Monday, September 13, 2010

Economics 13/9/10: Our crises are more than academic

This is an unedited version of my article in the Irish Mail on Sunday.

Adjoining the famed Moscow Conservatory there is a trendy Vieneese-styled café set in a quiet side-street of a bustling city center. Kofemania is a little microcosm of today’s young and upwardly mobile Moscow. On a late night break from the week of the Irish Trade Mission here, I was meeting a group of friends. Half a dozen of us, from different walks of life, crammed into a small booth were having a lengthy chat about life in general and our futures in particular. In our late 30s-early 40’s, one way or another, we can all relate to the topics of our children and our own and their futures.

For the first time in my life, I found myself being a deeper pessimist in the company of my Russian friends.

Like its Irish counterpart, Russian economy had a tough couple of years since the global financial crisis hit the country in the second quarter of 2008. However, amidst the crisis Russia has managed to deploy significant economic reforms – financed by a prudent fiscal policy during the boom. Their austerity programmes are offset by tax cuts, disposals of state assets and continued capital stimulus.

Since the beginning of 2010, the country economy has expanded at approximately 5% annual rate of growth, despite enduring the worst drought and wildfires in over 200 years. Moscow is enjoying a robust revival: city economy is up some 8% in real annualized terms since January this year, the local authority no longer runs a deficit and capital investment programme was underpinned just two days ago with a robust 12-yea bond placement for ca €500mln yielding less than Irish Government debt, despite being denominated in rubles. People are spending, taking holidays abroad, buying cars, and are genuinely almost over the “recession gloom” when it comes to their outlook for the future.
There is even a pick in investment in second homes in Spain and France taking place as a friend of mine, running a specialty real estate agency has told me. Tight credit conditions during the crisis are easing gradually, but steadily and not a single of my friends has switched their banks accounts to foreign intermediaries or altered the mix of currencies they hold - a sure bet that they do not expect significant pressure on the ruble or a ramp up in inflation that currently runs modest (by Russian standards) 5.5-5.7%.

My fiends are fully convinced that their lives are going to be just fine and their kids future will only get better. The generational game of renewal and raising of expectations – the hallmark of any society that enjoys a sense of confidence in its future – is well underway in Moscow.

It's a different story for us in Ireland.

This week’s admission by Alan Dukes, that the bank’s final expected loans losses can top €39 billion became the final straw for many people here, as well as for myself. Follow up admissions by the Government that the fiscal reforms of quangoes, promised back in 2008, are not happening made it clear that the policy path we are taking hardly amounts to much more than a waiting game in a hope for a miracle of the externally driven turnaround.

Over a year ago, I publicly estimated that the total losses in the Anglo will reach up to €38.6 billion. My total estimate of the net losses in Irish banking crisis since March 2009 has remained around €50-53 billion. There’s little to be gained from having gotten the estimates right. The sheer extent of the economic destruction that befell Ireland over the last three years is now hitting my own home, hard.

A third year into an economic equivalent of the Perfect Storm, the reality of our economic collapse remains unchanged. Worse – the storm, using Bertie Ahern’s turn of phrase, is only getting stormier.

All in, the combination of banking and fiscal hell we are currently living through will exact an economic toll unseen by this country since the age of the Famine. Courtesy of the consistent and persistent policy failures spanning the last decade and continuing to-date, my own family, like a million other ordinary taxpayers’ families in Ireland have been turned into an army of serfs bound by the state to the rapidly sinking Titanic of our banking and fiscal policies. The very hope of seeing my children living in a world of higher social and economic standards – that cornerstone of any family raison d’etre – is now under a real threat.

Within the last 12 months, the new wave of unemployment is wiping clean the ranks of professional, highly educated younger services sectors workers. The social mobility ladder that provides hope for our and our children future has collapsed.

Tens of thousands of students are now actively seeking to emigrate out of Ireland. Five years ago, less than one in ten in my Trinity classrooms intended to go abroad in search of starting careers. This summer, the number rose to about three quarters. By my estimates, over 200,000 people have left this island in the last 24 months and some 300,000 more are on the verge of emigrating, held back by the shackles of negative equity and rapidly rising debt.

For our middle class, just as for my own children, education was supposed to be a sure bet for achieving a steady progression to economic and social well being. Today, this is no longer the case.

