6/6/2013: Detroit is about to go bankrupt... differently from the Irish banks

So who is to say sovereign (or rather quasi-sovereign) defaults are a rarity in fiscal + currency unions? Here's a story about forthcoming, well-flagged in advanced Chapter 9 bankruptcy for Detroit: http://www.theepochtimes.com/n3/93438-detroit-facing-chapter-9-bankruptcy/

And, guess what - the story is telling in more than just one context. The terms and conditions of the restructuring will be ugly, but manageable... And the sequencing of events is revealing:

• Step 1: Detroit had $15.7 billion debt load it cannot repay - diagnosis was set as insolvency. 
• Step 2: The city was taken over by the state of Michigan and emergency manager was appointed.
• Step 3: The state of Michigan needed a calm evaluation of the problem confirming the diagnosis of insolvency and it was deemed to be structural (economy suffering from unsustainable levels of unemployment, declining population, loss of revenues, etc, but also cost overruns).
• Step 4: Rating agencies dropped ratings on Detroit debt and debt limits kicked in before then.
• Step 5: Chapter 9 bankruptcy, forced deal with the unions and Financial Advisory Board was set up with very clear termination objectives.

The sequencing of events above is distinct from what has happened in the case of Ireland's banking crisis resolution, where the above steps were re-ordered as follows:

1. Steps 4 and 5 (resolution steps) took place ahead of any assessment and diagnosis postulation and confirmation (banks guarantee issuance)
2. Step 3 took place next in the form of PCARs assessments
3. Step 2 (takeover) took place only after the PCARs
4. Diagnosis was never fully correctly established - all banks, save for Anglo and INBS are still considered officially solvent
5. Step 5 never took place with exception of Anglo and INBS

In other words, we never created a security cordon around the banks that would have resulted in banks takeover prior to guarantees and recapitalisations and this has meant that the banks were always able to use the threat of disclosure of insolvency as the means for bargaining out improved position vis a vis the taxpayers. 

Best proof of this: at no point in time did the state of Michigan tell the markets or the nation or its own taxpayers that Detroit will never be allowed to go bust. In contrast, during 2008-2010 period, Irish Government repeatedly asserted that the banks will be provided all and any funding necessary to stay in business. 

6/6/2013: Can Ballyfermot area unemployment be running at ca 60%?

A survey conducted by Sin Fein in the specific area of Dublin landed in my mailbox today.

"Survey shows 60.28% unemployment in Cherry Orchard: Ballyfermot Sinn Féin conducted an unemployment survey in the greater Cherry Orchard area. The purpose of which was to identify at first hand the true level of unemployment experienced by residents.

Speaking today after the survey was published; Sinn Féin’s Ballyfermot representative Daithí Doolan has called for, ‘immediate action to provide jobs for Ballyfermot.’ Doolan said, ‘Our aim was to identify at first hand the true level of unemployment experienced by the residents in Cherry Orchard. The findings of our survey are shocking and should act as a wake-up call to local government TDs.  We knocked on every door in Cherry Orchard. The stories we heard were heart breaking, families struggling with unemployment and emigration. The findings show that a massive 60.28% of those surveyed are unemployed. Even more concerning is the fact that over 85% are long term unemployed."

The question is: the shocking 60.28% unemployment rate figure - can it be true? Sadly, in my opinion, it can be true. Sinn Fein survey basically asked people the broadest question of defining whether they are working or not (self-reported unemployment, unrestricted by CSO methodological constraints). Thus, we can interpret it to be equivalent to CSO PLS4 category of unemployment (see http://trueeconomics.blogspot.ie/2013/05/3052013-official-broader-unemployment.html), plus those in state training programmes.

I define this metric as PLS4+STP, which in Q1 2013 nationwide was running at ca 29%. However, this metric excludes those who are unemployed and are in non-state training. Given the geography of the area surveyed, there is little reason to believe that the number of those in education and training but not in employment in the area is outside the nationwide average. Adding them into the PLS$+STP group should push overall 'unemployment' as self-reported potentially to 32-33%. The area of Ballyfermot has always had higher rates of unemployment than other areas of the country. For example, in 2006 unemployment in Ballyfermot was reportedly running at around 11.2% while nationwide unemployment was running at 5.2%. In 2008 the same was true, compared to Dublin overall: http://irelandafternama.files.wordpress.com/2009/12/unemployment-dublin-ea-scale-2008.jpg and things got worse into 2009: http://irelandafternama.files.wordpress.com/2009/12/live-register-recipients-increase-aug-08-to-feb-09.jpg.

There is plenty more evidence to support the assertion that overall broader unemployment in the Ballyfermot area can be running at around twice the rate of the national unemployment and this would push broader unemployment in the area surveyed by Sinn Fein out toward 60%.

6/6/2013: Irish School of Growthology: Sunday Times 02/06/2013

This is an unedited version of my Sunday Times column from June 2, 2013


This month, welcoming the start of the silly news season, interest group after interest group has been appealing to the Irish Government to "act decisively" on dealing with the crises sweeping across their sectors. From retail services to construction industry, from early age education to public sector unions, from pensions to faming, and so on every lobbyist is loudly demanding that the Government divert its resources to the plight of his clients.

The Irish School of 'Growthology', spurred on by the 'end of austerity' noises emanating from Brussels, as well as by the promised departure of the Troika, is out in public once again. One quango after another is promoting its sector as a core driver for future jobs creation, economic activity and a wellspring of exchequer returns subject to the Government taking the correct action on growth today.

The reality is that no one involved in this policy circus - not the economists launching reports, nor the quangos backing them, and least of all the Government - has a faintest idea as to how the Government really can do anything about growth. Everyone at the launches knows this and no one admits it. So after two or three iterations of the Growthology events, the entire Irish establishment begins to believe that if only the Government threw its support behind the latest fad, the crisis will be over. Hungry for PR opportunities, Ministers spin exports growth numbers like greyhounds bets, and green-nano-bio-gen-cloud-tech working groups and centres of excellence for knowledge-food-wind-agri island spin jobs promises in tens of thousands.

