Economics 07/04/2010: Another lesson from Greece

The lessons for Ireland from Greece are just keep on coming. In the weeks when the Irish Government is engaging in talks with the Unions concerning the reversal of budgetary reductions passed in Budget 2010, the Greeks are offering a somber reminder of what happens to the countries with runaway public finances.

The most important news in the last week or so was the renewal of the upward crawl in the spread of Greek bonds over German bund. The spreads have jumped from about 300bps to 400bps with Greek 10-year bond yields hitting a high of 7.161%.

Let us put this number into perspective. Irish Government currently is borrowing at around 4.6% per annum. This means that annually we are paying €46 million interest bill per each €1 billion borrowed. Through 2015, the total cumulative and compounded Irish Government cost of borrowing will equal, therefore, to €309.8 million per each €1 billion borrowed.

Now, were we borrowing at Greek rates, the same bill would be €514 million or 66% higher than current. Taking official projections for deficit, this means that at Greek rates of recklessness, Ireland Inc would be facing a deficit financing cost of €18.3 billion, as opposed to the current projected cost of €11.2 billion.

Short term borrowing would also be a problem, with Greek 2-year bonds yields jumping up by more than 1.2% to 6.48% overnight last – a record for any sovereign country.

Now, of course the Greeks are a basket case. Latest Eurostat revisions of its budgetary data show that actual deficit reached 13% of GDP in 2009. But Ireland is a close second here – with our deficit as a fraction of our real economy (GNP) being bang on with the Greek latest revisions. Worse than that, Greek economy has shrunk only by about 1/5 of the decline experienced by Ireland.

If you think that Greek rates extreme moves are a temporary blip on the market radar, think again. Greeks are preparing a Yankee bond offer in the US, and per Bloomberg reports, the markets are expecting pricing in the region of 7.25% yield for 10 year paper, or 410bps premium on the German bunds. Per Bloomberg report, Greek yields are now consistent with corporate junk bond yields.

And in a final note to the Unions here at home, Les Echos Jacques Delpla makes a very strong point that based on Fisher’s theory of debt deflation, it is a mountain of private debt, not public debt, that implies PIIGS are even in more deep trouble than the bond markets might suggest. Wage inflation (in real terms outpacing economic growth) and private debt increases (also in excess of real growth in the economy) during the boom times are now inducing a deleveraging withdrawal of consumers and investors from PIIGS. In the end, this is a much greater threat than the Exchequer deleveraging.

Good luck to all our Bearded Keynesians (or shall me say ‘Marxists’, for I doubt Keynes would have favoured an idea of piling up more Exchequer liabilities when deficits are running in double digits).

Economics 06/04/2010: Return of the markets

Another 'Must Read' from WSJ - Gary Becker on Obamanomics, health care reform and why Americans will opt once again for Smaller Government with more checks and balances on the power of bureaucracy. Read it here.

Perhaps the most insightful - from our point of view here in Ireland - is Becker's arguments about interest groups-driven poor legislation that ossifies into innovation-choking regulatory diktat absent proper competition between interest groups acting as a (limited) check on the corrupting power of tax-and-spend politics.

having just returned from the Western sea board, I can testify to that corrupting power. Take a small town, popular with summer vacationers, I visited. Bungalows piled mile-high - crowding each other and older homes. Local county councilors own, per local paper expose, many of these, with some holding mortgages on 7-9 of such vacation properties, with section 30 tax breaks attached to make the deal sweeter. Scores of developments (not one-offs) were built in violation of planning permissions granted. And scores of planning permissions were granted in violation of the standard building codes.

As a friend of mine has described the countryside: 'You have D4 folks with homes, back then, worth some €4-5 million rushing to buy public-housing-styled vacation homes for a €1 million-plus with an illusion that these were to be their country retreats. And the Government was dishing out tax breaks...'

We clearly have no competing interest groups - just a Social partnership feeding party.

Economics 29/03/2010: PS productivity deal will cost us all

Per latest reports on the talks with the Unions, it now appears that the Government will yield on the Budget 2010 pay cuts and accept a premise that our vast structural deficit can be corrected through a long-term change in work practices in the public sector.

This position represents a drastic reversal of the attempted correction of the structural deficit and has the following long-run implications for Ireland:

1. Since productivity gains do not address the issue of reducing actual spend in the public sector, the entire burden of correcting the structural deficit can be expected to fall on the shoulders of the taxpayers;
2. If the deal commits the Government to no future cuts in public spending in Budgets 2011-2013, the deal will mean that the entire €13-14 billion in Budget adjustments needed before 2014 will have to be carried by the Irish taxpayers. This means taxes will have to rise by a massive €13,000 per annum per current tax payer - a move that would trigger a meltdown in the economy;
   
3. Since higher earning taxpayers are already paying more than half of the income tax bill, the new taxes will have to disproportionately impact lower middle classes, thus in effect inflicting pain on the very workers whom the unions are allegedly aiming to protect;
4. Since the structural deficit will remain unaddressed, Ireland will not reach 3% deficit target by 2014, or for that matter by 2020, implying that we will be facing excruciatingly high cost of borrowing through the next 10 years or so, a cost, once again to be carried by our middle and lower-middle classes.

