Per report in today's Sunday Times, the Government 1% levy on life insurance products might be deemed illegal. You can read the details of the saga in the paper - cover of Business section, but the matter is important for several reasons.
First a foremost, governments routinely default on implicit contracts they create with their own citizens. For example, you might naively believe that there is a promise from the state to pay an old-age pension (however meager it might be) in exchange for your social security contribution. Alas, you are wrong. Courts in US, UK, Australia and elsewhere around the world have stated time and again that what we term 'Social Contract' (we pay taxes, they - the Government - provide service) is not a contract at all, hence it cannot be enforced.
Secondly, the Governments are created at least in part to safeguard the legality of private contracts. This is why we have a state-run judiciary. No party to the contract or any third party can alter the conditions of a private contract without consent of the contracting parties. Force majeure conditions apply, but these are extraordinary - reserved for the time of war, arbitrary acts of oppressive regimes etc. You just don't expect these to be a norm in a mature democracy.
Thirdly, what Irish Government is doing with the insurance levy is exactly that - it arbitrarily decided to alter the terms and conditions of the private sector contracts between the insurer and the insured. Nothing less, nothing more.
Gary Becker (of Nobel fame) once started our lecture in Microeconomics by writing words "Theft", "Taxes" on the board and then setting an equation identity: "Theft=Taxes" to illustrate the concept of involuntary exchange. I took this example from him and use it in some of my lectures - as some of you might have witnessed. But from now, we can generalise this beyond the narrow function of the state to collect taxes. Post Supplementary Budget 2009 the new equation should read "Irish Government=Theft" for our Government is now engaged in full-out forcefull conversion of private contracts to its own benefit.
It is a sad day for democracy when the courts become the last line of citizens' defense against the abuse by the State.
Showing posts with label Irish mini-Budget. Show all posts
Showing posts with label Irish mini-Budget. Show all posts
Sunday, May 3, 2009
Thursday, April 9, 2009
Daily Economics 10/04/09: Rappers want Euros
Taxpayer champions?
An excellent argument by David Quinn on the need for someone to step out of the shadows and become a taxpayers champion (here). FG to the front, suggests David. Most likely. But in the end, in my view, even Sinn Fein will do? Or a backbenchers'-led revolt in the FF. The country is now at its knees and the ZanuFF's leadership is so out of touch with reality, Cowen is telling us - private sector workers battered by unemployment, wage cuts, higher taxes and unbearable debts - that public sector employees know pain endured by the economy first hand. "I believe that the reality of the crisis we face as a society is particularly evident to public servants who are dealing at first-hand with the consequences – personal, social and economic – of our current difficulties,” said our out of touch leader (here). Tell me Brian - how? Through their jobs-for-life, strike-for-any-reason, guaranteed-pensions, increments-wage-rises, Partnership-giveaways, excessive-holidays, take-your-time-to-do-anything positions?
Consumer prices... deflation is of little help to the consumers: Per yesterday's figures on Irish CPI, see my comment in today's Irish Independent (here). And a quick comment to the Wall Street Journal from me relating to the latest Gov plan for a 'bad' bank (here).
And Gerard O'Neill has an excellent post on Partnership (here). Stockholm Syndrome at the IBEC and:
"Oh, I forgot: there's the Enterprise Stabilisation Fund - a grand total of €50 million this year. Let's work it out: say there's 1,000 companies eligible for support (about par with the numbers Enterprise Ireland works with every year). That equates to €50,000 in support - or stabilisation - for each company. Jaysus lads, this time next year we'll be millionaires..."
Actually it is even worse - of the €50mln, only €25mln is in new allocations to DETE, the other €25mln is coming from somewhere else - already in existence. And there was no support for export credits - a mad lunacy of the Government that is willing to waste billions on bad developer loans, but pinches an odd €10mln to provide short-term credit to companies with exports waiting at the dock and willing buyers on the other end. Instead of this virtually risk-free financing, we have the net 'stimulus package' is €25mln - a slap in the face to private sector Ireland and a clear indication of the arrogance and incompetence at the head of DETE.
A solution at hand for Cowen, Lenihan and Coughlan... Here is an excerpt from the post (here) by a celebrity masseuse, Doctor Dot:
"Tonight... I massaged the best looking President on earth, Mikheil Saakashvili... He is the President of Georgia and super fun to talk to. He originally wanted only a 30 minute massage but 90 minutes later, he told me my massage is "the best massage I have had in my life so far". Mikheil had body gaurds [sic] outside the massage room the whole time, who were all over 6 feet tall and like 4 feet wide. One spoke English really well and told me his favorite group is Metallica. Ha. He said "I am a rocker!" so we got along fine, whilst waiting for the President to finish his work out. I was excited to finally get to massage a President. I have massaged the Prince of Saudi Arabia before and a few Mayors, but this was the first President for me."
Thus we have a prescription to presidential joy: get your economy demolished, country demoralised, make some spectacularly disastrous decisions across the board, appease your cronies, get your country into debt to the EU and then, get a massage...
Doctor Dot, we have three Saakashvilli equivalents here in Ireland - not as good looking and with less pleasing body guards, but otherwise, even more spectacular disasters... Massage sessions on taxpayers' bill?
Inflation cometh... Here is an excellent recent blog post from Marc Faber on the issue of upcoming inflation (and a related blog here). I've spotted the risk a while ago (here), so I am happy to report that we are now seeing more and more commentators beginning to concerns themselves with the obvious problem: where can all the liquidity that the Fed and other Central Banks are pumping into the global economy go. From the point of view of the long-term policy consistency for the Irish Government, this is a proper conundrum.
Having raised taxes in 2008-2009, what will Brian do when we have externally imported inflation hammering households, the ECB hiking rates killing off scores of Irish homeowners and we have no control over tax levers (because we have borrowed so much that rising interest rates will simply make it impossible to cut tax rates as the inflationary spiral uncoils)? Oh, I get it - he will simply remind us all of our patriotic duty to keep paying his wages.
Hopes are rising?.. No, not in Ireland, but my hedge funds networking group website has been inundated with jobs offers - sales, technical, trading etc - from US headhunters. For the first time since early 2008, the usual daily page of posts has been dominated not by 'distressed assets for sale' or 'looking for a position' memos, but by jobs offers. May, just may be, should jobs situation abroad stabilise, by the mid 2009 we will have that Irish solution to an Irish problem - emigration - becoming available to Irish financial sector professionals. Then we'll truly arrive in the 1980s scenario.
On the US data: Yesterday's data from the US is painting an interesting, and cautiously encouraging picture.
First, the jobs front. First-time claims for unemployment benefits fell a seasonally adjusted 20,000 to 654,000 in the week ended April 4. The level of first-time claims is 83% higher than the same period in 2008. The four-week average of th2 initial claims fell 750 to 657,250. However, for the week ended March 28, the number of people collecting state unemployment benefits reached yet another new record, up 95,000 to 5.84mln - double the level in 2008. Per Marketwatch, "continuing claims have gained for 12 consecutive weeks, and have reached new weekly records since late January." The 4-week average of continuing claims was up 146,750 to a record 5.65mln. The insured unemployment rate - the proportion of covered workers who are receiving benefits - rose to 4.4% from 4.3%, reaching the highest level since April 1983. All of this signals that while the new unemployment may be bottoming out, workers are not seeing an increase in new jobs availability. Of course, unemployment itself is a lagging indicator relative to, say, capital investment. Inventories declines, posted in recent days, have probably more to say about the underlying dynamics, signalling potentially a flattening of the downward trend in economic activity.
Corporate earnings... Two major corporates announced pre-reporting updates last night. Wells Fargo & Co surprised the markets yesterday with the Q1 2009 earnings note claiming that earnings will rise to $3bn - ahead of analysts forecasts - on the back of falling impairments and rising mortgage lending. Earnings figures were quoted net of dividends on preferred securities, including $372mln due to the Treasury Department. Analysts expected earnings of ca $1.94bn.
I am of course being sarcastic - a disclaimer I have to put up for all Brusselcrats so concerned about any criticism of the euro. But to be honest, do we know how much of the EU paper been stuffed into the black markets? Seriously: rappers, mafia, drug barons... and Chinese Government - all think euro is the best thing since sliced bread... we've arrived.
And here is the latest take on the Budget (hat tip J):
An excellent argument by David Quinn on the need for someone to step out of the shadows and become a taxpayers champion (here). FG to the front, suggests David. Most likely. But in the end, in my view, even Sinn Fein will do? Or a backbenchers'-led revolt in the FF. The country is now at its knees and the ZanuFF's leadership is so out of touch with reality, Cowen is telling us - private sector workers battered by unemployment, wage cuts, higher taxes and unbearable debts - that public sector employees know pain endured by the economy first hand. "I believe that the reality of the crisis we face as a society is particularly evident to public servants who are dealing at first-hand with the consequences – personal, social and economic – of our current difficulties,” said our out of touch leader (here). Tell me Brian - how? Through their jobs-for-life, strike-for-any-reason, guaranteed-pensions, increments-wage-rises, Partnership-giveaways, excessive-holidays, take-your-time-to-do-anything positions?
Consumer prices... deflation is of little help to the consumers: Per yesterday's figures on Irish CPI, see my comment in today's Irish Independent (here). And a quick comment to the Wall Street Journal from me relating to the latest Gov plan for a 'bad' bank (here).
And Gerard O'Neill has an excellent post on Partnership (here). Stockholm Syndrome at the IBEC and:
"Oh, I forgot: there's the Enterprise Stabilisation Fund - a grand total of €50 million this year. Let's work it out: say there's 1,000 companies eligible for support (about par with the numbers Enterprise Ireland works with every year). That equates to €50,000 in support - or stabilisation - for each company. Jaysus lads, this time next year we'll be millionaires..."
Actually it is even worse - of the €50mln, only €25mln is in new allocations to DETE, the other €25mln is coming from somewhere else - already in existence. And there was no support for export credits - a mad lunacy of the Government that is willing to waste billions on bad developer loans, but pinches an odd €10mln to provide short-term credit to companies with exports waiting at the dock and willing buyers on the other end. Instead of this virtually risk-free financing, we have the net 'stimulus package' is €25mln - a slap in the face to private sector Ireland and a clear indication of the arrogance and incompetence at the head of DETE.
A solution at hand for Cowen, Lenihan and Coughlan... Here is an excerpt from the post (here) by a celebrity masseuse, Doctor Dot:
"Tonight... I massaged the best looking President on earth, Mikheil Saakashvili... He is the President of Georgia and super fun to talk to. He originally wanted only a 30 minute massage but 90 minutes later, he told me my massage is "the best massage I have had in my life so far". Mikheil had body gaurds [sic] outside the massage room the whole time, who were all over 6 feet tall and like 4 feet wide. One spoke English really well and told me his favorite group is Metallica. Ha. He said "I am a rocker!" so we got along fine, whilst waiting for the President to finish his work out. I was excited to finally get to massage a President. I have massaged the Prince of Saudi Arabia before and a few Mayors, but this was the first President for me."