The ministers love Growthology, As George Bernard Show put it ages ago "a government which robs Peter to pay Paul, can always count on the support of Paul".


Since the Irish state cannot print its own money, the Cabinet can only tax one side of economy to 'invest' in the other. Which is just fine with the Growthologists, as long as the Government robs someone else to pay them.
There are three basic variants of these 'multiplier schemes' being offered to the Government for post-Troika days.

The business lobby and the unions have been busy pushing the Government to do something to 'unlock' the spending power held in people’s savings. The preferred mechanism for forcing households to part with their safety nets varies from deploying inflationary pressures to expropriating funds via levies. Unions are calling for higher taxes on someone else (usually, the so-called 'rich'). The fact that such policies can leave households exposed to adverse income shocks in the case of a job loss or unexpected illness or a rise in necessary spending, such as children education fees, is not something that our Social Partners are concerned with.

Another option, usually favoured by the official economic policy quangos, is finding rich foreigners to invest in Ireland. Which, of course, sounds much more palatable than expropriating from our own. However, inward real FDI (as opposed to retained earnings accumulating in the IFSC) into Ireland has peaked. Worse, as the data from our external trade over 2010-2012 indicates, the FDI we are bringing in is linked to services exports. The latter have much lower propensity to support new employment, and when they do hire workers, they tend to import them. The activities of these new MNCs do increase our GDP, but this growth is illusory when it comes to the real economy.

About the only new value added generated by the MNCs activities in Ireland today relates to clustering and partnering models that some - but not all - R&D intensive MNCs are engaged in.  These are in their infancy still and require serious changes in the way we do business in this country to nurture to strengths. Examples of what needs to be done here include changing the way we tax equity investments, reinvested profits and how we deal with currently protected sectors of our economy. Again, promising, but not a Big Bang idea for jump-starting the economy without taking serious pain of structural reforms first.

The last pathway for Growthological 'stimulus' is to convince the Irish Government to borrow more funds to invest in some capital programmes. This is the preferred imaginary source for ‘funding growth’ for the Unions and the Labour Party backbenchers. However, even the current Government finds this theory infeasible. The reason is that we cannot sustain an increase in borrowings over 2013-2016 horizon without triggering a cascading effect of higher interest costs on existent debt.

In a way, in contrast to the Irish Growthology movement, this week's announcement by the Minister for Finance, Michael Noonan that he is working on a multi-annual plan covering the period of 2014-2020 to commit his and future Governments to continued fiscal discipline and structural reforms was a courageous and correct thing to do. By pre-empting the spread of Growthology across the Cabinet, Minister Noonan tried to focus our attention on the longer-term game, as well as on the present reality.

Irish Government will need to take some EUR5.1 billion more out of the private sector economy in 2014 and 2015 under the current Troika programme. Thereafter, just to keep on track toward reducing Government debt/GDP ratio to below 100% by 2020, total tax take by the Government will have to increase from EUR39.8 billion in 2012 to EUR54.1 billion in 2018, with expenditure, excluding banks measures, rising from rising fromEUR65 billion to EUR69 billion over the same period. Even that requires rather rosy assumptions, including the projections for government debt financing costs being flat over the next 7 years and economic growth averaging almost 3.7% per annum on GNP side through 2018.


Absent the pipe dreams of Growthology, the only real chances for Ireland to regain sustainable growth momentum is through organic and persistent long-term reforms. Instead of ‘Government must act decisively on growth’ mantra, we need a ‘Government must help change the way we work’ model.

Start with the elephant in the room: private sector debts. Write down using debt-for-equity swaps and direct write-offs all principal residences mortgages to the maximum of 110% of the current value of the house. By my estimates, this will require banks capital of less than EUR20 billion. To reduce capital call on the banks, change the rules for capital provisioning against legacy equity assumed by the banks and push out to 2020 the requirement for Irish banks to comply with the EU baseline capital targets. Restructure and convert all remaining mortgages into fixed rate loans. If needed, assuming the EU does not come to our help in doing this, exit the euro by monetising the economy with own currency, and make euro, dollar and sterling fully accepted as legal tenders.

Thereafter, levy a significant tax on land and use raised revenue to eliminate property tax and create a flat rate tax on all income under, say, EUR200,000 per annum per family of two at a benign rate of around 15%. Equalise corporate, income and capital gains tax rates. Remove all targeted tax breaks and incentives schemes, leaving only one standard general tax allowance per each adult with half-rate applying per each child.

Reform local authorities by consolidating them into 5 regional governments with half of all land value tax revenues accruing to them. Put in place a 4-year balanced budget rule for central and local governments. Break up all semi-state companies excluding infrastructure utilities (e.g. EirGrid) and privatize or mutualize them. Put a statutory cap on market share of any company or governing body (for professional services organizations) in any sector of domestic economy not to exceed 33% to reduce regulatory capture and incentivise exporting activities. Remove all restrictions on access to professions.

In the public sector, gradually identify and develop opportunities for linking pay and promotion to productivity. Shift – where possible – public sector operations to revenue generating models with staff sharing the upside of any exports and new business creation revenues. End life-time contracts and link hiring, tenure and promotions to on-the-job performance. Identify flagship public services, such as higher education and health as spearheads for developing exports potential and, again, incentivise staff to compete globally. Benchmark all non-revenue positions to EU27 average earnings and all political and politically-appointed salaries to a scale linked directly to GNP per capita. End fully all defined benefit pensions schemes and create mandatory pensions and unemployment insurance funds based on a mixture of public and private provision models.

