanwas unique. It was not. In fact, economies stagnate all the time.There is nothing unprecedented about stagnation.Think about Ireland in the 1980s.
One of the most extraordinary things about the 1980s is that the Irish economy grew in nine out of the ten years of that decade.GNP fell only in one year -1986 – and even then, the fall was modest.However, for people living through it, the 1980s felt like a recession. Around 480,000 emigrated from Ireland, and thiswas in a decade when the economy actually grew 90 per cent of the time.That is what stagnation feels like, and it happens all the time all over the world.
Recent research by Goldman Sachs shows that long periods of stagnation – as happened in Ireland fromthe late 1970s to 1990 – are not so unusual.There have been 20 such episodes in the past century. Interestingly, stagnation often occurred in developed countries, rich countries, countries like Ireland. In all cases, these periods of stagnation are preceded byone of four types of crisis. The probability of stagnation increases dramatically if the country experiences either (1) a banking crisis, (2) a financial crashwith stock and asset prices falling significantly, (3) a currency crisis or (4) a war.
The stagnation is characterised by modest growth in the economy of around 1 per cent per annum. Inflation is low, and so are interest rates.However,because the economy has just experienced a crash of some sort, the balance sheet is destroyed by debt and actually needs jaunty levels of inflation towipe out the debt. Low interest rates don’t spur growth because there is toomuch debt. Unemployment in this scenario spikes upwards and stays abnormally high for long periods, leading tovery high levels of long-termunemployment – or structural unemployment, as economists often call it.
And, as anyone who has been looking for work knows, it is much easier to get a new jobwhen you have one.The longer you are out of the game, the harder it is to convince someone to take you on. House prices fall dramatically and don’t recover in the stagnating economy. They remain low for prolonged periods and, of course, the stock market gets hammered,which affects pensions.The reason pensions take a battering is that with very low interest rates, it is impossible to guarantee an easy yield.Think about it.
Take an example where the yield curve is upward sloping (as it iswhen an economy is growing and there is a bit of inflation in the system), short-term interest rates are 1 per cent,but long-terminterest rates are 6 per cent.Then it is easy for even a dozy fundmanager to generate 5 per cent for the pension fund by simply investing the pension at the long end. But if the economy is stagnant, interest rates will be very low and there will be no yield to generate the returns for pensions. This has massive ramifications for the unfunded pensions of huge semi-states and the public sector. If the economy hits a period of stagnation, how will it throw off the necessary cash to generate the money for pensions? The question is then, how likely is it that Ireland will go into a period of stagnation? It is highly likely, aswe have experienced two of the four conditions for stagnation: the banking and asset price crises.
We are also in a dreadfully overvalued currency compared to our major trading partners, Britain and theUS, and this means that to get competitive,we have to go through the stupidity of this ‘internal devaluation’.Thismeans that we will grind downwages and prices over years, practically guaranteeing the stagnation that we are trying to avoid. We are entering a period that could come to be termed the ‘Great Stagnation in Ireland’.Like the 1980s,we may achieve the statistical feat of GNPgrowth, but it will feel like a recession characterised by high unemployment and emigration. It can be reversed by applying normal Leaving Cert economic solutions to an economy, such as a managed default and a profound change in the value of the currency. If we are not prepared to do this,welcome to stagnation, 21st-century style.
What does a 21st-century version of stagnation look like? It looks like a till with â‚¬60 in it at the end of a full trading day.
David, at least stagnation is a reasonable prospect. More reasonable than complete economic fallout although the two are not incompatible. Stagnation seems to represent the dilemma of the 2 extremes that we will verge towards. 1 -Economic Fallout – where we let those ‘bankrupt’ countries and banks be liquidated, if there are any that can be restructure try but faith in financial assets is currently limited. 2 – Continued DIP (Debtors in Possession) Financing continue i.e. IMF, ECB Funding for countries and Bond Issues at country or euro or world level to cover the bad debts of banks, companies etc… Read more »
Goldman Sachs are one the reasons for the crisis in the first place.