Thus we have a prescription to presidential joy: get your economy demolished, country demoralised, make some spectacularly disastrous decisions across the board, appease your cronies, get your country into debt to the EU and then, get a massage...
Doctor Dot, we have three Saakashvilli equivalents here in Ireland - not as good looking and with less pleasing body guards, but otherwise, even more spectacular disasters... Massage sessions on taxpayers' bill?
Inflation cometh... Here is an excellent recent blog post from Marc Faber on the issue of upcoming inflation (and a related blog here). I've spotted the risk a while ago (here), so I am happy to report that we are now seeing more and more commentators beginning to concerns themselves with the obvious problem: where can all the liquidity that the Fed and other Central Banks are pumping into the global economy go. From the point of view of the long-term policy consistency for the Irish Government, this is a proper conundrum.
Having raised taxes in 2008-2009, what will Brian do when we have externally imported inflation hammering households, the ECB hiking rates killing off scores of Irish homeowners and we have no control over tax levers (because we have borrowed so much that rising interest rates will simply make it impossible to cut tax rates as the inflationary spiral uncoils)? Oh, I get it - he will simply remind us all of our patriotic duty to keep paying his wages.
Hopes are rising?.. No, not in Ireland, but my hedge funds networking group website has been inundated with jobs offers - sales, technical, trading etc - from US headhunters. For the first time since early 2008, the usual daily page of posts has been dominated not by 'distressed assets for sale' or 'looking for a position' memos, but by jobs offers. May, just may be, should jobs situation abroad stabilise, by the mid 2009 we will have that Irish solution to an Irish problem - emigration - becoming available to Irish financial sector professionals. Then we'll truly arrive in the 1980s scenario.
On the US data: Yesterday's data from the US is painting an interesting, and cautiously encouraging picture.
First, the jobs front. First-time claims for unemployment benefits fell a seasonally adjusted 20,000 to 654,000 in the week ended April 4. The level of first-time claims is 83% higher than the same period in 2008. The four-week average of th2 initial claims fell 750 to 657,250. However, for the week ended March 28, the number of people collecting state unemployment benefits reached yet another new record, up 95,000 to 5.84mln - double the level in 2008. Per Marketwatch, "continuing claims have gained for 12 consecutive weeks, and have reached new weekly records since late January." The 4-week average of continuing claims was up 146,750 to a record 5.65mln. The insured unemployment rate - the proportion of covered workers who are receiving benefits - rose to 4.4% from 4.3%, reaching the highest level since April 1983. All of this signals that while the new unemployment may be bottoming out, workers are not seeing an increase in new jobs availability. Of course, unemployment itself is a lagging indicator relative to, say, capital investment. Inventories declines, posted in recent days, have probably more to say about the underlying dynamics, signalling potentially a flattening of the downward trend in economic activity.
Corporate earnings... Two major corporates announced pre-reporting updates last night. Wells Fargo & Co surprised the markets yesterday with the Q1 2009 earnings note claiming that earnings will rise to $3bn - ahead of analysts forecasts - on the back of falling impairments and rising mortgage lending. Earnings figures were quoted net of dividends on preferred securities, including $372mln due to the Treasury Department. Analysts expected earnings of ca $1.94bn.
Total net charges will be $3.3bn, compared with Q4 2008 net charges of $2.8bn. Wachovia - purchased by Wells Fargo on December 31, 2008, will see net charges of $3.3bn. Provisions will be about $4.6bn in the quarter compared to $8.4bn in provisions during Q4 2008.The news drove US financials to significant gains yesterday as the markets were delighted to see the bank finding a way of generating profits out of free Federal money it received. Who could have thought that possible.
Aptly, US stocks jumped higher across the board, with the Dow Jones Industrial closing its first five-week stretch of gains since October 2007, rising 246.27 points, or 3.1%, to finish at 8,083.38, up 0.8% for the week. The S&P 500 added 31.40 points, or 3.8%, to end at 856.56, a 1.7% rise in the week. The Nasdaq Composite climbed 61.88 points, or 3.9%, to 1,652.54, a weekly rise of 1.9%.
But there were some side-line noises from the real (i.e non-financial) side of the US economy when Chevron and Boeing issued earnings warnings on the back of lower oil prices, high production costs and falling demand for aircraft respectively. No free money from the taxpayers in their sectors has meant that the real economy continues to push lower.
World's new reserve currency... We have arrived - the Euro is becoming a reserve currency. The dollar is toast per BBC's latest report (here). And no, Euro's gains are not just in the market for Russian mafia wealth (remember those €1,000 bills issued in hope of diverting some of 'cash' reserves away from dollars). In fact, it is well diversified. As BBC reports, for some time already there has been a strong movement of US rappers out of dollars into euro. And there has been growing trade in services for euro-based money laundering by the drug cartels. At last, the hopes for a reserve currency challenge on the dollar are being realised.Aptly, US stocks jumped higher across the board, with the Dow Jones Industrial closing its first five-week stretch of gains since October 2007, rising 246.27 points, or 3.1%, to finish at 8,083.38, up 0.8% for the week. The S&P 500 added 31.40 points, or 3.8%, to end at 856.56, a 1.7% rise in the week. The Nasdaq Composite climbed 61.88 points, or 3.9%, to 1,652.54, a weekly rise of 1.9%.
But there were some side-line noises from the real (i.e non-financial) side of the US economy when Chevron and Boeing issued earnings warnings on the back of lower oil prices, high production costs and falling demand for aircraft respectively. No free money from the taxpayers in their sectors has meant that the real economy continues to push lower.
I am of course being sarcastic - a disclaimer I have to put up for all Brusselcrats so concerned about any criticism of the euro. But to be honest, do we know how much of the EU paper been stuffed into the black markets? Seriously: rappers, mafia, drug barons... and Chinese Government - all think euro is the best thing since sliced bread... we've arrived.
And here is the latest take on the Budget (hat tip J):
Tuesday, April 7, 2009
Daily Economics 07/04/09: Lenihan's McHammer Land
I have posted a set of presentation slides on Irish Economy on my partner blog: Long Run Economics. Feel free to check them out.
(scroll for Ireland note below)
Junk-bonds default rates: Per Bloomberg (here) ca 53% of US companies that issued high-risk, high-yield bonds will default over the next five years. Jim Reid, head of fundamental credit strategy at Deutsche Bank AG, further argued in his note yesterday that the recovery rate on this paper will be around 0%. This compares with 31% 5-year default rate in the two previous recessions and 45% in the Great Depression. “...40% high-yield defaults over five years seems to be a minimum starting point for this default cycle,” Reid wrote, with 50% rate being “not unrealistic.”
According to Moody’s Investors Service note from March, the 12-month default rate will rise to 22.5% in Europe and 13.8% in the U.S. by the end of the year. Moody’s forecast the 5-year default rate to be about 29% by February 2014, according to the report.
Reid's forecast is driven by continuously falling property markets and he sees another 16% declines due for the US and 30% in further falls in the UK property markets. And this leaves us here in Ireland in a dust. Reid-assumed implicit cumulative property declines over the 5-year horizon are:
But what Reid's analysis shows is the dire need for stronger credit risk assessment of the fixed income portfolios traded, including in the ETFs universe. Seniority is the king, plus Government underwriting.
Junk estimates default rates: there are new 'estimates' of the Exchequer receipts being floated around today by Brian Lenihan (here): €33bn in tax revenue for 2009. This is about as realistic of an assessment as a snail's own worldview stuck atop a bullet train. The state will be lucky to pluck €30-31bn out of this economy comes December, simply because whatever the boffins of DofF are forecasting today for increased revenue from the mini-Budget tax hikes - all will be undone tomorrow by business and income tax receipts from sole traders and SMEs.
“Two-thirds of our spending is now welfare payments and payments to public servants. If you want an adjustment on the spending side you have to cut pay for public servants or cut rates for social welfare,” he told RTÉ News. “I have not seen many people advising me to do that. Let’s get real where the balance has to be struck here. Anyone who suggests that this cannot be done without tax is deceiving themselves.” Well, Minister, this is what happens when you surround yourself with lackeys for advisers. If 2/3rds of your household bill goes to pay servants and your non-working extended family, you are in an MCHammer-land: fat trousers and bankrupt estate.
My advice to our Minister-in-Charge-of-Bankrupting-Ireland is to get his head of the sand: cut 20% of the public pay bill by laying off some, trimming wages of others and scaling back pensions to those retired will be a good start. Follow it up with welfare spending cuts and stronger enforcement of welfare standards: unemployment benefits down by 5%, social welfare rates down by 15%.
Otherwise, Mr Lenihan's default rates on Budget forecasts will exceed those of the US junk bonds... Then again, it is hard to tell right now which paper is of higher quality.
Capital flows and Irish Capital Acquisitions Data:
Per mu post yesterday, here are two charts (from Follow the Money)
showing US financial and trade flows dynamics and an even faster fall off in the capital formation. Clearly, our yesterday's CSO data is somewhat different, which suggests to me that Irish stats on relatively slow-declining capital acquisition in the industrial sectors are linked to some accounting trickery more than to real acquisitions. If the rest of the world is falling through the basement, how can Ireland still be hanging around in its first floor bedroom?
Over5seas Travel Data from CSO is out: predictably, the number of trips abroad by Irish residents fell by 13.4% to 474,000 in February 2009 compared to 547,600 a year ago. February 2009 overseas trips to Ireland were down 5.5% to 445,200 from the same month in 2008. Visits from the UK fell by 15,000 (5.8%) to 244,800. Trips from Other Europe increased by 1% to
149,100 while those from North America fell by almost 20% to 37,500. Chart below (courtesy of CSO) illustrates:
In 2009 to date, trips abroad by Irish residents are down by almost 11% to 976,100, "a complete reversal of the growth rate achieved in 2008". Overseas trips to Ireland are down 4.3% to 869,400 compared to an increase of almost 1% in 2008.
(scroll for Ireland note below)
Junk-bonds default rates: Per Bloomberg (here) ca 53% of US companies that issued high-risk, high-yield bonds will default over the next five years. Jim Reid, head of fundamental credit strategy at Deutsche Bank AG, further argued in his note yesterday that the recovery rate on this paper will be around 0%. This compares with 31% 5-year default rate in the two previous recessions and 45% in the Great Depression. “...40% high-yield defaults over five years seems to be a minimum starting point for this default cycle,” Reid wrote, with 50% rate being “not unrealistic.”