Open up Irish immigration regime to new entrepreneurs and key skills employees with strong incentives to naturalise successful newcomers and anchor them here. Use early immigration incentives such as social contributions tax credits in exchange for zero access to social welfare net over the first 10 years of residency (including post-naturalization).

Lastly, we need to gradually, but dramatically reform our social welfare and health care systems. We need to retain a meaningful, high quality safety net, but we also need to eliminate any possible disincentives to work and undertake business activities currently present in the system.

Aside from the changes mentioned above, we also need political reforms, changes in the way we shape and enact policies, enhancement of direct democracy tools and building robust systems of transparent governance and administration.

The main point, however, is that we need to end our addiction to the Growthlogist interest groups politics.

Box-out:


The latest data on earnings and labour costs in Irish economy was published this week. The data shows that average weekly earnings in the economy in Q1 2013 stood at EUR €696.59, basically unchanged on last year. In contrast, average hourly earnings rose from EUR 22.15 in the first quarter 2012 to EUR22.31 in 2013. In other words, Irish labour cost competitiveness remained at the same levels as in 2012 solely because over the period of 12 months through March 2013, average hours of paid work have fallen by 1%. Given that over the last 4 years weekly paid hours in the private sector have fallen by 2.2%, the latest data suggests that the average quality of employment in private sector has declined at an accelerated rate in 2012, compared to the 2009-2011 period.

6/6/2013: US House Prices: Trouble Brewing for Monetary Policy Dilemma

Now, QE seems to be feeding through into the real assets, not just financial ones, in the case of the US. Here's a chart from Pictet on CoreLogic house prices index changes and underlying house prices fundamentals:

And the same adjusting for inflation, annualised 3mo series (q/q):

CoreLogic rose 3.2% m/m in April, following a +2.2% m/m rise in March. Based on Pictet seasonal adjustments, "the increase remains surprisingly high: +1.6%, after +1.7% in March. Since the end of last year, house prices have risen by 6.4% (after seasonal adjustments), an astonishing annualised rate of 20.4%. On a y-o-y basis, the increase reached 12.1%, the highest since April 2006."

Although as the chart below shows, things are still ok in 'affordability' terms (index of house prices), with recent rises from the trough returning the index to mid-2009 levels. It would take a further 28% rise to hit pre-crisis peak of March 2006:

Lest we forget - unwinding the QE will hammer interest rates on longer maturities (see: http://trueeconomics.blogspot.ie/2013/05/1652013-on-that-impossible-monetary.html) which will spell trouble for debt-funded assets, like property.

6/6/2013: Domestic Economy v MNCs: Sunday Times 26/5/2013

This is an unedited version of my Sunday Times column from May 26, 2013



Over recent months, one side of the Irish economy – the side of aggressive tax optimization and avoidance by the Ireland-based multinational corporations – has provided a steady news-flow across the global and even domestic media. While important in its own right, the debate as to whether Ireland is a corporate tax haven de facto or de jure is missing a major point. That point is the complete and total disconnection between Ireland’s two economies: economy we all inhabit in our daily lives and economy that exists on paper, servers and in the IT clouds. The latter has a mostly intangible connection to our everyday reality, but is a key driver of Ireland’s macroeconomic performance and the Government PR machine.

Take a look at two simple sets of facts.

According to our national accounts, Ireland’s economy, measured in terms of GDP per capita, has been growing for two consecutive years expressed in both nominal terms and inflation-adjusted terms. Real GDP per capita in Ireland grew over 2010-2012 period by a cumulative 2.38% according to the IMF. Accounting for differences across the countries in price levels and exchange rates (using what economists refer to as purchasing power parity adjustment), Ireland’s GDP per capita has risen 5.7% over the two years through the end of 2012. Over the same period of time, Ireland’s GNP per capita, controlling for exchange rates and prices differentials, has grown by 3.3%.

Sounds like the party is rolling back into town? Not so fast. The aggregate figures above provide only a partial view of what is happening at the households’ level in the Irish economy. Stripping out most of the transfer pricing activity by the multinationals, domestic economy in Ireland is down, not up, by 5.2% between 2010 and 2012, once we adjust for inflation and it is down 2.7% when we take nominal values. With net emigration claiming around six percent of our population, per capita private domestic economic activity has fallen 4.2% over the last two years.

All in, Irish domestic economy is the second worst performer in the group of all peripheral euro area states, plus Iceland. Sixth year into the crisis, we are now in worse shape than Argentina was at the same junction of its 1998-2004 crisis.


What the above numbers indicate is that the Irish domestic economy, taken at the household level, has been experiencing two simultaneous pressures.

While aggregate inflation across the economy has been relatively benign, stripping out the effects of the interest rates reduction on the cost of housing, Irish households are facing significant price pressures in a number of sectors, reducing their real household incomes just at the time when the Government is increasing direct and indirect tax burdens. At the same time, rampant unemployment and underemployment have been responsible for lifting precautionary savings amongst the households with any surplus disposable income. By broader unemployment metrics that include unemployed, officially underemployed, and state-training programmes participants, Irish unemployment is currently running at 28% of the potential labour force. Adding in those who emigrated from Ireland since 2008 pushes the above broad measure of unemployment to close to 33%.

Lastly, the households are facing tremendous pressures to deleverage out of debt, pressures exacerbated by the Government-supported efforts of the banks to increase rates of recovery on stressed mortgages.

In this environment, real disposable incomes of households net of tax and housing costs are continuing to fall despite the increases recorded in GDP and GNP. The Irish Government, so keen on promoting our improved cost competitiveness when it comes to the foreign investors is presiding over the ever-escalating costs of living at home.

In 2012 consumer prices excluding mortgages interest costs stood the highest level in history and 1.2% ahead of pre-crisis peak of inflation recorded in 2008. Much of this is accounted for by the heavily taxed and regulated energy prices.