So, common sense dictates toI take what they report with a grain of salt.
‘What Happens Next?’
Answer : Toxic for a generation
There is no comparison between the 80’s and now in Ireland or between Ireland and Japan or antwhere else for that matter . What differentiates Ireland from the 80’s and any other country currently is how it began in Ireland since 2000 .
Irish Banking Fraud and Banksta-ism proliferated since 2000 and that Toxic Glue it has deposited will be a hard Scum to remove .
And what did May do with the â‚¬6000 a day she was taking in on Saturdays during the boom? Any remorse for such high markups? Perhaps she felt she deserved a bolt hole in the south of France to escape from time to time the windswept rainsoaked emerald isle? People like her were part of the problem. If clothes weren’t so expensive, people wouldn’t have demanded higher wages in the boom, which as we know helped us get into this mess.
In the 80s, there was emigration to the UK & USA primarily, with less going to Australia, Canada and the Continent. The difference is this time all these places do not offer a long term emigration option. Australia only want under 30s for 2 years, then its “Thanks, nice knowing you” time! Same with Canada. USA is closed, obvious reasons. The continent requires language skills that most of our unemployed do not have and are incapable of developing. The UK is treading water, very little opportunities there compared to 80s. So, its not quite like the 80s. The Emigration valve… Read more »
INTO I attended a Pension Conference in Thomond Park last friday evening run by the INTO to listen to the advice given by an internal Advisor .The message given was ‘its up to you to make it out in your personal circumstances’.All the arithmatic was accurately given and debated likewise. I could not help watching the anxious eyes of those in attendance and the delema they were facing .They all seemed so cool and oblivious to the real outside world they inhabit .Their only concern was the extra pennies they might lose whether they leave by 28th February 2012 or… Read more »
David, don’t sully your credibility by using Goldman Sachs as a source of information or data. To say that they played an instrumental part in the world’s financial problems, past and present, would be a major understatement.
As Matt Taibbi referred to them “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” he’s not wrong!
As ever David you are on the money. Economic behaviour can often be explained in micro economic anecdotes – the 60 euro in the till is one such example we all know of many such cases. The new legisltation on pensions introduced the other day – is only a soft ball before the end of Croke park, the pensions we cannot afford to pay our public sector – cos there will be no growth to pay them in a stagnant economy is the big issue for political economic observers – you as good as said it in this article david… Read more »
In the 80s Banks were functioning and businesses were not .
In the 2008 – 2012 Banks are not funtioning businesses cannot .And will not for a generation.
To quote a Trader on BBC last week……………
‘Goldman Sachs RULES the world…’.
Check it out : http://www.youtube.com/watch?v=kpg76VjTa58
We won’t have stagnation, problems are too deep rooted debt wise to ride the waves of stagnation, default will come first..get the printing presses ready:)
Can you explain why most unemployed people are not capable of developing foreign language skills please?
Or, even better, Max Keiser on RT…
‘Goldman Sachs are S*UM…’
Check it here : http://zerohedge.blogspot.com/2009/07/max-keiser-goldman-sachs-are-scum.html
Afternoon, Just to clarify on Goldman Research. This piece I read was a 150 years time series that their economists did and it simply evidenced incidences of stagnation. They then tried to see what were the common denominators preceding the stagnant period. This is worthwhile stuff. Don’t worry I hear what you are saying about Goldman as an outfit. That said, they have some very good economists doing macro work for them and it is always good to read (if you have the patience) as much as possible from whatever source to try and get a handle on what is… Read more »
David surely if a high street retail operation was taking â‚¬1500 on a Sunday during the boom and now only taking â‚¬60 it proves that there is no necessity for whatever goods this operation is selling Someone with such an operation does not need my sympathy because they have had time to save and quit while they are ahead. Come off it Last week I passed one of those pretentious boutique type shops which was empty and the windows were papered with 50% off fliers while the proprietor was sitting at her till dripping in gold. It was a sad… Read more »
Europe is Hell bent on Austerity Measures (God only knows why!!!) Until they change their minds and there is a radical change to the Euro we may all better get used to it!