According to Moody’s Investors Service note from March, the 12-month default rate will rise to 22.5% in Europe and 13.8% in the U.S. by the end of the year. Moody’s forecast the 5-year default rate to be about 29% by February 2014, according to the report.
Reid's forecast is driven by continuously falling property markets and he sees another 16% declines due for the US and 30% in further falls in the UK property markets. And this leaves us here in Ireland in a dust. Reid-assumed implicit cumulative property declines over the 5-year horizon are:
- per Case-Schiller in the US: 32.8% peak to trough fall, and
- per Halifax index in the UK: 44% peak to trough fall;
- per Daft.ie index in Ireland (my estimates consistent with Reid's assumptions on the US & UK dynamics): a whooping cumulative implied contraction of 43% peak to trough.
- Things might be not as bleak if one were to take into account Reid's most contentious assumption of the zero recovery rate. Standard assumptions assign ca 20% recovery rate for senior junk-grade paper. Times are not exactly standard, so, say, we get this down to 10%. This will comfortably bring Reid's numbers to the range of Great Depression, but not to the range of the last two recessions.
- Now, take a knife to his housing markets forecast. Although extremely tenuous at this moment in time, the US housing market (and indeed the UK market) is starting to show some early signs of stabilization. Suppose that home prices were to bottom at the OECD latest projection: US at -20% and UK at -34% (for Ireland, -38% drop).
But what Reid's analysis shows is the dire need for stronger credit risk assessment of the fixed income portfolios traded, including in the ETFs universe. Seniority is the king, plus Government underwriting.
Junk estimates default rates: there are new 'estimates' of the Exchequer receipts being floated around today by Brian Lenihan (here): €33bn in tax revenue for 2009. This is about as realistic of an assessment as a snail's own worldview stuck atop a bullet train. The state will be lucky to pluck €30-31bn out of this economy comes December, simply because whatever the boffins of DofF are forecasting today for increased revenue from the mini-Budget tax hikes - all will be undone tomorrow by business and income tax receipts from sole traders and SMEs.
“Two-thirds of our spending is now welfare payments and payments to public servants. If you want an adjustment on the spending side you have to cut pay for public servants or cut rates for social welfare,” he told RTÉ News. “I have not seen many people advising me to do that. Let’s get real where the balance has to be struck here. Anyone who suggests that this cannot be done without tax is deceiving themselves.” Well, Minister, this is what happens when you surround yourself with lackeys for advisers. If 2/3rds of your household bill goes to pay servants and your non-working extended family, you are in an MCHammer-land: fat trousers and bankrupt estate.
My advice to our Minister-in-Charge-of-Bankrupting-Ireland is to get his head of the sand: cut 20% of the public pay bill by laying off some, trimming wages of others and scaling back pensions to those retired will be a good start. Follow it up with welfare spending cuts and stronger enforcement of welfare standards: unemployment benefits down by 5%, social welfare rates down by 15%.
Otherwise, Mr Lenihan's default rates on Budget forecasts will exceed those of the US junk bonds... Then again, it is hard to tell right now which paper is of higher quality.
Capital flows and Irish Capital Acquisitions Data:
Per mu post yesterday, here are two charts (from Follow the Money)
showing US financial and trade flows dynamics and an even faster fall off in the capital formation. Clearly, our yesterday's CSO data is somewhat different, which suggests to me that Irish stats on relatively slow-declining capital acquisition in the industrial sectors are linked to some accounting trickery more than to real acquisitions. If the rest of the world is falling through the basement, how can Ireland still be hanging around in its first floor bedroom?Over5seas Travel Data from CSO is out: predictably, the number of trips abroad by Irish residents fell by 13.4% to 474,000 in February 2009 compared to 547,600 a year ago. February 2009 overseas trips to Ireland were down 5.5% to 445,200 from the same month in 2008. Visits from the UK fell by 15,000 (5.8%) to 244,800. Trips from Other Europe increased by 1% to
149,100 while those from North America fell by almost 20% to 37,500. Chart below (courtesy of CSO) illustrates:
In 2009 to date, trips abroad by Irish residents are down by almost 11% to 976,100, "a complete reversal of the growth rate achieved in 2008". Overseas trips to Ireland are down 4.3% to 869,400 compared to an increase of almost 1% in 2008.Saturday, April 4, 2009
Public Sector's Missing 'Pains'
Charts below are self-illustrative:
A lesson to be learned by voters: they (Brian, Brian & Mary) don't give a damn if we know or not.
- Public Sector Employment is up,
- Public Sector Wages are up,
- Public sector wages dispersion is extremely low across all categories, so Unions' claim that in some sectors wages are too low simply does not add up (per above and below)
- Cost Savings promised in July 2008, September 2008, October 2008, November 2008, December 2008, January 2009, February 2009, March 2009 and that will be promised comes next week's Mini-Budget are nowhere to be seen.
A lesson to be learned by voters: they (Brian, Brian & Mary) don't give a damn if we know or not.
Housekeeping: Daily Economics 02/04/09
So per your comments, let's start from the top.
First comment by the Anonymous:
I do not anticipate any significant reduction in the social welfare. Social welfare, from my point of view is divided into 2 parts:
"(b) The PRSI ceiling lifted - hitting the middle/upper income bracket with a stealth 4% tax on top of levies up to 6% - Bye Bye wealth creators, entrepreneurs and prospective international employers". Distinctly possible - trade unions will buy this and for the Government this is a soft target. The measure will disproportionately hit those who are self-employed and/or employ others. In a labour-intensive world of services based economy, this will be a disaster.
"(d) announce property tax on private residence for next year: this is the most insane of all so it warrants further analysis: We have plenty of evidence from our pre-98 property tax days - it was a disaster which produced no net income... - do we honestly think people who paid huge stamp duty and saddled with big management fees and mortgage costs will do their patriotic duty and pay? ...This property tax will cost too much to collect; it will be political dynamite - up for abolition at every election. Contrary to David McWilliam's view that it is not a tax on work and therefore should be pursued I would strongly disagree. For instance who does he think would be asked be pay such a tax? ...in fact it would be yet another tax on work NOT to mention further damaging the already crippled property sector. Which by the way we own through our guarantee of the banking system. The time to consider this type of annual property tax is (if ever) only when we see clear signs of recovery so it can be truly counter-cyclical, but not beforehand."
A lot is going on this point. Some property tax will be introduced, undoubtedly, later this year. And property-linked tax is, in my view, needed. I believe it should be based on land value of your property, not property itself - for many reasons which I will explain over time, so keep reading this blog in the future. Your arguments against property tax above are related to three main points: (1) cost and efficiency of administration; (2) incidence of taxation burden; and (3) timing.
On (1), I agree, our clowns will have hard time coming up with anything serious. Most likely, replacement of the half-brains we have with more half-brains that are lurking behind them - i.e our glamorous Opposition - is not going to solve this problem. But at least we can try. And the cost of setting up an LVT system does not need to be high - Daft.ie can run the entire housing market off a laptop, so can Land Registry Office, especially if we leave one chap/gal working there and tell them: "do it, or you are out of the job..."
On (2) land value tax will not have the same adverse effects as a property tax. First, LVT will not affect disproportionately those with higher mortgages, because their properties were mostly bought at the height of Celtic Tiger and are, therefore, located on poorer quality land (e.g bedroom communities, rather than D4). It will actually have a stronger impact on those who bought many years ago and who are now net recipients of transfers from improved land around them. This said, transition to LVT must take into account stamp duty paid, say in the last 7-10 years. It also should replace the stamp duty, in a revenue neutral way at the start. As far as who pays LVT - of course it will be the middle class and the 'rich' - there is no way around this. But some cash-poor, asset rich folks - families on social welfare that have inherited large homes - will be forced to trade down. This is good news. They under utilise their assets and thus should be given an incentive to trade these assets to improve their own income stream and improve the prospects of higher economic returns to resources. This is not a direct tax on labour and it does not discourage more effort/investment in human capital. In fact, it encourages the latter by bringing closer to reality the artificially depressed rates of return to higher education in Ireland.
On (3) - timing. It does not matter much when you introduce LVT, because you would set it on the basis of 2-3 year average valuation of land, not on the basis of an immediate land value. Depressing the returns to land - which LVT will do - will amplify the returns to adding value to that land through quality development, so you can think of LVT as being stimulative of good development and depressive of the overall sunk cost of development. It is, therefore, an expected support to the construction and property sector, but only in the area of added value, not speculative land banks holding.
"(f) reduce tax breaks on redundancy payments (excusing it by saying it will only affect to 'rich' i.e. payments above €100k - of course these unfortunates wont be rich for long as there ain't any jobs left and the banks will want this €100k to payback loans/mortgages etc." Yes, this will be damaging to the economy and the more vulnerable people who lose their better paying (and more productive) jobs. Given the structure of layoffs - with younger workers getting axed first - courtesy of our Unions'-sponsored idiotic labour policies - this measure will put extremely severe pressure on the households with greatest mortgages exposure, inducing a spike in mortgage defaults.
And per your intention to find a better location for your business - spot on. Your civic duty is to look after your own rate of return to your own talents and work. It is not to provide Cowen and the rest of the goons in the Leinster House with cash to waste. All I would ask of you is to send a Christmas postcard to your local TDs and to Cowen saying "Thanks to you, I am living outside Ireland now! Because of this, this year you will not be getting my taxes."
Per Fintan's comment:
"I wonder are we cynically waiting for the IMF to come in and force us to finally slash the untouchable public and social welfare bill? Sadly I think this government will try to play to gallery and therefore put most of the burden on the dwindling higher earners and naively expect this shrinking group to remain in Eire. They will not - this group is much more mobile than the govt thinks." Yes, Fintan, I agree with you. One small caveat - remember that when they tax higher earners - many of the PAYE higher earners are actually public sector employees... and the Government ministers etc.
Per third comment - by Anonymous:
I agree that one of the critical subheads is social welfare. It is a form of modern day slavery in so far as it locks potentially productive lives into a state of perpetual dependency. Higher taxation burden on lower income earners will indeed incentivise more transition out of work, so a cut in social welfare is needed urgently, especially as wages are falling.
Per immigrant labour: I am not sure you are right that we "had hundreds of thousands of immigrants paying little or no tax". Many of these immigrants were not aware of the tax deductions and did not avail of these, so while some have probably paid no tax (being out of tax net on the basis of their income or registered as sole-traders or employed via Northern Ireland-based subcontracting firms - practices well established in the construction sector), many were overpaying tax. In addition, thousands that went back home are now out of our pensions and welfare nets. On the net, I still believe immigration has contributed to the economy.