Sectoral data reveals the story of rampant annual inflation in state-controlled parts of the economy. Of ten broader categories of goods and services, ex-housing, reported by CSO, all but one private sectors posted virtually no inflation over 2012 compared to the average levels of prices in 2006-2008 period. Food and non-alcoholic beverages prices declined 1.4%, clothing and footware prices are now a quarter lower, costs of furnishings, household equipment and routine household maintenance are down 13%, and recreation and culture services charges are down more than 2.7%. Restaurants and hotels costs are statistically-speaking flat with price increases of just 0.4% on 2006-2008 average. The only private sector that did post statistically significant levels of inflation was communications where prices rose 3.5% by the end of 2012 compared to pre-crisis average. But even here postal services charges lead overall inflationary pressures.

In contrast, every state-controlled and heavily taxed sub-sector is posting rampant inflation. Alcoholic beverages and tobacco prices are up 12.3%, health up 13.4%, transport up 11.4%, and education costs are up 30.4%. Energy costs are up 32.5% and utilities and local charges are up 14.9%. While energy costs rose virtually in line with increases in global energy price indices, the state still reaped a windfall gain from this inflation via higher tax revenues, and higher returns to state-owned dominant energy market companies: ESB, Bord Gais and Bord na Mona.

The state extraction of funds through controlled charges and taxation linked to these charges is rampant. Over 2009-2012 period, indirect taxes, state revenues from sales of services and investment income – all linked to the cost base in the underlying economy rose from EUR 24.8 billion in 2009 (44.3% of total state revenues) to EUR 25.2 billion in 2012 (44.5% of total state revenues). This was despite significant declines in imports and consumption of goods in the domestic economy and declines in government own consumption of goods from EUR 10.4 billion in 2009 to EUR 8.56 billion in 2012. For those who think this extraction is nearly over now, let me remind you that IMF forecast increases in Government revenues for Ireland over 2014-2018 are set to exceed revenues increases passed in all budgets since 2008.


The price and tax hikes on Irish households leave them exposed to the risk of future increases in mortgages costs. Government controlled prices are sticky to the downside, which means that the once prices are raised, the state regulators and policymakers are unwilling to adjust prices downward in the future, no matter how bad households budgets can get. The reason for this is that semi-state companies reliant on regulated charges have significant market and political powers, especially as they act as prime vehicles for big bang ‘jobs creation’ and ‘investment’ announcements that fuel Irish political fortunes. At the same time, the state uses revenues obtained directly via dividends payouts and indirectly via taxes on goods and services supplied by the semi-state companies as substitutes for direct taxation. Absent deflation in state-controlled sectors, there is very little room left in the private sectors to compensate households for any potential future hikes in mortgages by reducing costs of goods and services elsewhere.

And mortgages costs are bound to rise over time. In 2008, new mortgages interest rates averaged around 5.2% against the ECB repo rate average of 3.85%, implying a lending margin of around 135 basis points. Since January 2013, ECB rates have averaged 0.7% while Irish mortgages rates averaged around 3.4%, implying a margin of 270 basis points. At this stage, we can expect ECB rates to revert to their historical average of around 3.1% in the medium-term future. At the same time, according to the Troika, Government and Central Bank’s plans, Irish banks will have to increase their lending margins. Put simply, current average new mortgages rates of 3.4% can pretty quickly double. Ditto for existent mortgages rates.

Based on CSO data, end of 2012 mortgages interest costs stood at the levels some 14.5% below those in 2007-2009 period and 29.6% below pre-crisis peak levels.  Reversion of the mortgages interest rates to historical averages and adjusting for increased lending margins over ECB rate would mean that mortgages interest costs can rise to well above their 2008 levels, with inflation in mortgages interest payments hitting 50%-plus over the next few years.


The dual structure of the Irish economy, splitting the country into an MNCs-dominated competitiveness haven and domestic overpriced and overtaxed nightmare, is going to hit Ireland hard in years to come. The only solution to the incoming crisis of rampant state-fuelled inflation in the cost of living compounding the households insolvency already present on the foot of the debt crisis is to reform our domestic economy. However, the necessary reforms must be concentrated in the areas dominated by the state-owned enterprises and quangos. These reforms will also threaten the state revenue extraction racket that is milking Irish consumers for every last penny they got. With this in mind, it is hardly surprising that to-date, six years into the crisis, Irish governments have done nothing to transform state-sponsored unproductive sectors of the domestic economy into consumers-serving competitively priced ones.

Chart with Argentina: GDP per capita adjusted for PPP differences (prices and exchange rates)

Box-out: 

Remember Ireland’s ‘exports-led recovery’ fairytale? The premise that an economy can grow out of its banking, debt and growth crises by expanding its exports has been firmly debunked by years of rapid growth in exports of goods and services, widening current account surpluses and lack of real growth in the underlying economy. Recent data, however, shows that the thesis of ‘exports-led recovery’ for the euro area is as dodgy as it is for Ireland. In 2010-2012, gross exports out of the euro area expanded by a massive 21.4%. Over the same period GDP grew by only 2.8%. Stripping out positive contributions from the private economy side (Government and household consumption, plus domestic investment), net exports growth effectively had no impact on shallow GDP expansion recorded in 2010 and 2011. The latest euro area economy forecasts for 2013 across 21 major research and financial services firms and five international economic and monetary policy organizations show a 100% consensus that while exports out of the euro area will continue to post positive growth this year, the euro area recession will continue on foot of contracting private domestic consumption and investment. Median consensus forecast is now for the euro area GDP to fall 0.4% in 2013 on foot of 2.1% drop in investment, 0.8% contraction in private consumption and a relatively benign 0.3% decline in Government consumption. The same picture – of near zero effect of exports on expected growth – is replayed in 2014 forecasts, with expectations for investment followed by private consumption expansion being the core drivers for the euro area return to positive GDP growth of ca 1.0%. Sadly, no one in Europe’s corridors of power seem to have any idea on how to move from fairytale policies pronouncements to real pro-growth ideas.