Using a simple prisoners' dilemma game, one can easily show that the Government currently has all the incentives to run the economy deeper into depression. Such a move will ensure that the poisoned chalice the current Government passes to the opposition will be even more toxic, thus giving Fianna Fail stronger chances of election victory in the next 5 years.

In other words, if the Government does indeed sign up to the unions'-conjured 'plan' for 'efficiency'-exit from the deficit, it will be implicitly acting to derail any hope of a fiscal and economic recovery, while optimising its own political objectives.



PS: For all those who are keen on accusing me of being anti-Fianna Fail: nothing I write is designed to attack any political party in general or its members in totality. There are plenty of very good people in FF, and some of my friends are members of the party. There some competent, well-meaning and experienced members of the Government. Sometimes I disagree with them on policies, sometimes on ideologies, sometimes we agree. I express these views in public and privately. I always prefer an open debate.

The collective actions of the current Government, in my view, deserve very severe criticism. And that criticism I tend to provide: not behind the back, but in the open, publicly accessible fora.

Economics 16/01/2010: Fun and games

In the spirit of the new attitudes at this blog: a 'No Comment Needed' section will be appearing in these pages on occasion. This is one such occasions: story in the Indo linked here is certainly worth a read. It left me breathless!


And here is another link - this one made me cry with laughter. To describe 80,000 people disagreeing on pronunciation in an obscure (from the point of view of the entire humanity and the vast majority of Irish people themselves) linguistic parlor game as a schism is about as absurd as to label a queue of three at your local Tesco till a sign of food shortages hitting the Western World.

What the story does really tell us is the extent to which our state focus on engineered national identity (with Gaelic at the heart of these efforts) crowd out our real culture and history - global, internationally convertible and fully integrated culture of our world class writers, several superb painters, a handful of world class composers, masses of folk arts practitioners and so on. Instead of studying obscure and globally irrelevant historical and cultural events and figures, our children will do better learning Western and Eastern philosophers, histories, thinkers. They are better off learning Latin and Greek tragedy, Roman and Renaissance literature, the ideas of Enlightenment and so on than be boxed into a proto-nationalistic dead-end street of the Romantic version of the 'Irish identity' now fully embraced, practiced and subsidized by our state.

When 80,000 people can evolve such distinct dialects and attitudes to their language, replete with total breakdown of communications between the two, one has to fear that our cultural isolationism has finally yielded its inevitable denouement: cultural inbreeding. Irish Times, of course, can not be accused of spotting this much...


Also, my favorite blog, Calculated Risk (here), has recently highlighted the topic I've been covering for some time now - the Fed cutting back its liquidity operations (for now, via balance sheet adjustments). Good to see my earlier predictions coming true.


Another item: the latest listings of academic jobs for January 2010 show trouble brewing in the European paradise of the 'knowledge economy'. Early in 2009 I have stated in Sunday Times article that in few years time we might end up with an army of unemployed PhDs. Once the EU numerical targets for science and technology PhDs hit the jobs markets - who will be their future employers?

Back then I said that the problem is now apparent in the fact that majority of these PhDs find only temporary employment post-degree completion, largely in the form of post-doctoral researchers. These contracts tend to run 2-3 years and are non-pensionable, non-tenure track and are state-subsidized. These contracts do not lead to permanent academic employment in the majority of cases and if the subsidies were to run out, the freshly-minted PhDs have no where to go.

Well, this month I found out that we have a follow-up subsidized employment category for some of these PhDs. Several institutions in Europe now advertise for Senior Post-Doctoral Researchers posts, offering another round of 3-year contracts to bridge the gap between the doctorate and the welfare check for the lucky few who can get it.

In years time, prepare yourselves for a prospect of a friendly dinner at the house of Dady Post-Post-Post Doc Senior, kids with Senior Post-Doc grants in tow and grandchildren with Junior Post-Doc Applications in their rooms, ready for signing by the grant-supporting lead researcher: Mommy Post-Post-Doc Junior.


And lastly - current issue of the Fortune magazine has a story about the plans for converting urban land in Detroit into agricultural land. Given that land in Detroit (within 8-mile Road) sells for USD3,000 per acre, while Iowa's average agricultural land is selling for USD5,000 per acre, the idea makes sense. Of course, here in Ireland we do have Nama-lands. So hanging vegetable gardens off multistory shells in Sandyford anyone? Or pig farms in the abandoned estates in the Midlands? Mushrooms growing in three-bed semis out in the West's Bungalow Blitz Estates? You've never thought D4 stores might supply fresh produce grown hydroponically in the historical and irreplaceable D4 hotels rooms?