David don’t forget to leave a space between your words in your next article. Michael
As Einstein might have said ‘Its simply a matter of Relativity’. Thus if Ireland’s growth rate is 1.25% and the leading economies in the world are only growing at 1% then there will be a surge of investment towards Ireland from every quarter. In fact economies don’t just grow gradually but in fits and starts like quanta. As Max Born might have agreed, the economics quantum is based on chance, rather than causal certainties. Quanta are governed by Heisenberg’s Uncertainty Principle. You can either measure the economy’s actual state or its momentum. The very fact of measuring an economic variable,… Read more »
Retail. Consumers have no money. And in many cases they have houses that are full of clutter already. They need to money for food, and fuel ( which incicentally have increased in cost since the crisis began). Some items are more essential than others. Others you can stretch a bit. Apart from that, it is obvious that the scale of the Peak suburbia build out, expecially in Retail – is killing town/city centres. Dun Leary is a prime example. Even in Dublin city, things are the recession is getting recessionier to paraphrase a muppet from Drumcondra. Now, this is a… Read more »
If only we could have seen the way that the economic landsape was developing before this crisis, we could have prepared accordingly, and been better equipped to deal with a new economic dispensation that will be with us for decades.
Actually, if you look at post bubble societies – the post bubble crash takes a very long time to remedy. Think about France after John Law bankrupted the country, printing money. Think about the Netherlands after the Tulip mania bubble. Thees things take a long time to recover from.
The troika are calling for more “signs” that Greece will get it’s finances in order.
Hurray for the holders of Greek sovereign debt in Paris. Frankfurt, London etc… They must be delighted with all of this. Nice to see that all this misery is making the people that matter, happy, for a few minutes.
When we, and the other countries in the Euro zone, who are up to our necks in debt get to the bottom, then the Germans and French will offer us way out that will require us to give up our independence and join the United States of Europe. This has been the plan all along
If Stagflation was all that was ahead of us it would not be too bad. We are headed for severe deflation and not just in houses and property. And its what is ahead of us for a long time. Houses will drop to 10% of peak as will all other property prices. And its no harm really, houses and property are not productive assets, all they do is use up expensive natural resources which could be more productively used. We need houses ok, just not at the size and scale we are building them. Until Economists realize that energy is… Read more »
Stagflation has been a feature of our economy for the last few years and will continue for another 10 years due to high debts . This happened in Japan and will happen here . I must say the Irish are useless with money and this will result in boom bust cycles forever. Now the EU/IMF/ECB are in charge and it gives me more hope as the locals are useless. Austerity will be the main driving force of our economy for the next 10 years . It is better to get it over with ina shorter period of time and start… Read more »
Not for some…..! They might have pulled down the drapes in spectacular Scarlett O’ Hara fashion with the bunravelling of their byzantine web [Justice Kelly] of companies; but the boys are back in business.
You could not make this up…….
Their property asset management company is expected to manage properties for NAMA and other banks.
Interest in the Anglo HQ shell in the Docklands is evident apparently.
This building and the stories behind it are mirror images of the underlying problems in irish society which have contributed to the current dire state of affairs.
Economists working for Goldman Sachs are bottom of the list for intelligence research on economics.
If they are prepared to take a wage from such an outfit it indicates ill judgement and compromised ethics and so diminishes the individuals research.