5/6/2013: The economics of Lost Generations: Sunday Times 16/5/2013

This is an unedited version of my Sunday Times column from May 16, 2013


Not known for its 'ahead of the pack' thinking and bruised by recent controversies, nowadays, the ESRI focuses on a more retrospective in-depth analysis of the trends shaping Irish economy and society. Aptly, this week's most talked-about Irish research note was ESRI paper on the impact of the crisis on households. Covering data through 2009/2010, it offers both a fascinating look into economics of our lost generations, and a reminder that it takes official Ireland at least 3 years before everyday reality gets translated into policy-shaping analysis.

The topic is close to my heart: back in 2010 and then in 2012, in these very pages, I wrote about the fact that Ireland is facing not one, not two, but a number of lost generations covering those under the age of 50. Things only got worse since.

The crises we face continue to destroy lives and wealth of the 35-50 year-olds, who mortgaged their future back in 2003-2007. Pensions and savings are gone, psychological and social wellbeing is under unrelenting pressure from the threat of unemployment, losses in after-tax disposable income, negative equity, the banks' push to extract revenues from borrowers, and the internecine policies adopted by the Government.

Housing wealth and negative equity exact the greatest toll. Housing wealth accounted for over 3/4 of the total real disposable wealth that formed the bedrock of pensions provisions in the years before the crisis hit. This has now tumbled by over half, once taxes and property prices declines can be factored in.

Income losses are not far behind. Not withstanding the effects of tax increases, an average working age family in this country lost close to EUR100,000 in income between the beginning of 2008 and the end of 2012.

Much of these losses were accumulated by the prime working age group of 35-50 year-olds. Adjusting for changes in population and unemployment in these groups, relative to the rest of the country population, the opportunity cost of foregone savings, and adding the impact of tax increases, the real disposable income declines during the crisis run somewhere closer to EUR120,000 per family with two working adults in the 30-50 years of age group. When you consider the losses in housing wealth over the life time, and interest costs on negative equity components of mortgages, the total real life-time losses due to the crisis easily reach over EUR200,000 per family. This number assumes expected house prices appreciation in line with 2% annual inflation from 2013 on, but excludes effects of future tax hikes.

And more tax hikes are coming still. The Government might boast that ‘most of the adjustment is behind us’. Alas, IMF’s latest forecasts for the Irish economy clearly show that by 2018, compared to 2012, Irish Government tax take needs to increase by EUR12.5 billion per annum. Of these, EUR8.7 billion in revenue will come from personal income taxes and VAT. For comparison, between 2009 and 2012 receipts from these two tax heads rose only EUR2.9 billion. Social Insurance contributions are required to rise by EUR2.2 billion in 2013-2018, against the decline of EUR2.6 billion recorded in 2009-2012.

The ESRI research, published this week, does not go as far as attaching real numbers to the losses sustained by Irish households, but it does conclude that "income and consumption increase roughly steadily for the average household over the age of 45 from 1994/95 to 2009/10. ...In sharp contrast to the increase in earning and expenditure of older households over the last two decades, there has been a large drop in income and consumption for the younger average household in the crisis. Between the 2004/05 survey and that of 2009/10, real disposable income decreased by 14 per cent, real consumption including housing by 25 per cent and excluding housing by 32 per cent."

In other words, at the end of 2012, gross investment in the Irish economy stood at the levels below those in 1997, domestic demand at mid-2003 levels and private domestic demand (excluding Government spending) at the levels last recorded in 1998.

The future looks bleak for today's 30-50 year-olds even beyond income declines and the negative equity considerations. Per ESRI, "Mortgages are most prevalent in the 35-44 year bracket, with more than half of households in this group having a mortgage. About 43 per cent of the households aged 25 to 34, and 45 per cent of those aged 45 to 54 are mortgage holders as well." In other words, those in 30-50 years of age cohorts are in the worse shape when we consider housing wealth.

The ESRI fails to note that these households are also facing a very uncertain future when it comes to the cost of funding their mortgages.

Currently, ECB benchmark rate stands at 0.50%, which is miles below the pre-crisis period average of 3.10%.. At some point in time, Germany and other core European economies will be back delivering the rates of growth comparable to those seen over 2002-2007 period and the ECB rates will inevitably rise. At the same time, Irish banks will be carrying an ever-worsening book of household loans. With every year, average mortgage vintage on banks books moves closer and closer to 2006-2007 peak market valuations, as better quality older mortgages are being paid down. As real estate prices continue to signal zero hope of a rapid recovery, Irish banks will have to keep margins well above pre-crisis averages. Failing SMEs loans and Basel III capital hikes add to this pressure.

This week IMF released a set of research papers focusing on expected paths for unwinding extraordinary monetary policy measures deployed by the central banks around the world. Their benchmark scenario references interest rates increases of 2.25% for longer maturities and the adverse scenario a 3.75% rates hikes. Were the benchmark scenario to play out, mortgages rates can jump by over 2 percentage points on today's rates, before the increases that would be required for capital supports.

For mortgages of 2003-2007 vintage a return to historical levels of ECB rates combined with higher lending margins will spell a disaster.

Put simply, anyone who thinks the worst is now behind us should heed the warning: wealth destruction wrecked by the property bubble collapse is yet to run its full course.

The ESRI report doesn't tell us much about the expected effects of the crisis on our youngest working-age cohorts of 18-25 year olds. Truth is they too count as Ireland's Lost Generation.

Lower incomes and higher debt burdens of the 30-50 year-olds will translate into longer working careers and less secure retirement. For the younger generations, this means fewer promotional opportunities and reduced life-time earnings in the future, as well as higher tax burden to care for the under-pensioned older generation. The disruption and delays in access to career-building early jobs will also cost dearly. Many of today’s graduates of the universities with professional degrees and skills face rapid depreciation of their earnings when they delay entry into the professions.