Both myself and my wife hold advanced post-graduate degrees and have achieved above average careers with over 15 years of steady growth. Yet, back in the Autumn of 2008 both of us have almost simultaneously lost our main jobs. Four subsequent months, spent living in the hell of uncertainty, were some of the toughest periods we ever endured. Throughout these months, the fear for the future backed by our steadily declining savings was compounded by the complete absence of any leadership from our policymakers.

This fear still remains a part of our daily lives. Hope for a recovery today is contrasted by the vacuous and occasionally outright insulting statements from high podia about imminent ‘turnarounds’ and ‘patriotism’, and the ‘hard choices’ allegedly being made the country leadership that is painfully unable and patently unwilling to make any real decisions.

The crisis we face is not a temporary, but a structural one. In order to unwind a roughly 700,000 strong-army of surplus workers who are out work or grossly under-employed, Ireland will have to more than triple our entire exporting sector – a feat that even during the Celtic Tiger era would have taken some 25 years to achieve.

By the time my children finish their education, some 20 years from now, our family will have spent over two decades in a state of perpetual struggle to pay for the legacy of our banking sector collapse and fiscal policy fiascos, to cover the costs of bankers and bond holders bailouts and to unwind a massive pile of private and public debts accumulated through the erroneous and egregious policies we have pursued since 2001-2002.

To finance ever-increasing social welfare and public sector pay bills, a family like ours will be pushed into massively higher taxes on income, property and everyday necessities.

The numbers are frightening. Frightening to the point of getting me worried about even my own family ability to endure this crisis.

Nama and banks rescues alone will add some €110,000-120,000 to our family debt pile through state-accumulated liabilities. Property and assets collapses in the end will contribute another loss of €300,000 to our net worth. The benefits of free education and children-related allowances will be gone, implying a life-time loss of roughly €120,000 for our family. At current yields, the debt accumulated through the deeply flawed banks recapitalizations and Nama, plus egregious current spending deficits will impose an annual interest bill of €12,000-15,000 on our family by 2014. Interest on the state debt alone will cost us every year the same as our children’s education.

American philosopher and writer, Ayn Rand once said that: “It only stands to reason that where there's sacrifice, there's someone collecting the sacrificial offerings. Where there's service, there is someone being served. The man who speaks to you of sacrifice is speaking of slaves and masters, and intends to be the master.” Recall Minister Lenihan’s statements about the need for ‘patriotism’ in his two Budget 2009 speeches. With the events transpiring around us today, Rand’s words are now no longer a catchy turn of a phrase.

Our pensions – supported solely by our personal savings – will be a shadow of their current expected value as funds returns will remain stagnant over the years of painfully slow growth, caused by the disastrous policy choices. Inflation, imported from the rest of the Eurozone, will mean that the real value of our savings will be declining over time.

Our healthy demographics – normally a reason for optimism in economic future – can end up driving this economy deeper into slow growth scenario. By the time my children will be finishing their university degrees, today’s middle-age workers will see their pension ages extended in order to reduce the exchequer pensions liabilities. This means that twin peaks of new job markets entrants between 2020 and 2030, Irish workforce will swell with educated, but inexperienced professionals unable to locate a job because their retirement age parents have no option but to continue working into their seventies.

This scary trend is well underpinned by today’s reality, including that of my own household. Save for a sizeable mortgage, our family is completely debt-free for the moment. Myself and my wife have good private sector jobs and earn well above the average family income. On the paper – we are doing fine.

Our future liabilities are massive, courtesy of the Government mismanagement of fiscal balances since 2003, the Croke Park deal, the Social Partnership-led pillaging of the growth years, the banks rescues, Nama and the chronic lack of real reforms in the state-controlled sectors.

Banks bailouts are already having a direct effect on our family. Amidst historically low interest rates, our mortgage has grown throughout 2010 and is likely to rise even more comes 2011, just as the negative equity continues to bite deeper and deeper into our ‘investment’ which value has shrunk roughly 40% since the time we bought into it. By my estimates, the spreads between the ECB base rate and the average variable rate mortgage charges will rise from 2.5-3% today to 4% by the end of the next year. After that, the ECB will start hiking its rates, with a distinct possibility of our mortgage finance costs more than doubling within a span of 15 months.