I warned (here) that our immigration flows since 2004 were of much lower (Human Capital-wise) quality and that this will end up costing us in terms of economic efficiency. A simple selection bias model would show that immigrants with above-average skills and aptitude are more likely to leave Ireland once they become unemployed, save for the social welfare generosity here. So the increases in the Live Register due to immigrants here are reflective of two things: (1) lower quality migrants choosing to stay here; (2) people who actually anchored themselves to Ireland (negative equity, family ties etc).
A friend of ours was made redundant this week - a Polish national who lived in Ireland over 10 years now and who was never redundant before. Professional girl, with good education (some of which she completed here, having paid out-of-EU tuition back before 2004). Should she be allowed access to unemployment benefits? Hell, yes. Should she be allowed this access ahead of a native person who have not contributed as much to the economy over the last 10 years, having, say, tapped the system of welfare instead of working? Yes, again.
What I mean here is that we have to be careful not to throw baby with the bath water - some (many) immigrants are very productive, very much contributive economically, socially, culturally to this country. They must not be bunched with the loafers and low-quality workers we have been attracting as well.
Over 20% of immigrants are unemployed and now on social welfare.As all the other tax revenue sub heads are down ,income tax is the only one they are going to target to pay for this.
This means immigration has been a burden on the Irish taxpayer.This ,in my opinion will have a negative effect on sentiment towards immigration.
It might be a selfish statement - coming from myself - given that I am a foreigner (having come to Ireland from the US and being a Russian and an Armenian), my wife is a foreigner (being an Italian and a Native American) and my son is somewhat a foreigner (Irish, American, Russian and Italian - some mix of nationalities he has). Even my dog is bloody American... But the facts are very simple - there are here foreigners who are world class workers and citizens. I know several Russians, Georgians, Serbs, Czechs, Ukrainians, you name it, in Trinity who either worked in the past or can work now in Yale, Princeton, Harvard, Chicago - you name it. They are obviously not a problem. On the other hand, I see hundreds of Eastern Europeans hanging about cash machines begging for money.
"More PPS numbers were issued to Non nationals in February and March than were issued to Irish people. Its hard to credit that all these new non nationals are taking up jobs here in this savage downturn. Something is not right. Is it possible some are somehow coming here and immediately going on social welfare?"
I have not seen the latest PPS numbers. But remember - PPS numbers are an opportunistic measure of actual employment. They might be a signal of an intention to seek employment, but they do not tell us whether a person was seeking long-term employment or just a summer (or even shorter) job, whether they were actually doing any labour search or whether they stayed in the country at all. Fortunately, our idiots in the Leinster House did set out a requirement that an Accession States citizens must work in this country for a number of years (in some instance, though - months) before accessing welfare system. You can see some of the details here. At the time of the Citizenship Referendum, I argued that the 2 years requirement (most extensive benchmark for accessing the welfare) is too short and should be extended to 5 years, with no exemptions for any forms of welfare. Of course, BBC, Irish Times and the rest of the 'Left' have accused me at the time of being anti-immigrant, even racist... Alas, in the end we opted for a shorter period.
"Why is rent income supplement being paid out when there are 250,ooo empty houses in the State? There is an oversupply of accommodation.Rent should be on the floor. Instead the taxpayer is subsiding landlords. I think the figure for this is around a Billion euros a year." Spot on - it is too costly and too loosely administered scheme that does not encourage tenants on assistance to seek cheaper accommodation. Cut assistance back by 20% to reflect the actual drop in rents and index future payments to average rents. We have social welfare recipients affording life in D4, while families that pay taxes cannot afford renting accommodation in D24! I would also remove social welfare housing out of Dublin City Center altogether (with exception of the elderly) and make the land available for development to accommodate families that actually work in the city. It is absurd that for the sake of 'maintaining community' we encourage city center residency for those who do not work (and who often contribute to social problems in the areas), while we require people who pay for this luxury to commute hours on end.
As Yeats said.. ''...things fall apart,the centre cannot hold...'' The middle classes cannot hold in this madness. Yes, it is time to send Cowen a note saying 'We are not paying your taxes anymore - get stuffed!" from each and everyone of us!
First comment by the Anonymous:
I do not anticipate any significant reduction in the social welfare. Social welfare, from my point of view is divided into 2 parts:
- unemployment benefits - which should be fully replaced with private unemployment insurance (competitively supplied and paid for by transferring PRSI into a mandatory insurance purchase). This will automatically restrict access to benefits to those who actually worked in the state. Under the current PAYG system, a cut in the benefit should not exceed 5-7% as people are losing their job and they do need assistance;
- long-term welfare benefits - which include housing assistance, direct payments etc. These have to be cut by 20-25% to bring them closer to the UK levels. The benefits should have a life-time cap of, say, 10 years. Of course, exceptions, e.g lifetime disability, apply. Several reasons for doing so include: aligning the incentives to work and reducing incentives for people from elsewhere in Europe to migrate under our welfare umbrella. Social welfare recipients must be required to perform civic duties - cleaning up graffiti and parks, for example, which can total 5-10 hours per week. Welfare assistance to families with children should be conditional on children staying in school and not committing social order offences.
"(b) The PRSI ceiling lifted - hitting the middle/upper income bracket with a stealth 4% tax on top of levies up to 6% - Bye Bye wealth creators, entrepreneurs and prospective international employers". Distinctly possible - trade unions will buy this and for the Government this is a soft target. The measure will disproportionately hit those who are self-employed and/or employ others. In a labour-intensive world of services based economy, this will be a disaster.
"(d) announce property tax on private residence for next year: this is the most insane of all so it warrants further analysis: We have plenty of evidence from our pre-98 property tax days - it was a disaster which produced no net income... - do we honestly think people who paid huge stamp duty and saddled with big management fees and mortgage costs will do their patriotic duty and pay? ...This property tax will cost too much to collect; it will be political dynamite - up for abolition at every election. Contrary to David McWilliam's view that it is not a tax on work and therefore should be pursued I would strongly disagree. For instance who does he think would be asked be pay such a tax? ...in fact it would be yet another tax on work NOT to mention further damaging the already crippled property sector. Which by the way we own through our guarantee of the banking system. The time to consider this type of annual property tax is (if ever) only when we see clear signs of recovery so it can be truly counter-cyclical, but not beforehand."
A lot is going on this point. Some property tax will be introduced, undoubtedly, later this year. And property-linked tax is, in my view, needed. I believe it should be based on land value of your property, not property itself - for many reasons which I will explain over time, so keep reading this blog in the future. Your arguments against property tax above are related to three main points: (1) cost and efficiency of administration; (2) incidence of taxation burden; and (3) timing.
On (1), I agree, our clowns will have hard time coming up with anything serious. Most likely, replacement of the half-brains we have with more half-brains that are lurking behind them - i.e our glamorous Opposition - is not going to solve this problem. But at least we can try. And the cost of setting up an LVT system does not need to be high - Daft.ie can run the entire housing market off a laptop, so can Land Registry Office, especially if we leave one chap/gal working there and tell them: "do it, or you are out of the job..."
On (2) land value tax will not have the same adverse effects as a property tax. First, LVT will not affect disproportionately those with higher mortgages, because their properties were mostly bought at the height of Celtic Tiger and are, therefore, located on poorer quality land (e.g bedroom communities, rather than D4). It will actually have a stronger impact on those who bought many years ago and who are now net recipients of transfers from improved land around them. This said, transition to LVT must take into account stamp duty paid, say in the last 7-10 years. It also should replace the stamp duty, in a revenue neutral way at the start. As far as who pays LVT - of course it will be the middle class and the 'rich' - there is no way around this. But some cash-poor, asset rich folks - families on social welfare that have inherited large homes - will be forced to trade down. This is good news. They under utilise their assets and thus should be given an incentive to trade these assets to improve their own income stream and improve the prospects of higher economic returns to resources. This is not a direct tax on labour and it does not discourage more effort/investment in human capital. In fact, it encourages the latter by bringing closer to reality the artificially depressed rates of return to higher education in Ireland.
On (3) - timing. It does not matter much when you introduce LVT, because you would set it on the basis of 2-3 year average valuation of land, not on the basis of an immediate land value. Depressing the returns to land - which LVT will do - will amplify the returns to adding value to that land through quality development, so you can think of LVT as being stimulative of good development and depressive of the overall sunk cost of development. It is, therefore, an expected support to the construction and property sector, but only in the area of added value, not speculative land banks holding.
"(f) reduce tax breaks on redundancy payments (excusing it by saying it will only affect to 'rich' i.e. payments above €100k - of course these unfortunates wont be rich for long as there ain't any jobs left and the banks will want this €100k to payback loans/mortgages etc." Yes, this will be damaging to the economy and the more vulnerable people who lose their better paying (and more productive) jobs. Given the structure of layoffs - with younger workers getting axed first - courtesy of our Unions'-sponsored idiotic labour policies - this measure will put extremely severe pressure on the households with greatest mortgages exposure, inducing a spike in mortgage defaults.
And per your intention to find a better location for your business - spot on. Your civic duty is to look after your own rate of return to your own talents and work. It is not to provide Cowen and the rest of the goons in the Leinster House with cash to waste. All I would ask of you is to send a Christmas postcard to your local TDs and to Cowen saying "Thanks to you, I am living outside Ireland now! Because of this, this year you will not be getting my taxes."
Per Fintan's comment:
"I wonder are we cynically waiting for the IMF to come in and force us to finally slash the untouchable public and social welfare bill? Sadly I think this government will try to play to gallery and therefore put most of the burden on the dwindling higher earners and naively expect this shrinking group to remain in Eire. They will not - this group is much more mobile than the govt thinks." Yes, Fintan, I agree with you. One small caveat - remember that when they tax higher earners - many of the PAYE higher earners are actually public sector employees... and the Government ministers etc.
Per third comment - by Anonymous:
I agree that one of the critical subheads is social welfare. It is a form of modern day slavery in so far as it locks potentially productive lives into a state of perpetual dependency. Higher taxation burden on lower income earners will indeed incentivise more transition out of work, so a cut in social welfare is needed urgently, especially as wages are falling.
Per immigrant labour: I am not sure you are right that we "had hundreds of thousands of immigrants paying little or no tax". Many of these immigrants were not aware of the tax deductions and did not avail of these, so while some have probably paid no tax (being out of tax net on the basis of their income or registered as sole-traders or employed via Northern Ireland-based subcontracting firms - practices well established in the construction sector), many were overpaying tax. In addition, thousands that went back home are now out of our pensions and welfare nets. On the net, I still believe immigration has contributed to the economy.