Our economy’s re-orientation toward ICT services is an additional risk factor. Recent research points to an alarmingly high rate of skills depreciation in ICT services sectors, with declining employability of those in late 30s and early 40s compared to their younger counterparts. Likewise, worldwide and in Ireland, the earnings premium, even adjusting for the risk of unemployment, associated with education is now much smaller than in the late 1990s - early 2000s.

In short, today's young face lower life-time real earnings, higher life-time burden of taxation and dramatically reduced value of intergenerational wealth transfers (or put simply -inheritance).

The ESRI attributes younger households' aggressive cuts in consumption during the crisis to the bottlenecks in credit supply, parrot-like mimicking the Government assertion that if only the banks were lending again, things will miraculously return to normal. The reality on the ground is different. Irish society has been hit by a series of inter-related crises that not only reduced credit supply to younger households, but made household balance sheets insolvent by a combination of high debt, reduced life-time disposable incomes and wiping out middle and upper-middle classes wealth.

The only solution to these crises is to help repair households' balance sheets by helping them to deleverage their debts faster and a lower cost. This can be achieved solely by lowering tax burden on the households and aggressively writing down unsustainable levels of debt. Like it or not, were the banks to start lending tomorrow, even ignoring the fact that the cost of credit is only going to climb up in the future, the impact this will have on the economy and Irish households will be negligible.

Two successive Irish Governments have spent over 5 years throwing scarce resources on repairing the banks. It is time to realize that doing more of the same and expecting a different outcome is not bright policy to pursue. It is time to focus on what matters most in any economy – people.

Box-out:

This week, the IMF published its Article IV assessment of Malta’s economic conditions. The study expresses one major concern about the risks faced by the Maltese economy in the near future that is salient to the case of Ireland, yet remains unvoiced in the case of our assessments by the Fund. Quoting from the release: "In the longer term, regulatory and tax reform at the European or global level could erode Malta’s competitiveness. The Maltese economy, including the financial sector and other niche services, has greatly benefitted from a business-friendly tax regime. Greater fiscal integration of EU member states and potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output, and fiscal revenues."

Ireland is a much more aggressively reliant on tax arbitrage than Malta to sustain its economic model and has been doing so for far longer than Malta. Both, our modern manufacturing and traded services sectors are virtually captive to the foreign multinationals reliant on tax arbitrage opportunities to domicile here. Yet, neither the IMF, nor any other member of the Troika seem to be concerned about the prospect of tax reforms in Europe and elsewhere in the context of Irish economy. May this be because the elephant in the room (our reliance on tax arbitrage) is simply too large to voice in the open?

5/6/2013: More bad news for the future of IMF's EU bias?

A very significant article from WSJ by always-excellent @MatinaStevis : http://online.wsj.com/article/SB10001424127887324299104578527202781667088.html?mod=WSJEurope_hpp_LEFTTopStories

"The IMF said that it bent its own rules to make Greece's burgeoning debt seem sustainable and that, in retrospect, the country failed on three of the four IMF criteria to qualify for assistance."

This is the first time the Fund is admitting knowingly bending own rules and it is very significant in the context of the IMF internal structures (permanent staff v political appointees) and external power balance, with BRICS clearly not going to sit quiet in the future when the IMF is now de facto admitting that its European bias in leadership is potentially to be blamed for its bypassing own rules on lending.

I have mentioned the above point earlier last month on foot of another report on IMF internal struggles with Greek 'solution': http://trueeconomics.blogspot.ie/2013/05/1252013-what-greek-osi-will-mean-for-imf.html

And IMF has already sung the surrender song on debt restructuring blunders: http://econintersect.com/b2evolution/blog1.php/2013/05/27/imf-rethinks

Next stop: Cyprus, where there is now evidence that Troika cooked the facts on banks in the context of 'dirty money', which, of course, helped to legitimise the wholesale, wonton destruction of the island economy: http://www.cyprus-mail.com/anti-money-laundering/troika-distorted-dirty-money-findings/20130524

Thereafter, expect fireworks to start when Ms Lagarde term comes up for renewal...


Update: as @Pawelmorski points out, this is not the first time that the IMF has admitted to making a policy error. Here's the paper on Argentina crisis lessons from 2003: http://www.imf.org/external/np/pdr/lessons/100803.htm and a paper on Asian crisis lessons: http://www.imf.org/external/pubs/ft/op/op178/index.htm . Of course, Argentina's case is an interesting one as the country took its own course away from the IMF-led programme prescriptions. For better or worse (and there is evidence to both sides of that argument, Argentina's recovery was faster and more decisive than that of Ireland so far - see chart here: http://trueeconomics.blogspot.ie/2013/06/662013-domestic-economy-v-mncs-sunday.html ). At least, unlike the EU, IMF is big enough to admit its errors...

Update 2: IMF actual report on Greece is here: http://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf

31/5/2013: Bank Holidays Links: On Art, Science and In Praise of Unfocused Thoughts

For the bank holiday - an alternative (to economics) reading list of things artsy & scientific…


A quick note before I launch into the links: I will be taking part in http://www.rar.ie/ on June 13th.