As an economist, I am all too familiar with the long term nature of the fiscal, house prices and banking crises that were are experiencing today.

Based on what we know about fiscal crises, our debt to GDP ratio will peak at over 125-130% around 2015-2017. At these levels, any economy, even a highly competitive one, would suffer a catastrophic decline in long term prospects for growth.

In the end, Ayn Rand was right – the sacrifices and patriotism of our politicians’ speeches has turned the people of this country into serfs to the vested interests of Social Partnership and banks’ elites. They speak of a sacrifice, intending to be the masters. My family, and millions of other ordinary people around this country are now just meaningless pawns in their game for survival.


Brendan Quinn said...

As a man in a similar situation, age, not as good education but degree holder, in IT industry with young family, I feel myself fortunate. I shouldn't. I'm almost in tears at the future outlined. Unfortunately, people that have jobs think they will be alright Jack. They don't understand the deep hole the political masters are digging us into. You're article is the best you've ever written, from the heart. If only there was a way to change it. The existing main parties won't or can't. We need to become the freest economy in the world to even have a chance to succeed yet we are going in the other direction. Even though I'm trying to start a liberal economic party to ensure economic freedoms, I fear we haven't a chance to succeed unless some existing TD's have the courage to change.

Anonymous said...

Well done Constantin.

An article that finally sets the alarm bells ringing, no more hiding from the reality that the Irish Economy has been destroyed by incompetence, corruption,cronyism, greed and stupidity.

However i fear we are too insular on focusing on the problems of Nama, the Banks, austerity etc.

The entire western financial system is utterly broken - to quote Karl Denninger of Market (US)

"2008 was a tiny crack in the dam. A spurt of water. The economic dislocation you saw was one small part of the $53 trillion on balance sheet debt bubble quivering.

A mere 2% of that debt bubble actually going bad caused all the awful things you saw happen from the beginning of 2007 to the spring of 2009.

The other 98% is still there, and of it half, if not more, stinks like dead fish.

You think this is over? That things are "stable"?

The awful reality is that entire western financial system has been undermined by DEBT.

We cannot stimulate, borrow or procratinate our way out of this depression. This will end only when the debt problem (EU, US) has been solved.

But who wants to tackle that?
better to live in hope and kick the can further down the street.

laughingbear said...

the sacrifices and patriotism of our politicians’ speeches has turned the people of this country into serfs to the vested interests of Social Partnership and banks’ elites. They speak of a sacrifice, intending to be the masters. My family, and millions of other ordinary people around this country are now just meaningless pawns in their game for survival.

BRAVO!!!!! What a fantastic blog entry in deed!

Thank you Constantin for putting a personal perspective to it, much appreciated!


Robert Browne said...

The government for the want of a better word have acted in the most treacherous manner imaginable. I have contacted the EU on numerous occasions to complain about NAMA and "blanket guarantees" and other Ponzi schemes that hold the nation up to ransom. FF and the GP have lost Ireland it's sovereignty. The only satisfaction will be when our children tell them they are not going to be allowed to draw any of their Ponzi pensions because they have been complicit in bankrupting the state.

Eventually, this debt will have to be forgiven or written off it will never be paid off. We might pay interest for a while to please our EU enablers but wait until the rest of the Piigs go broke?

Anonymous said...

A very powerful and personal post and very much to the point. Thanks again Constantin for putting it on the line.


Bravo Constantin!

The real leader has no need to lead--
he is content to point the way.
Henry Miller

Anonymous said...


Nice post, but your realization of the disastrous costs that are being (unevenly) shared out is somewhat late. Ronan Lyons, with commentary from me, was discussing the same issue on his blog last year.

Anyone trying to create value in the country over the next decade or more better be able to create a lot of value, because they owe a lot of money even before they start. Of course, if this value creation is portable they should probably consider adding value elsewhere...if they value their children's future.


Fungus the Photo! said...

All sad.

All true.