I warned (here) that our immigration flows since 2004 were of much lower (Human Capital-wise) quality and that this will end up costing us in terms of economic efficiency. A simple selection bias model would show that immigrants with above-average skills and aptitude are more likely to leave Ireland once they become unemployed, save for the social welfare generosity here. So the increases in the Live Register due to immigrants here are reflective of two things: (1) lower quality migrants choosing to stay here; (2) people who actually anchored themselves to Ireland (negative equity, family ties etc).
A friend of ours was made redundant this week - a Polish national who lived in Ireland over 10 years now and who was never redundant before. Professional girl, with good education (some of which she completed here, having paid out-of-EU tuition back before 2004). Should she be allowed access to unemployment benefits? Hell, yes. Should she be allowed this access ahead of a native person who have not contributed as much to the economy over the last 10 years, having, say, tapped the system of welfare instead of working? Yes, again.
What I mean here is that we have to be careful not to throw baby with the bath water - some (many) immigrants are very productive, very much contributive economically, socially, culturally to this country. They must not be bunched with the loafers and low-quality workers we have been attracting as well.
Over 20% of immigrants are unemployed and now on social welfare.As all the other tax revenue sub heads are down ,income tax is the only one they are going to target to pay for this.
This means immigration has been a burden on the Irish taxpayer.This ,in my opinion will have a negative effect on sentiment towards immigration.
It might be a selfish statement - coming from myself - given that I am a foreigner (having come to Ireland from the US and being a Russian and an Armenian), my wife is a foreigner (being an Italian and a Native American) and my son is somewhat a foreigner (Irish, American, Russian and Italian - some mix of nationalities he has). Even my dog is bloody American... But the facts are very simple - there are here foreigners who are world class workers and citizens. I know several Russians, Georgians, Serbs, Czechs, Ukrainians, you name it, in Trinity who either worked in the past or can work now in Yale, Princeton, Harvard, Chicago - you name it. They are obviously not a problem. On the other hand, I see hundreds of Eastern Europeans hanging about cash machines begging for money.
"More PPS numbers were issued to Non nationals in February and March than were issued to Irish people. Its hard to credit that all these new non nationals are taking up jobs here in this savage downturn. Something is not right. Is it possible some are somehow coming here and immediately going on social welfare?"
I have not seen the latest PPS numbers. But remember - PPS numbers are an opportunistic measure of actual employment. They might be a signal of an intention to seek employment, but they do not tell us whether a person was seeking long-term employment or just a summer (or even shorter) job, whether they were actually doing any labour search or whether they stayed in the country at all. Fortunately, our idiots in the Leinster House did set out a requirement that an Accession States citizens must work in this country for a number of years (in some instance, though - months) before accessing welfare system. You can see some of the details here. At the time of the Citizenship Referendum, I argued that the 2 years requirement (most extensive benchmark for accessing the welfare) is too short and should be extended to 5 years, with no exemptions for any forms of welfare. Of course, BBC, Irish Times and the rest of the 'Left' have accused me at the time of being anti-immigrant, even racist... Alas, in the end we opted for a shorter period.
"Why is rent income supplement being paid out when there are 250,ooo empty houses in the State? There is an oversupply of accommodation.Rent should be on the floor. Instead the taxpayer is subsiding landlords. I think the figure for this is around a Billion euros a year." Spot on - it is too costly and too loosely administered scheme that does not encourage tenants on assistance to seek cheaper accommodation. Cut assistance back by 20% to reflect the actual drop in rents and index future payments to average rents. We have social welfare recipients affording life in D4, while families that pay taxes cannot afford renting accommodation in D24! I would also remove social welfare housing out of Dublin City Center altogether (with exception of the elderly) and make the land available for development to accommodate families that actually work in the city. It is absurd that for the sake of 'maintaining community' we encourage city center residency for those who do not work (and who often contribute to social problems in the areas), while we require people who pay for this luxury to commute hours on end.
As Yeats said.. ''...things fall apart,the centre cannot hold...'' The middle classes cannot hold in this madness. Yes, it is time to send Cowen a note saying 'We are not paying your taxes anymore - get stuffed!" from each and everyone of us!
Monday, March 30, 2009
Cowen is just 3 weeks behind this blog?
When I was updating my budget deficit forecasts last week, I noted that the Government has been catching up quickly with my predictions from December, followed by February forecast for a shortfall in revenue.
Now, like Ireland behind Iceland (with an alleged 3-months delay), our Government is about 3 weeks behind this blog. Today's papers report that Brian Cowen now expects a tax revenue of €32bn in 2009. Well, I'll be damned... see my latest update here projecting €31.4bn in revenue.
Of course, a speculation is due - the results are to be released on the 3rd of April. Last month, Biffo didn't bother to read these in advance, nor did anyone else in the Government. This ended up looking like the Government that can't handle its own figures (which, obviously, the can't) let alone deal with the crisis in the entire economy (ditto). Maybe this time around Brian^2+Mary decided to set aside some time to govern? Fat chance. I think the entire drip-feeding of new - downward - figures is designed not for the public consumption but for the clandestine Partnership Talks going on.
Per information I gathered from the sources at that Partnership Table, last week, the Government managed to present a half-baked argument that things have bottomed out in the economy already. Improvement is around the corner and thus we can borrow our way through this. Documents I have seen - given to the Partners - showed relatively rosy forecasts for 2009 and 2010. The Government, it appears, also believes that it has resolved successfully the financial institutions crisis via a mix of past policies and the forthcoming scheme for dealing with 'bad' loans. It further claimed that it will be delivering a stimulus package, icnlsuive of some enterprise credit support measures - alongside the mini-Budget next week.
Well the latter might have something to do with a forthcoming document from one serious international organization that we are the members of which (later this week) will show that compared to other developed countries around the world, Ireland finds itself as:
But back to our Taoiseach's pronouncements on fiscal policy matters. At the same time as delivering 'good' news, keeping public pressure on the Partners by sending 'bad news' messages is a relatively unsophisticated practice that our Triumvirate is well capable of. So go figure.
By all measures to date, however, it looks like the March Exchequer returns are going to be very bad, even by our recent standards. Remember - you have read it first here. Biffo is still 3 weeks behind...
Now, like Ireland behind Iceland (with an alleged 3-months delay), our Government is about 3 weeks behind this blog. Today's papers report that Brian Cowen now expects a tax revenue of €32bn in 2009. Well, I'll be damned... see my latest update here projecting €31.4bn in revenue.
Of course, a speculation is due - the results are to be released on the 3rd of April. Last month, Biffo didn't bother to read these in advance, nor did anyone else in the Government. This ended up looking like the Government that can't handle its own figures (which, obviously, the can't) let alone deal with the crisis in the entire economy (ditto). Maybe this time around Brian^2+Mary decided to set aside some time to govern? Fat chance. I think the entire drip-feeding of new - downward - figures is designed not for the public consumption but for the clandestine Partnership Talks going on.
Per information I gathered from the sources at that Partnership Table, last week, the Government managed to present a half-baked argument that things have bottomed out in the economy already. Improvement is around the corner and thus we can borrow our way through this. Documents I have seen - given to the Partners - showed relatively rosy forecasts for 2009 and 2010. The Government, it appears, also believes that it has resolved successfully the financial institutions crisis via a mix of past policies and the forthcoming scheme for dealing with 'bad' loans. It further claimed that it will be delivering a stimulus package, icnlsuive of some enterprise credit support measures - alongside the mini-Budget next week.
Well the latter might have something to do with a forthcoming document from one serious international organization that we are the members of which (later this week) will show that compared to other developed countries around the world, Ireland finds itself as:
- the worst economically governed in the world;
- in deepest trouble when it comes to housing markets declines to date;
- the country that is applying all the wrong (uniquely Irish) remedies to its fiscal problems; and
- the country that is least well positioned to come out of this recession any time soon.
But back to our Taoiseach's pronouncements on fiscal policy matters. At the same time as delivering 'good' news, keeping public pressure on the Partners by sending 'bad news' messages is a relatively unsophisticated practice that our Triumvirate is well capable of. So go figure.
By all measures to date, however, it looks like the March Exchequer returns are going to be very bad, even by our recent standards. Remember - you have read it first here. Biffo is still 3 weeks behind...
Wednesday, March 25, 2009
Daily Economics Update 24/03/2009
Ireland:
I tried to resist commenting too much on Brian Cowen's remarks today concerning the extended borrowing he envisions for Ireland Inc in 2009. I tried, but this is simply an extraordinary statement from a person who is
I tried to resist commenting too much on Brian Cowen's remarks today concerning the extended borrowing he envisions for Ireland Inc in 2009. I tried, but this is simply an extraordinary statement from a person who is
- either clearly not capable of thinking straight in the crisis or
- from a politician, so cynical and obsessed with self-preservation that he is willing to preemptively surrender this nation's hope for economic survival in order to throw another bone to his political cronies.
Either way, Cowen today has managed to achieve nearly impossible in virtually a single breath:
- Putting Ireland closer to fiscal insolvency - by enhancing the (already significant) uncertainty as to how much he will borrow in 2009 (and through 2013) and on which terms (will Ireland be forced to continue borrowing short, front loading 2011-2013 deficits to finance Brian's 'Partners' today?);
- Destroying his own reputation by telling the world that he cannot be trusted on any of his future policy pronouncements (undoing his own pre-commitment to keep the deficit under 10% he stated that no budgetary projection, including yet to be published mini-Budget, from this Government can be trusted);
- Showing that this Government will flip flop not only on soft targets (e.g promises not to tax us to death), but also on hard ones (including his commitments to the EMU);
- Destroying whatever hopes the ECB and the EU Commission might have had that this Government can be a responsible participant in the EMU;
- Forcing the bonds markets into a situation where, from now on, no pricing of Irish debt paper can be conducted on a basis of rational valuation.
Only 3 weeks ago, Cowen was fully committed to keeping 2009 borrowing under 9.5% of GDP. He is now telling the world that this was all a matter for him to change his mind over. Perhaps the only reason for such an extraordinary statement I can think of is that possibly (I am speculating here), Cowen saw preliminary figures from the Exchequer revenue for March. Even then, there has to be a real 'nuke' in these figures to justify such a public humiliation of this economy in the eyes of the developed world.