Wired.com [http://www.wired.com/wiredscience/2013/05/neurologist-markam-human-brain] article on a fascinating project to build a computer to replicate human brain "down to the individual ion channel". The newsy bit here is that on January 28, 2013, the EU Commission awarded the lead research group (headed by Henry Markram) EUR 1 billion to attempt to perform that task. There is much of interest here - beside the fascinating technology behind. Here are some questions that puzzle myself and many others:

1. As article points out, the task is multi-dimensional: it is one thing to build a replica of neurons and physical interfaces. It is yet an entirely different thing to build a replica of consciousness. "The way Markram sees it, technology has finally caught up with the dream of AI: Computers are finally growing sophisticated enough to tackle the massive data problem that is the human brain. But not everyone is so optimistic. “There are too many things we don’t yet know,” says Caltech professor Christof Koch, chief scientific officer at one of neuroscience’s biggest data producers, the Allen Institute for Brain Science in Seattle. “The roundworm has exactly 302 neurons, and we still have no frigging idea how this animal works.”"
2. Is the EU Commission engaging in an absurd gamble with taxpayers money is another, perhaps mundane question, but the one that arises on foot of (1). 
3. Bigger question of the two above - can consciousness be reproduced? Is consciousness even a logical system system?

ArsTechnica piece on the role of focus (singularity of objective) in raising IQ [http://arstechnica.com/science/2013/05/if-everything-fades-into-the-background-you-may-have-a-high-iq/] might be leading to an interesting set of questions - possibly even related to the previous link. If focusing on a task help raise our IQ, then:

1. How meaningful is IQ as a measure of human capacity to think vs to create? After all, focus can also be seen as concentrating attention on a singular subject or even an aspect of a subject. In doing so, we forego the breadth of inquiry for the depth of inquiry. If IQ is positively and strongly correlated with the depth (focus), is it not then negatively correlated with the breadth? 
2. Is IQ a tool/source of incremental uncovering of knowledge as opposed to revolutionary discoveries? Again, focus can be helpful in the former, but it can also be detrimental to the latter.
3. In modern academia and even art, specialism is the core driver of publications and output, and the latter are the core drivers of earnings, promotion, access to research and creative funding etc. Does this focus --> IQ --> incremental productivity nexus lead to a dramatic reduction in encyclopaedic inquiry? We are having more and more specialist researchers and fewer and fewer Leonardo's and the reason for this might not be the difficulty of engaging in encyclopaedic inquiry, but a disincentive to engage in it contained in the added capacity for pursuing the IQ-based forms of incremental inquiry that also tend to generate higher career payoffs?

As you can see, I am not attempting to exert too much focus here… perhaps because I don't really care if I do sound like a Mensa member…

And here's a link to show that focus --> IQ link might be complete rubbish:
http://blog.foreignpolicy.com/posts/2013/05/30/why_indian_americans_dominate_spelling_bees Now, the article quotes: "The first generation immigrant parent brings with her/him a set of memories about how education works and what is to be valued. For Indians that is a memory of endless class tests doled out on a regular basis to evaluate our ability to retrieve information - spellings of words, names of world capitals, cash crops of states, length of rivers, height of mountains, and a plethora of minutiae charmingly labeled as General Knowledge." ... Err… so Indian-Americans are more focused on the task of spelling stuff. Great. I am looking forward to them starting to focus on content of what they are spelling more… which, automatically means they will have to stop focusing and start thinking much broader. Great art and science are not made out of 'focus' - they are made out of wandering.


Now onto art - let's start with kitsch, but brilliant efforts of the Northern Irish and British authorities at creating a Potemkin Village out of Belcoo, Co. Fermanagh in the anticipation of the G8 summit later this month:
http://www.irishtimes.com/news/recession-out-of-the-picture-as-fermanagh-puts-on-a-brave-face-for-g8-leaders-1.1409112 Here's an image from the Irish Times of a comer butcher's shop in town now transformed into a window-display of fake prosperity.

I class this 'art' because to really describe the nature of what is happening in this instance one would need volumes of unpleasant explicatives... let's keep things academic, instead.


Onto serious art: Biennale is on in Venice and I am going to keep linking to it. One of the most memorable things I did so far in my own life was to take part in 2006 Beinnale by writing an essay for irish entry volume.

The main link to this year's Biennale is here: http://www.labiennale.org/en/Home.html and a couple of images / stills from there:

Those heading for Venice for Biennale - do not miss http://www.villamanin-eventi.it/eng/index.php great venue for art in Friuli.


On art, @Saatchi_Gallery twitter account was posting some stunning images this week.

One worth checking out is https://twitter.com/saatchi_gallery/status/339672007127998465/photo/1 and this comes via PetaPixel article: http://petapixel.com/2013/05/30/miniature-world-photo-manipulations-by-14-year-old-photographer-fiddle-oak/

Another one is from Art Basel Hong Kong show:

This is the first and probably the last VW, that I would love to own… Artist's work is discussed here: http://www.mondecor.com/kuratorial/ichwan-noor-solo-exhibition-english-version and Art Basel page for the artist: http://abhk.insideguidance.com/artists/ichwan-noor

A quick synopsis of some of the best works at Art basel this year is here: http://www.highsnobiety.com/2013/05/29/10-great-artworks-from-art-basel-hong-kong-2013/  One of my other favourites is:

Bruegelesque (as in Peter Bruegel's Seven Deadly Sins etching)…


Cool tech thinking from the 1970s? Sure: http://www.businessinsider.com/what-is-elon-musks-hyperloop-2013-5 And it proves, in passim, that much of the cutting-edge-new is really a well-forgotten-old…


Tripping spirituality meets art and collides with nature? Only in NYC, but stunningly so:
http://www.amnh.org/our-research/hayden-planetarium/resources/manhattanhenge