Afternoon, Thatks for all the comments. Events in Greece today are moving apace, but we all know this and have known this for ages. Can I just come back to the subject of this piece. She was a very ordinary person and we must stop this attitude that “they deserved it” because they spent in the boom or they work in a shop. This person is on a little over the minimum wage and will be out of a job surely if the economy doesn’t turn around. There is no point being “investment fetishists” when we know that over 65%… Read more »
We’re here on Antonio Bay, Ireland, waiting to see if Greece will survive its fog of debt:)
Crash of the Euro is now inevitable! In March 1948, Germans believed their savings were secure, but he new D-Mark was already printed. What we witnessed in the now three years lasting undemocratic ECB monetary policy is a silent financing via the printing press of the financial Industry, camouflaged by grotesque programs such as EFSM, EFSF, or ESM. The ECB knows this since long, and their policy of protracted defaults is extended as long as possible, come 2013, all of ECB’s interventions will be automatically inflationary. The public discussion is steered and manipulated by vested interest groups, and is oozing… Read more »
There’s movement to be seen in the fog, it’ll become clearer as time moves forward. http://www.midasoracle.org/2011/10/02/max-keiser-roseanne-barr-morgan-stanley/ Its now evident Morgan Stanley Societe Generale are probably high on the list of the French banks sitting on enrmous exposure to Greek Debt. The dominos are getting ready to fall just like Lehman’s 2008; we’re moving into Societe Generale 2011 Part 11 (remake of 2008 meltdown?) Same situation as in 2008, banks don’t trust who might be sitting on the losses in Europe. http://www.voanews.com/english/news/economy-and-business/European-Banks-Exposure-to-Greek-Debt-Erodes-Market-Confidence-130198748.html For sure this situation cannot last. The lack of transparency and coverup stress tests won’t work. Barrossa, the federalist,… Read more »
@Lyndon Jones & other potential austerity priests The only reason italy is not breaching 5, approaching 6 in this chart that I temporarily put in my dropbox for your convenience here: http://dl.dropbox.com/u/4914840/spread.jpg is because ECB in their insanity broke their own rules and again purchased Italian bonds like crazy. Near Future: Watch French exposure to Italy unfolding, and now where Germany has 20% of their entire GDP committed to “The Pipeline”, Ireland btw. committed 20% of GDP to Anglo Irish Bank, the permanent bailout construct, a pipeline to suck continuously money from the real economy and up the arse of… Read more »
Just a thought….
20 Finance Ministers and their staff ‘negotiating’ with market makers, is like 20 seals negotiating with a pack of a few hundred sharks…. just add a wee bit of fresh blood.
Bon appÃ©tit. LOL
I was at a conference last weekend on debt. There were 31 individuals in the room. Guess how much debt there was in this one room!
Says a lot huh!
The concept of *consumption* economically speaking is generally accepted as the gobbling up of something.
And humans gobble up stuff on a daily basis, I agree.
But, to base an economy on this is lunatic.
An economy surely ought to be based on something which is monolithic.
We should send some researchers to Japanese Universities to study their policies and where they could have done better. Perhaps they would say they should have got rid of their non-performing loans more quickly which would not suit the vested interests in Ireland. There are somethings that Ireland has an advantage over Japan. 1. A much younger population/Young Immigrants. 2. English speaking. 3. Japans debt/GDP is close to 300% and some disadvantages 1. Japan is right next to high growth markets in Asia. 2. Japanese people work harder 3. Japan has much better infrastructure and innovation and a much larger… Read more »
The Number SEVEN Slowley The PULL begins to Hoover all around you and Suck the world about you .Gradually it will become stronger until the Full Moon next tuesday . Try to Break and Slow down and do so NOW . Watch the insanity become transparent nearby and do not participate , feel the crinkly pain surface in your body reminding you of your mortal self , observe the crazy driver daftness and record your mood swings especially from week end . Watch the Presidential Elections become more acrimonious and discredit the public office , try to locate Noonan holding… Read more »
Net emigration in the eighties was 22,000 per annum, last 2 yrs, it is 36,000 per yr.