Cowen said in his address that he is not willing to sacrifice the real economy on the altar of public finances. Coming from him, this is rich. Cowen and his Government
Cowen said in his address that he is not willing to sacrifice the real economy on the altar of public finances. Coming from him, this is rich. Cowen and his Government
- raised taxes in October 2008 and again in December 2008, and is going to raise them in April - 3 times in 7 months - amidst the wholesale collapse of the real economy (incidentally, these tax hikes were necessitated by the decisions on run-away train of public current expenditure growth that he adopted during his tenure as the Minister for Finance);
- raised VAT and other taxes directly impacting businesses, employment and public economic welfare, as his incompetent Minister for Enterprise sat silently beside him;
- raised levies, taxes and charges on all workers, including those who lost their jobs and then cynically turned around to wage an oratorical crusade about 'equality' and 'shared pain';
- paid public sector wage increases and then clawed some of these back, posturing as if a heroic leader who broke the mold 'to do the right thing';
- got in bed with trade unions in the Summer 2008 to produce a partnership agreement that committed the private sector taxpayers to servitude to public sector wage demands;
- once again cowardly moved into the new Partnership Talks last night as an excuse to surrender his policy making authority;
- presided over a largely failed set of actions on the banks that shored up (temporarily) Irish Developers Country Club at the expense of the real economy;
- watched idly as the real economy was falling off the cliff between June 2008 and October 2008;
- made wild promises of reforms and productivity enhancements in the public sector and delivered none;
- blamed everyone - from Americans to the World - for our economic ills, but not a single time managed to tell the nation that he is sorry for serial errors of judgment his Government committed in only 9 months in power;
- appointed the most incompetent person imaginable to run the key ministry in charge of our real economy (and no, I do not mean DofF here); and now
- turned our entire budgeting process into a public farce...
This is really rich!
Richard Brutton put it perfectly when he said today that “The spectacle of a Government thrashing around, unable to set any clear framework for a Budget that is just two weeks away is damaging our international reputation. It is damaging the confidence of markets from whom we hope to borrow €24 billion this year... This Government is destroying its authority to provide ...leadership.”
May I add that it is also destroying the real economy - the same one that Brian Cowen claims to be protecting.
International:
March McKinsey survey of economic conditions is out today, showing that "the percentage of the executives who say economic conditions have gotten worse at the national level hasn’t increased, but fewer than a third expect an upturn this year... 53 percent expect profits to drop in the first half of 2009, and the number expecting to shed workers has jumped eight percentage points in six weeks." Companies that are thought of as being well managed in the downturn are likelier:
Richard Brutton put it perfectly when he said today that “The spectacle of a Government thrashing around, unable to set any clear framework for a Budget that is just two weeks away is damaging our international reputation. It is damaging the confidence of markets from whom we hope to borrow €24 billion this year... This Government is destroying its authority to provide ...leadership.”
May I add that it is also destroying the real economy - the same one that Brian Cowen claims to be protecting.
International:
March McKinsey survey of economic conditions is out today, showing that "the percentage of the executives who say economic conditions have gotten worse at the national level hasn’t increased, but fewer than a third expect an upturn this year... 53 percent expect profits to drop in the first half of 2009, and the number expecting to shed workers has jumped eight percentage points in six weeks." Companies that are thought of as being well managed in the downturn are likelier:
- to be reducing both operating costs and capital spending,
- not weakening operations a great deal, and
- "are also likelier than others to be improving productivity".
US:
Existent sales up, prices up and now new home sales are up as well - what is the world (ok, the US) is turning into? Well, not anything resembling of a bull market, at least not yet. Per data released today, new homes sales were up 4.7% in February relative to the record low (since 1963) reached in January, but sales are still down 43.8% compared to February 2008. I worry that this is not a floor yet, but a slight bounce before further falls. Even if the current level signals an upturn in sales, things are bound to remain testing for a while, as inventory overhang remains enormous. A 2.9% fall in inventories of unsold homes in February still leaves 12.2-months worth of stuff unsold - up full 3 months on February 2008.
But there is more noisy data coming out today - there was an unexpected and a welcome rise in orders for durable goods - the first increase after six-straight-monthly declines. Offsetting the gain in February somewhat was a sharp downward revision to orders in January (from -4.5% in preliminary estimate, to -7.3% decline).
The best piece of analysis on this is on Bloomberg (here). In my own view - setting aside defense spending and consumer stuff - the gains are reflective most likely of amortization cycle (replacement of capital goods delayed during the previous 15 months) than due to capital inventories build up. There is also a strong 'noise' component to the rebound - given the precipitous fall in orders in Q4 2008, when durable goods orders fell at a rate not seen since the late 1950s.
The fact that we are seeing all this volatility in economic series away from the unrelenting downward trend is a good signal. In my view, as I said before, this is a sign that the markets are now seriously testing the floor of this recession. In other words, I now expect similar modest gains in some parameters and stabilization of other parameters through May, followed by the first positive gains in the capital spending and declines in new unemployment claims in June-August. This will put the US economy onto recovery path by mid-Q3-early-Q4.
Tuesday, March 24, 2009
'Happy Times' at NTMA: Updated
Remember that unrivaled shot of Borat sun-bathing on the banks of the river? Green unitard thong and brownish sand of post-Apocalypse industrial wasteland of a landscape? This is probably the scenery at NTMA today. The guys, and my heart goes to them for their effort (honestly - they did as good of a job as was possible under the circumstances), have gone away with loading into the markets a €700mln worth of 10-year Irish bonds. They wanted to upload €1bn, but stopped selling 30% short of the target. Why, you might ask? Well, it all comes down to terms. There is no actual information on bid spreads, but the average was 5.80%, lowest price of 89.6, average price 89.527. Yikes.
Some time ago I predicted that we might see 6.5-7% yields on Irish Government paper by the year end. Well, that was before the latest 50bps drop in the ECB rate (March 11), implying that at 5.80% today we are in the territory of 6.00-6.10% already if compared with the situation before March 11th.
What is even more telling is that I was right on March 10 when I priced 10-year bonds in the range of 5.7%-5.9% (here).
Lastly, it is worth looking at the volume of issue - €700mln... sunflower seeds for the public sector - at current rate of spending, Brian^2+Mary are going to get through this amount in less than 4 days and 1 hour 30 minutes. NTMA is better start issuing new paper weekly at that rate of spend! Or maybe they should pick up a phone and dial Leinster House, asking to stop the madness of bleeding the taxpayers and companies to feed the beast of our public sector and start cutting fat. Showing the markets that Ireland's Government is not just a public sector unions' crony and is capable of getting its fiscal policy under control just might bring down the cost of borrowing.
Happy Times?
Update: the media is singing praise for yesterday's issue, but hold on: they say we raised €1bn, in reality, we raised only €700mln in 10-year paper and €300mln in 3-year paper. You don't have to be genius to see that the 3-year stuff is going to mature before the expiration of the 2013 deadline for putting our finances in order. So in effect, we kicked €300mln worth of a problem into the scoring zone... This is equivalent to a drug addict's miraculous 'recovery' reports when the chap simply stashed some powder for a quick hit in a couple of hours time. Some success.
More details from NTMA itself: for the 10-year bond, lowest price 89.46 at yield of 5.818%, weighted average yield 5.808%. Pricey stuff this is and wait until the mini-budget shows the rest of the world that Cowen has no intention of seriously tackling the deficit - where will we be next time we shove pile of debt into pre-2013 maturity?
And you don't have to be a genius to recognize that if the state completes one 'successful' auction like the one yesterday per month, NTMA will have, by the end of 2009:
Some time ago I predicted that we might see 6.5-7% yields on Irish Government paper by the year end. Well, that was before the latest 50bps drop in the ECB rate (March 11), implying that at 5.80% today we are in the territory of 6.00-6.10% already if compared with the situation before March 11th.
What is even more telling is that I was right on March 10 when I priced 10-year bonds in the range of 5.7%-5.9% (here).
Lastly, it is worth looking at the volume of issue - €700mln... sunflower seeds for the public sector - at current rate of spending, Brian^2+Mary are going to get through this amount in less than 4 days and 1 hour 30 minutes. NTMA is better start issuing new paper weekly at that rate of spend! Or maybe they should pick up a phone and dial Leinster House, asking to stop the madness of bleeding the taxpayers and companies to feed the beast of our public sector and start cutting fat. Showing the markets that Ireland's Government is not just a public sector unions' crony and is capable of getting its fiscal policy under control just might bring down the cost of borrowing.
Happy Times?
Update: the media is singing praise for yesterday's issue, but hold on: they say we raised €1bn, in reality, we raised only €700mln in 10-year paper and €300mln in 3-year paper. You don't have to be genius to see that the 3-year stuff is going to mature before the expiration of the 2013 deadline for putting our finances in order. So in effect, we kicked €300mln worth of a problem into the scoring zone... This is equivalent to a drug addict's miraculous 'recovery' reports when the chap simply stashed some powder for a quick hit in a couple of hours time. Some success.
More details from NTMA itself: for the 10-year bond, lowest price 89.46 at yield of 5.818%, weighted average yield 5.808%. Pricey stuff this is and wait until the mini-budget shows the rest of the world that Cowen has no intention of seriously tackling the deficit - where will we be next time we shove pile of debt into pre-2013 maturity?
And you don't have to be a genius to recognize that if the state completes one 'successful' auction like the one yesterday per month, NTMA will have, by the end of 2009:
- raised maximum of €10bn, while we need €15bn just to stay afloat this year;
- pushed some €7bn (€3bn in monthly auctions, plus €4bn in February sale) in new debt into 2011;
- reached €63.5bn national debt level (up from €52.5bn as of the end of February); and
- forced Ireland Inc even further away from meeting its commitment to the European Commission of getting under 3% budget deficit limit by 2013.
Friday, March 20, 2009
Daily Economics Update 20/03/2009 - II
Ireland
Retail Sales volume decreases by 20.4% in January 2009 relative to a year ago, per CSO report out today. In monthly terms, index fell 9.4%. Mad numbers. And the things are going only to get worse, given the inept, virtually economically illiterate policies this Government has been putting out to date. Motor trades collapsed by 42.2% in January 2009 - in part due to tax hikes in October, in part due to VRT and road tax changes by the Greens, and to a large extent due to income uncertainty being hammered by the additional uncertainty as to the tax hikes the Government is planning to inflict on this already devastated economy. Ex-motor trade the volume of retail sales decreased by 8.1% in January 2009 compared to January 2008 and the monthly change was -0.1%. The value of retail sales decreased by 19.9% in January 2009 compared to January 2008 and decreased by 10.0% in the month. These are the largest annual decreases on record (1974 for volume record, 1962 for value).
Food, beverages & tobacco were down -11.6% in volume and -8.2% in value annually. These are inelastic demand articles, showing the full extent of consumers taking their business out of the Brian^2+Mary-devastated Ireland to the North and the Continent. Virtually every category of durable goods - goods that can be purchased up North and brought back to Ireland - is showing decreases in the 20-30% range. This is the real cost of Government's incompetence and the real indication that for all the wishful thinking our pro-tax-and-spend economists (in academe and SIPTU/ICTU) might deploy arguing that higher VAT will produce higher revenue, the reality of raising VAT (or income tax, for that matter) in terms of Exchequer revenue is going to be brutally contrarian.