From things brilliant to brilliant narrative. Here's a superb blogpost on the nature of the value of expressed beliefs: http://noahpinionblog.blogspot.ie/2013/05/bets-do-not-necessarily-reveal-beliefs.html  This treats beliefs in the context of revealed preferences - many analysts and now even journalists make the argument that to reveal true underlying motives for a judgement, one has to have "a skin in the game". I myself was on a receiving end recently from a business editor of one of the major newspapers. When I queried if an interview with investor in one of the banks was fully open and transparent in his/her praise for the bank in a totally uncritical interview with the investor published by his newspaper, the editor simply accused me of not having "a skin in the game" and thus not having a valid point of view to offer. Idiotic? You betcha: anyone's starting position for a conjecture has nothing to do with validity of the conjecture or with testability of this validity. Double idiotic because as a taxpayer and a bank customer, I do have probably more "skin in the game" than the said investor. Nonetheless, the entire incident reminds me that people often think that someone placing a bet (say going long VIX) is equivalent to them revealing their true belief (that for example volatility will rise in the future). Actually, it is not. And the blogpost linked above explains why. It is all really basic, but we too often forget that basic things are the first ones to be forgotten by us…


Lastly, here's an excellent article (based on a very interesting paper) that argues that sustainability of 'local' food sources might be severely over-exaggerated: http://www.guardian.co.uk/lifeandstyle/2013/may/26/worrying-about-food-miles-missing-point?post_id=100005271660100_143433612509027#_=_ Now, one additional point is that we are talking here about UK (heavily subsidised) agriculture vs New Zealand (zero subsidies regime). Should the balance of carbon required to produce subsidies be entered into the equation? I doubt anyone would then be 'ethically' buying much of anything local… The original paper referenced in the article is here: http://www.lincoln.ac.nz/documents/2328_rr285_s13389.pdf

So enjoy the long weekend!

31/5/2013: Part-time v Full-time Unemployment in Ireland

"Less positively, the Quarterly National Household Survey showed that most of the gains in employment have been in part-time rather than full-time jobs." Irish Times : http://www.irishtimes.com/business/economy/ireland/employment-grows-for-third-successive-quarter-1.1412103?utm_source=dlvr.it&utm_medium=facebook

Sadly, I must say, this is simply incorrect.

In Q1 2013, full-time jobs stood at 1,391,100 which is down on Q4 2012 when these counted 1,398,700 (-7,700 q/q change) and is down on Q1 2012 when the full-time jobs counted 1,394,800 (-3,700 y/y). This is also down on Q1 2011 when full-time jobs numbered 1,401,800 (a net loss of 10,700 full-time jobs in 2 years).

Part-time jobs rises accounted for all, repeat all, increases in Q1 2013: these increased to 454,400 in Q1 2013 from 450,200 in Q4 2012 (+4,200 q/q) and were up on 430,200 (+24,200 y/y) on Q1 2012. This is goodish, as - obviously - it is better that people are working at least part-time. However, it is simply incorrect to claim that "most of the gains in employment have been in part-time rather than full-time jobs" when there were DECREASES in full-time jobs.

Worse than that: the picture is further distorted by the differences in changes in part-time underemployed jobs numbers and part-time not underemployed numbers.

Year on year, part-time not underemployed numbers rose from 291,300 in Q1 2012 to 298,500 in Q1 2013 - a gain of 7,200 or just 29.7% of all part-time (and net) jobs gained y/y. The rest 70% of the jobs gains were amongst part-time underemployed. And compounding this, quarter on quarter, numbers of those in part-time employment who are not underemployed actually fell - from 304,400 in Q4 2012 to 298,500 in Q1 2013.

It would help to read the Table 1 of the CSO release : http://www.cso.ie/en/media/csoie/releasespublications/documents/labourmarket/2013/qnhs_q12013.pdf

30/5/2013: Future Interest Rates & the 'Impossible Monetary Policy Dilemma'

Recently, I wrote about the monetary policy exit dilemma (here) on foot of IMF research. This week, BIS published another paper on the issue of long-term interest rates problem presented by the need to eventually unwind the extraordinary monetary policy measures (including this). Do note that the dilemma also covers the problem of unwinding banking sector leverage overhang (see presentation covering, among other things, this matter here).

BIS paper is linked here.

We might want to believe in the permanence of the low (negative currently) long term rates, but, alas, that is not so. I have written about this on a number of occasions, including in my Sunday Times columns. But a reminder from BIS:

Or even at policy rates level (here), or per BIS:

I don't know about you, but any reversion to the mean will end the bond bubble like the property bust ended the REITs bubble - solidly and overnight. And when the IMF said 6% swing up on yields, they weren't kidding:

Ditto for term premium uplift on reversion:

So unless you are into 'This Time It'll Be Different, For Sure' argument, then brace yourselves for the ride - it is coming. May be not in 2013-2014, but one day it is...

The quality risk-free paper mountain has grown... just as all the ABS and RMBS and other BS... and we know even absent excel errors from R&R 2010 how that stuff ended...

30/5/2013: That fiscal adjustment race... where we are?

How much more adjustment needed for Ireland to reach fiscal debt stabilization? Ok, nice folks at Deutsche Bank Research have done some plots and:

Which is, of course IMF number of ca 5% of GDP, and it puts Ireland neatly ahead of all peripheral states. We are, afterall, in a better position... except... well, except of one snag: GDP is not something that matters much for Ireland. Instead - we are more like a GNP economy, by which metric the primary adjustment required for Ireland to reach debt/GDP stabilisation is more like... 6.25% of GNP which puts us right at Portugal's doorsteps. Now, consider that Ireland has started the crisis well ahead of all other peripheral states and went into the Troika programme well ahead of all peripheral states, save Greece. Which means that at least a year ahead of all peripherals, we are barely ahead of them in distance to target. Yep, you know - that race ain't over until it is over.

30/5/2013: More on Wellbeing v Income

Recently, I have posted on the issue of subjective wellbeing and measured incomes: here. This week, The Economist crunched through the OECD data on synthetic indices of well-being: here.

The chart from The Economist is telling:

Do note that the distance for Germany (gap) is pretty similar to that in the US and, given lower overall well-bing in Germany than the US, proportional gap is probably actually larger.

And the conclusion is: "for all the fancy metrics, the Better-Life Index does not look too different from classic GDP rankings."

Now, back to the top link above for more in-depth analysis...