I came to a similar conclusion shortly after 11th Sept 2001. Clearly things were becoming unstable. From an Ireland where my children would not be able to get a job, after a good education, to an Ireland where they could get a career but not be able to buy a house.
Now, I am optimistic. I am in Australia, but an invalid. My children ahve as many jobs as they wish but ironically, cannot afford to buy a house. Given what has hppened in Ireland and the rest of the west, I know that true to form, Australia will enbter the depression forewarned but house prices will fall relative to incomes as my children start to have children of their own. They can always go to Ireland where housing will soon be cheaper than ever before, but why endure such dreadful weather?
Greed brings a punishment. I am way ahead of you on the curve I am afraid. Consider it too much and you too will be crippled.

Unknown said...

Brendan Quinn seems unaware that we already had the world's freest economy back in 2007 as measured by the Wrold Heritage Foundation (followers of the same Ayn Rand lionised by Constantin in his article). what both of you refuse to recognose is that we handed over public policy to businessmen and they bankrupted us. They did this because being business-men they were not public-spirited. The fault is ours for having handed all power to these people. They are rich , which was always their stated object and the rest of us are not, they are the masters, we are the slaves. Irealnd is an oligarchy, just like Constantin's native Russia. Constantin will no doubt have to emigrate from a second failed oligarchic state, but he will not let the evidence get in the way of his ideology.

Anonymous said...

Your posts are stark and illustrate the dreadful situation facing us all in this country.
What does the Taoiseach do? give one of the most embarrasing interviews yet.
And a science minister was preparing to go to an anti Darwin book launch.
Things are very grim aren't they?

ottogunsche said...

My wife buys the Mail on Sunday and I read Constantin's article with interest.

What can I say? The article presents an accurate description of the situation that this country finds itself in.
We have wasted 2 years in nad have missed 24 months in which to start to try to fix the problem.
The political classes are still debating about what is the best way to tackle the economic crisis that we face as a nation.

The independent economists like Constantin, Karl Whelan and david McWilliams are rediculed by elements within the goverment-approved economic commentators and this subtle attempt to discredit their views appears to be more important than tackling the issue facing this country.

As others have said, debt is the issue.
Personal debt levels are too high.
Corporate debt levels are too high.
Sovereign debt levels are too high.
Short of debt forgiveness or debt amnesty, the only prospect facing this nation is to pay all that debt back.

Othside of the pure economic aspect of this discussion, Constantin and others raised the issues of the moral/ethical issue of how private debt at Anglo has now become public debt and for which this country is being made atone.
This moral/ethical question lies at the heart of all this.

Why should what was private debt, be paid for by the public?
If we're honest with ourselves, and more importantly if the goverment were honest with the electorate, this matter would have been dealt with 2 years ago and perhaps by now we would be well on the road to some sort of recovery.

However the politicians refused to take a moral on stand and we're now paying for this.

Keep up the good work, Constantin

AL said...

Excellent article, a must read blog!
Thanks Constantin.

Gregory Pym said...

A brilliant article written from the heart and unfortunatly all too true. I am an agnostic but I am starting to belive that we are going to need devine intervention to rescue this country-The fools that call themselves the Goverment are incapable of doing so. Keep it up Constantin. You and a few others are like candles in the hurricane of hot air form goverment buildings

Unknown said...

As a related point - in that it will impact nominal householder wealth - the recent changes in mortgage interest rates are starting to make the rent/buy decision even more interesting than previously. This will continue and will inexorably put more pressure on house prices.

If given the choice to rent a 4 bed house for €1500/month or to buy a house for the same monthly payment on a 35 year mortgage, I would have to notice that the buy option is in Swords or Clonsilla or Santry or Lucan or Tallaght, whereas the rent option includes Clontarf and Malahide and Terenure and almost (but not quite) Sandymount. I have nothing for or against either set of locations, but the market does.

With daft saying rents are now 25% below their 2007 level and more than 10% below their 2002 level, it'd be a brave person who assumed house prices will stay stable. The pressure on households will continue to be felt, but the damage was done by the high prices in the past and is not being caused by the return to sanity happening now.

Unknown said...

Well done, Constantin and brilliant work. As the country is currently configured (in almost every economic sense) Ireland has no long term future and you have been saying it for years. I heeded your advice and left....but did not sell our house at my partner's behest....and now we are paying on the other side of the world. Once sold, I will never go back except to see my old friends, of which you are one.

Well done....and there is always a place for you or your children here in Aotearoa...