Check other commentators' view - here Gerard O'Neill's blog on the topic, comparing the situation to "economic bungee jumping without the bungee". Well put! And here is another good comment worth reading.
Myles' post links to a report produced by the Office of the Revenue Commissioners and the CSO in February 2009, desperately trying to explain away the price differentials between the Republic and NI by all possible means other than those that put blame at the feet of the Government. Myles cuts past the bull&castle stuff in the report and, I think, correctly places most of the blame on the Government policies of squeezing consumers out of their earnings. But the linked report is fun. Fun, because it had to rely on, wait, other Government reports (e.g. June 2008 report by that illustrious data collection and analysis organization - the National Consumer Agency - that wouldn't know a data point if it jumped out of the hedge and bit it, and December 2008 Forfas report that was so poorly prepared and sampled that it was rubbished by several subsequent responses to it, including some from the objective/disinterested organizations and individuals). So I do encourage you to read through the report that Myles links in his blog - it is a good example of self-referential work being done by Government agencies.
Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post.
Oh, and here is a pearl: Industrial wars are heating up... This is from IFUT - "a professional association and union representing over 1400 staff in third-level institutions" (hat tip to an Anonymous)
"Subject: BALLOT FOR INDUSTRIAL ACTION
I wish to advise you that the Ballot for Industrial Action was counted today and the following is the result:
US
According to the latest data from the US Treasury Department (here) the US public debt just passed $11 trillion. Chart below (courtesy Seeking Alpha - here) illustrates.
If you think Obamanomics will be the New Bill Clinton era, think again - more than $2trillion worth of new US bonds to be issued this year alone is going to see this chart shooting for $13trillion mark by the end of 2009. Thereafter? The sky is the limit.
Although dollar is currently trading on the upside (0.41%) to the euro, given the US public debt trajectory and factoring in the aggressive quantitative easing by the Fed, it is hard to see how the green buck can stay below $1.45-1.47/1euro range...
To update you on General Electric figures concerning GE Capital's (alleged) rude health, here is a link to investor presentation.
An interesting (and pioneering) case is developing in the US: the battle-ravaged AIG filed a lawsuit against Countrywide Financial Corp - one of the largest issuers of MBS. The lawsuit alleges the mortgage lender misrepresented the underwriting standard of loans that the AIG unit insured. The claim is that mortgages packages insured by AIG either violated Countrywide’s own guidelines or contained defects. Surely this paves the road to European insurers to sue mortgage providers and MBS-issuers. The big question for Irish financials is now - how soon can this wave of liabilities reach our own shores?
A Georgia-based FirstCity Bank was closed by the US regulators today, marking the 18th bank failure of 2009. Regulators also shut down some US credit unions with assets of up to $57bn.
Retail Sales volume decreases by 20.4% in January 2009 relative to a year ago, per CSO report out today. In monthly terms, index fell 9.4%. Mad numbers. And the things are going only to get worse, given the inept, virtually economically illiterate policies this Government has been putting out to date. Motor trades collapsed by 42.2% in January 2009 - in part due to tax hikes in October, in part due to VRT and road tax changes by the Greens, and to a large extent due to income uncertainty being hammered by the additional uncertainty as to the tax hikes the Government is planning to inflict on this already devastated economy. Ex-motor trade the volume of retail sales decreased by 8.1% in January 2009 compared to January 2008 and the monthly change was -0.1%. The value of retail sales decreased by 19.9% in January 2009 compared to January 2008 and decreased by 10.0% in the month. These are the largest annual decreases on record (1974 for volume record, 1962 for value).
Food, beverages & tobacco were down -11.6% in volume and -8.2% in value annually. These are inelastic demand articles, showing the full extent of consumers taking their business out of the Brian^2+Mary-devastated Ireland to the North and the Continent. Virtually every category of durable goods - goods that can be purchased up North and brought back to Ireland - is showing decreases in the 20-30% range. This is the real cost of Government's incompetence and the real indication that for all the wishful thinking our pro-tax-and-spend economists (in academe and SIPTU/ICTU) might deploy arguing that higher VAT will produce higher revenue, the reality of raising VAT (or income tax, for that matter) in terms of Exchequer revenue is going to be brutally contrarian.
Check other commentators' view - here Gerard O'Neill's blog on the topic, comparing the situation to "economic bungee jumping without the bungee". Well put! And here is another good comment worth reading.
Myles' post links to a report produced by the Office of the Revenue Commissioners and the CSO in February 2009, desperately trying to explain away the price differentials between the Republic and NI by all possible means other than those that put blame at the feet of the Government. Myles cuts past the bull&castle stuff in the report and, I think, correctly places most of the blame on the Government policies of squeezing consumers out of their earnings. But the linked report is fun. Fun, because it had to rely on, wait, other Government reports (e.g. June 2008 report by that illustrious data collection and analysis organization - the National Consumer Agency - that wouldn't know a data point if it jumped out of the hedge and bit it, and December 2008 Forfas report that was so poorly prepared and sampled that it was rubbished by several subsequent responses to it, including some from the objective/disinterested organizations and individuals). So I do encourage you to read through the report that Myles links in his blog - it is a good example of self-referential work being done by Government agencies.
Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post.
Oh, and here is a pearl: Industrial wars are heating up... This is from IFUT - "a professional association and union representing over 1400 staff in third-level institutions" (hat tip to an Anonymous)
"Subject: BALLOT FOR INDUSTRIAL ACTION
I wish to advise you that the Ballot for Industrial Action was counted today and the following is the result:
Total Ballots Cast:
Those in Favour:
Those Against:
Spoiled Votes:
Therefore, the majority in favour being above the minimum set out in Rule 16 (b) (ii) we are authorised to participate in the ICTU National One-Day Stoppage scheduled for 30 March 2009..." blah-blah-blah, signed by the General Secretary of IFUT.
Note that per IFUT own website, there are over 1,400 members in this organization. Assuming the vote count reported is correct and that IFUT's rounding rules are the same as those holding for the rest of humanity, the ballot was passed with just 35-36% of the total number of eligible voters on a turnout of just above 50%. Hmmm... without a doubt - a mass-movement, supported by popular outrage against the Government.
US
According to the latest data from the US Treasury Department (here) the US public debt just passed $11 trillion. Chart below (courtesy Seeking Alpha - here) illustrates.
If you think Obamanomics will be the New Bill Clinton era, think again - more than $2trillion worth of new US bonds to be issued this year alone is going to see this chart shooting for $13trillion mark by the end of 2009. Thereafter? The sky is the limit.Although dollar is currently trading on the upside (0.41%) to the euro, given the US public debt trajectory and factoring in the aggressive quantitative easing by the Fed, it is hard to see how the green buck can stay below $1.45-1.47/1euro range...
To update you on General Electric figures concerning GE Capital's (alleged) rude health, here is a link to investor presentation.
An interesting (and pioneering) case is developing in the US: the battle-ravaged AIG filed a lawsuit against Countrywide Financial Corp - one of the largest issuers of MBS. The lawsuit alleges the mortgage lender misrepresented the underwriting standard of loans that the AIG unit insured. The claim is that mortgages packages insured by AIG either violated Countrywide’s own guidelines or contained defects. Surely this paves the road to European insurers to sue mortgage providers and MBS-issuers. The big question for Irish financials is now - how soon can this wave of liabilities reach our own shores?
A Georgia-based FirstCity Bank was closed by the US regulators today, marking the 18th bank failure of 2009. Regulators also shut down some US credit unions with assets of up to $57bn.
Wednesday, March 11, 2009
A Patent Lie: Ireland's Capital Investment Stimulus
In its April 2008 review of Ireland's economy, seen by the Government some 5 months prior to its publication, OECD has identified two salient medium term problems linked to the twin crises we are currently experiencing:
Reforming the taxation of housing. "...the unusually favourable tax treatment increases the role of housing in the economy and adds to volatility in the housing market. There should be a gradual move towards a more neutral system of housing taxation," said OECD. Thus, even assuming its ignorance prior to the OECD report, the Government had at least 15 months since to design a functioning system of either land-value or property taxation, there by reducing the impact of the house prices slowdown.
Public spending needs to slow. "Fiscal performance has been strong in recent years but revenue growth has moderated as the economy, particularly the housing market, has weakened. Public expenditure is set to slow but it is important to avoid locking-in expensive commitments, particularly on public sector pay. As spending rises more slowly, improving public services will have to rely more on undertaking further reforms to public sector management and getting better value for money." Once again, nothing has been done in over 15 months to address these recommendations.
Chart below - taken from the OECD report, illustrates the extent of the problem.
However, a closer examination of the components of the public expenditure in Ireland show even more dramatic failure by the Irish Governments to stop the gravy train of wasteful expenditure.
Consider the following chart plotting actual net current expenditure against capital expenditure, incorporating my own forecast for fiscal consolidation in 2009-2010 and DofF January 2009 forecasts for the same period.
Two features can be glimpsed from the chart:
Chart below shows the net current and capital expenditures as a percentage of GDP.
According to this chart, the economically unproductive spending which is largely absorbed into public sector wages and social welfare subsidies (our current expenditure):
Should you wonder how high were the rates of growth in current and capital expenditure over the last decade, chart below shows that in 2000-2009, even by DofF own (excessively optimistic) projections for this year, cumulative capital investment's importance in overall economy will decline by 39%. In contrast, cumulative current expenditure growth will reach +27%.
In short, the above figures show that:
Reforming the taxation of housing. "...the unusually favourable tax treatment increases the role of housing in the economy and adds to volatility in the housing market. There should be a gradual move towards a more neutral system of housing taxation," said OECD. Thus, even assuming its ignorance prior to the OECD report, the Government had at least 15 months since to design a functioning system of either land-value or property taxation, there by reducing the impact of the house prices slowdown.
Public spending needs to slow. "Fiscal performance has been strong in recent years but revenue growth has moderated as the economy, particularly the housing market, has weakened. Public expenditure is set to slow but it is important to avoid locking-in expensive commitments, particularly on public sector pay. As spending rises more slowly, improving public services will have to rely more on undertaking further reforms to public sector management and getting better value for money." Once again, nothing has been done in over 15 months to address these recommendations.
Chart below - taken from the OECD report, illustrates the extent of the problem.
However, a closer examination of the components of the public expenditure in Ireland show even more dramatic failure by the Irish Governments to stop the gravy train of wasteful expenditure.Consider the following chart plotting actual net current expenditure against capital expenditure, incorporating my own forecast for fiscal consolidation in 2009-2010 and DofF January 2009 forecasts for the same period.
Two features can be glimpsed from the chart:- Over the last decade, there has been a steady, unrelenting rise in the current expenditure - largely reflecting social welfare spending and the wage bill increases in the public service.