Very interesting take on Europe from a strategy consulting firm. It sys the current dilemma is political in nature rather than financial, with solutions being rationalized on the basis of untrustworthy statistics. Among other insightful things, it says that Europe can only hold together on “a promise of prosperity” and “the myth of the rational civil servant.” In reaction I think austerity offers a dubious, far-off, mythical return to prosperity, sort of like the workers’ paradise of the Soviets, though not as extreme. And from the comments here and elsewhere about Ireland, Greece and Brussels the production of statistics by… Read more »
The Euro bosses really have their heads in sands on this one. How can Greece be expected to deliver even more austerity when it is missing its budget targets on the previous “austerity lite”?
“We are also in a dreadfully overvalued currency compared to our major trading partners.”
Check out the exchange rates. Euro is now at a 10 year low against the yen and has dropped to â‚¬1.32 against the dollar.
My point re the currency is that the currency should reflect the fundamentals of the economy and our economy needs a profoundly lower exchnage rate to reflect our weakness. Because we are not integrated trade-wise into the Euro economy proper, we always run the risk of being dragged upwards by Germany.
Point taken about the Euros weakness but in this Anglo/American, Hibernian wing of the Euro, the currency is just too strong.
Hello boys & girls Once again , just to remind you all that Greece will default and they will still get their next bail-out money. Anybody want to take a bet that German Finance minister is NOT in a warehouse somewhere dusting down the printing presses to start getting the Deutschmark going again ? 440 Billion EFRS FUND is like throwing petrol on a wildfire. All hail JP Morgan because they are the only ones left standing by Christmas. Oh Boy,are we in the middle of a shitstorm or what ? Whoever heard of a Nuclear power plant’s P.R Company… Read more »
Fascinating scenes from the US (Wall Street), Americans really showing some metal, who said they were depoliticised?
I just love to hear marooned sing his dirges of doom, especially about peak oil etc. To such as marooned, it’s a bit like anthropogenic climate change, a new religion, unburdened by hard science. The issue isn’t about peak oil, or man made climate change. The constant of climate throughout history is change. As to peak oil? Have a read of this; http://www.engdahl.oilgeopolitics.net/Geopolitics___Eurasia/Peak_Oil___Russia/peak_oil___russia.html and then maybe this; http://www.engdahl.oilgeopolitics.net/print/Epochal%20Tectonic%20Shift.pdf Now you’re motorin!. None of this SH 1 T is accidental. The fact is, the markets are gamed, and the oligarchs are in control. Democracy is only an illusion. Look up Simon… Read more »
Here are some worrying parallels from the 20s and 30s to today’s situation where the currency is put above everything else (from Karl Polanyi’s The Great Transformation (1944)). I’m not sure if he says there was any easy alternative as the way the system had evolved seemed to make the outcome inevitable. Polanyi was (of course) a Jew, though from Hungary not Germany. “The achievement of Geneva was remarkable in its way. Had the aim not been intrinsically impossible, it would have been surely attained, so able, sustained and single-minded was the attempt. As matters stood, no intervention was probably… Read more »
Fantasy news on RTE yet again at six. Michael ‘The Eternal Optimist’ Noonan, although I don’t think he really believes his own propaganda.
All irish mortgages are insured. Twelve months and one day after default the Bank can cash in on their mortagage insurance to the full amount.
They will STILL chase you for the money eventhough they have been paid and got the house back off you.
Sweet business for some hey!!!
David, it seems that McKinsey are in agreement with you
Hands up who believes we have.. 1% growth ? Our Government is either Drunk , stoned, or both. “Can they really believe the crap their selling to themselves and to us”?# It is truly laughable were it not so serious. Greece falling apart in front of our eyes which diverts our attention from France.Germany preparing to relaunch the Deutshmark , Dexia Bank in Belgium has collapsed. Currency values are swinging wildly, Oil below a hundred dollars a barrel when supply is greatly reduced.!!!!! I could go on but its really not worth it, what you and I are looking at… Read more »