- Even before the mini-Budget this month, our capital expenditure has peaked in 2008. Recall that Brian Cowen and Mary Coughlan are endlessly repeating that in 2009-2010 NDP-linked capital investments will act as a stimulus to the economy. Either they have not seen their own Government projections, or cannot comprehend the reality. During the recessionary 2009-2010, Ireland Inc is planning to spend decreasing net amounts of funds on capital programmes. If the Government can think of the NDP (created two years ago) as a recession-busting stimulus, then it has fired virtually all of its ammunition in 2008. And, of course, that has made no difference to the recession, as we all know.
Chart below shows the net current and capital expenditures as a percentage of GDP.
According to this chart, the economically unproductive spending which is largely absorbed into public sector wages and social welfare subsidies (our current expenditure):- has grown virtually exponentially as a share of economy, whilst the capital investment programmes have bounced along a declining trend, and
- has far outstripped capital investment in terms of its role in the economy.
Should you wonder how high were the rates of growth in current and capital expenditure over the last decade, chart below shows that in 2000-2009, even by DofF own (excessively optimistic) projections for this year, cumulative capital investment's importance in overall economy will decline by 39%. In contrast, cumulative current expenditure growth will reach +27%.
In short, the above figures show that:- Our leaders have deceived us about the importance of capital investment in the economy: between 2000 and 2009, capital expenditure share of GDP has actually fallen, while the current expenditure share of GDP has risen much faster than the GDP itself;
- Since 2000, our Governments have misled the public about the nature of Exchequer expenditure growth by stressing less rapidly expanding investment portion of the budget and downplaying a rampant expansion of payoffs to the public and social welfare sectors promoted by the Social Partners;
- Our current leadership is now deceiving the country and the markets by referring to a falling capital-spending programme as economic stimulus. That 'stimulus' applied to 2008 and not 2009-2010 and even in 2008 it was relatively small, compared to the current spending waste;
- Our Governments since at least 1999 have engaged in reckless and unsustainable increases in the current expenditure - in 2000-2009, current spending has grown in nominal terms by 138%, outstripping almost 2:1 the rate of growth in the nominal GDP (72%). Meanwhile capital expenditure has grown by 57% - over 2.5times slower than the current expenditure.
Tuesday, March 10, 2009
Irish bonds - on the move again (updated)
UPDATE: see below
In case you've missed it, Irish bonds spreads are on a renewed march upwards - needless to say, in anticipation of the mini-Budget maxi-soaking-of-the-middle-class by Brian^2+Mary. Hat tip to BL, the chart explains all:
The same story told in price indices:
Of course, our primary (and not-so-primary) dealers keep telling us that Government bonds are fine, things are going swimmingly indeed. In the mean time, another local maximum is breached, 10-year at 223.4 and 5-year at 217.9. Term premium widened again. Perhaps the prospect of an imminent roll-over of the last month issue at maturity (2012) coinciding with still gargantuan budget deficits is driving the 10-year spread away from the 5-year bonds?.. Wait until we issue the next tranche.
Update: From NTMA press-release on February Euro4bn bond issue: "The bond attracted strong demand from domestic investors who subscribed 55% of the total, as well as investors from euro area countries (20%), the UK (13%) and the Middle East (9%). As would be expected with a relatively short maturity bond, banks accounted for 72% of the amount invested. Pension funds contributed 11%, fund managers 10% and Central Banks 7%." Does this suggest that most of the bond was 'bought-in' by the publicly-supported Irish Banks and the Euro-area Central Banks? After all a whooping 79% of the bond placement went to Banks and Central Banks (BCBs), 75% went to 'investors' (inclusive of BCBs) tothe euro area countries, and only a meagre 21% went to private institutionals (although how does one treat funds run by the state-supported banks?). As I said before, February issue was a pipe-priming for the low-quality issues to come that will aim from the origination date for placement with the BCBs. A helicopter drop, indeed, but not of money - of public waste!
Now, per current spreads: term premium on 5-10year bonds yield spreads is now at +2.52% or in pricing terms +6.6%, implying that our 3-year bond, priced at an annual yield to maturity (YTM) of 4.01% is equivalent, roughly, to a 5.7-5.9% yield for a 10-year security.
In case you've missed it, Irish bonds spreads are on a renewed march upwards - needless to say, in anticipation of the mini-Budget maxi-soaking-of-the-middle-class by Brian^2+Mary. Hat tip to BL, the chart explains all:
The same story told in price indices:
Of course, our primary (and not-so-primary) dealers keep telling us that Government bonds are fine, things are going swimmingly indeed. In the mean time, another local maximum is breached, 10-year at 223.4 and 5-year at 217.9. Term premium widened again. Perhaps the prospect of an imminent roll-over of the last month issue at maturity (2012) coinciding with still gargantuan budget deficits is driving the 10-year spread away from the 5-year bonds?.. Wait until we issue the next tranche.Update: From NTMA press-release on February Euro4bn bond issue: "The bond attracted strong demand from domestic investors who subscribed 55% of the total, as well as investors from euro area countries (20%), the UK (13%) and the Middle East (9%). As would be expected with a relatively short maturity bond, banks accounted for 72% of the amount invested. Pension funds contributed 11%, fund managers 10% and Central Banks 7%." Does this suggest that most of the bond was 'bought-in' by the publicly-supported Irish Banks and the Euro-area Central Banks? After all a whooping 79% of the bond placement went to Banks and Central Banks (BCBs), 75% went to 'investors' (inclusive of BCBs) tothe euro area countries, and only a meagre 21% went to private institutionals (although how does one treat funds run by the state-supported banks?). As I said before, February issue was a pipe-priming for the low-quality issues to come that will aim from the origination date for placement with the BCBs. A helicopter drop, indeed, but not of money - of public waste!
Now, per current spreads: term premium on 5-10year bonds yield spreads is now at +2.52% or in pricing terms +6.6%, implying that our 3-year bond, priced at an annual yield to maturity (YTM) of 4.01% is equivalent, roughly, to a 5.7-5.9% yield for a 10-year security.
Monday, March 9, 2009
Insanity of our policies
Limbering through crises since the end of 2007 (for its was painfully clear, following the credit markets stalling in July-August 2007, that the near future promises no prospect of continuity of the orgy of credit and debt that we partook in from the beginning of this century) we now have reached that state of nature where the Government is, once again, embarking on an effort to 'do something' about the economy. The latest promise is that of a mini-Budget 2009 by the end of this month.
It reminds one of a famous fable about Albert Einstein's last exam. Upon being told that his final pre-retirement term paper in physics contained the same questions as those posited on the previous year exam, Einstein remarked: "Ah, yes, the questions are the same. The answers, however, have changed".
And so it is with Ireland Inc. The questions, or rather the issues faced by us are painfully the same as we faced before:
Sadly, not. The menu of economic policy potions on offer from the Government and academe is:
Has anyone noticed that having raised VAT in October, we are seeing continued collapse in VAT revenue? Having raised income tax from January on, we are seeing continuous deterioration in the income tax receipts? Having implemented not a single pro-growth policy since the beginning of 2008, we are seeing real costs of living and working in this country remaining stubbornly high and real returns to work depressingly declining?
How long will it take? How many homes will have to be repossessed? How many personal bankruptcies and corporate insolvencies declared? How many of us and our children will have to emigrate out of here before our policy idiocy will lead us to the conclusion that you cannot tax yourself out of a recession?
Some years before his final exam, Einstein remarked that "Insanity is doing the same thing over and over again and expecting different results".
For now our politicians soldier on, with Unions whistling in step, back into the 1980s. Back into the 1980s answers to the 1980s-like problems. Stop cheering them on!
It reminds one of a famous fable about Albert Einstein's last exam. Upon being told that his final pre-retirement term paper in physics contained the same questions as those posited on the previous year exam, Einstein remarked: "Ah, yes, the questions are the same. The answers, however, have changed".
And so it is with Ireland Inc. The questions, or rather the issues faced by us are painfully the same as we faced before:
- Public spending that is running at ca 38% (current expenditure) ratio to GNP - the same as in the early 1980s;
- Businesses insolvencies and personal bankruptcies rising like an unstoppable tide - too great to see it before it breaks over our heads;
- Financial system that is facing ruin in real terms and a currency that is no longer offering any comfort;
- Collapsed taxes (some 25% down y-o-y already and counting) drawn out of a folding economy (having contracted ca 4-5% to date, heading for triple that rate in cumulative terms over 2009-2011);
- Rising tax burdens amidst shrinking economic activity and private sector incomes;
- A specter of mass emigration (with net outflows of workers out of Ireland recorded in 2008 already) and double-digit unemployment (expected to reach 14% this year);
- Public sectors war against the rest of society waged to ensure that the privileges - in employment, monopoly power, wages etc - of the few will be protected even at a cost of sacrificing the prosperity of the many;
- Corruption (this time - primarily of legal nature) led by the interest groups that stand close to the center of power;
- Elites, incapable of any new thinking, neurotically running for cover of failed ideologies;
- Academia that is so far removed from reality that its practitioners forget ABCs of their own disciplines (finance and economics) in their desire to embrace the consensus;
- Desperate electorate that, in a Stockholm Syndrome moment of truth, are begging their captors - the State and its leaders - to 'do something', 'anything', 'to present a plan for the future'; and so on.
Sadly, not. The menu of economic policy potions on offer from the Government and academe is:
- Conviction-driven hikes in direct income and consumption taxation (Priority 1);
- Ideologically motivated (the ideology of public greed) hikes in indirect taxation so desperate in their scope that we are now facing a prospect of a tax on text messages and a clawback of pension deductions (Priority 2);
- Ambiguous & vague promises of some current expenditure cuts (Priority 3);
- Empty & often outright senile promises of an NDP stimulus packaged along with a pork train of 'knowledge' economy, 'green' economy and 'social' politics measures (Priority 4).
Has anyone noticed that having raised VAT in October, we are seeing continued collapse in VAT revenue? Having raised income tax from January on, we are seeing continuous deterioration in the income tax receipts? Having implemented not a single pro-growth policy since the beginning of 2008, we are seeing real costs of living and working in this country remaining stubbornly high and real returns to work depressingly declining?
How long will it take? How many homes will have to be repossessed? How many personal bankruptcies and corporate insolvencies declared? How many of us and our children will have to emigrate out of here before our policy idiocy will lead us to the conclusion that you cannot tax yourself out of a recession?
Some years before his final exam, Einstein remarked that "Insanity is doing the same thing over and over again and expecting different results".
For now our politicians soldier on, with Unions whistling in step, back into the 1980s. Back into the 1980s answers to the 1980s-like problems. Stop cheering them on!
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