22/8/2013: Slow Moving Sovereign Debt Crises: a new MIT Paper

Guido Lorenzoni and Ivan Werning (LW, 2013) new paper "Slow Moving Debt Crises" (June 30, 2013, MIT Department of Economics Working Paper 13-18. http://ssrn.com/abstract=2298813) theoretically links the environment and policies conditions that can lead to self-fulfilling increases in sovereign interest rates.

To do so, the authors use a model of the dynamics of debt and interest rates in a setting where default is driven by insolvency. "Fiscal deficits and surpluses are subject to shocks but influenced by a fiscal policy rule. Whenever possible the government issues debt to meet its current obligations and defaults otherwise."

The result is a model that has multiple equilibria where both "low and high interest rate equilibria may coexist". There are self-fulfilling risks as "higher interest rates, prompted by fears of default, lead to faster debt accumulation, validating default fears. We call such an equilibrium a slow moving crisis, in contrast to rollover crises where investor runs precipitate immediate default." In a sense, Italy, and potentially the rest of the euro area periphery, ex-Ireland, appear to be stuck in this 'slow moving debt crisis'.

In September 2012, commenting on the ECB announcement of OMT, the ECB’s president,
Mario Draghi, clearly linked the on-going sovereign debt crisis in euro area peripheral states to a self-fulfilling crisis: “…we are in a situation now where you have large parts of the Euro Area in what we call a bad equilibrium, namely an equilibrium where you have self-fulfilling expectations. You may have self-fulfilling expectations that generate, that feed upon themselves, and generate adverse, very adverse scenarios. So there is a case for intervening to, in a sense, break these expectations [...]”

According to LW (2013): "If this view is correct, a credible announcement is all it takes to rule out bad equilibria, no bond purchases need to be carried out. To date, this is exactly how it seems to have played out."

In the LW (2013) model, "the government faces a fluctuating path of fiscal surpluses or deficits, that are affected by shocks and the current debt level. Each period, it attempts to meet these obligations by visiting a credit market, issuing bonds to a large group of risk-neutral investors. The capacity to borrow is limited endogenously by the prospect of future repayment and default occurs when a government’s need for funds exceeds this borrowing capacity. In equilibrium, bond prices incorporate the probability of default."

Bonds can be issued as short-term and long-term. "In the case of short-term debt", LW (2013) show that "the equilibrium bond price function (mapping the state
of the economy into bond prices) is uniquely determined."

The main point, however, is that uniqueness of he price function "does not imply that the equilibrium is unique. Multiplicity arises from what we call a Laffer curve effect: revenue from a bond auction is non-monotone in the amount of bonds issued. If the borrower targets a given level of revenue, then there are multiple bond prices consistent with an equilibrium."

"With long-term bonds the price function is no longer uniquely determined, because a
bad equilibrium with lower bond prices in the future now feeds back into current bond
prices. In addition, the existence of a good and bad equilibrium may be temporary. For
example, if we follow the bad equilibrium path for a sufficiently long period of time,
the debt level may reach a level for which there exists a unique continuation equilibrium with high interest rates; the bad equilibrium may set in."

This is important to the current case, as it links directly high level debt starting position to the bad equilibrium outcome without the need to reference investors' withdrawal from the funding market. This is the core difference to the traditional crises and LW (2013) call this a 'slow moving debt crisis' "to capture the fact
that it develops over time through the accumulation of debt" as distinguished "from liquidity or rollover debt crises". The 'liquidity crisis' occurs when "current investors, …pull out of the market entirely, leading to a failed bond auction; complete lack of credit then triggers default, analogous to depositors running on banks".

LW (2013) model "can be used to identify a “safe” region of parameters, for which
the equilibrium is unique. In particular, the safe region corresponds to a low initial debt level and to high responsiveness of the surplus to debt in the fiscal policy rule."

Very interesting conclusion from the LW (2013) paper is that "with long term debt, a slow moving crisis, by its very nature is due to a breakdown in the coordination of investors at different dates. As a result, it cannot be averted by coordinating investors meeting in a given market at a certain moment of time. If, instead, the borrower could commit to a certain bond issuance, this would eliminate the multiplicity problem." The commitment that ends such a crisis, in theory, implies commitment to specific steady levels of borrowing - a deficit path - while maintaining certain debt bounds forward. In contrast to mainstream literature, LW (2013) "assume that the borrower cannot commit to a certain bond issuance, because it cannot adjust its spending needs. Thus, it will issue the bonds needed to finance its obligations." The reason for this assumption is that while the borrowers "can control the amount of bonds issued… during any given market transaction or offer", in the long run, the actual amounts raised in the markets will not be fully predictable. Per LW (2013): "consider a borrower showing up to market with some given amount of bonds to sell. If the price turns out to be lower than expected the borrower may quickly return to offer additional bonds for sale to make up the difference in funding [and thus] …the overall size of the bond issuance remains endogenous to the bond price."

LW (2013) conclude that "it seems difficult to dismiss the concern that a country may find itself in a self-fulfilling “bad equilibrium” with high interest rates. In our model, bad equilibria are not driven by the fear of a sudden rollover crisis, as commonly modeled in the literature following Giavazzi and Pagano (1989), Alesina et al. (1992) and Cole and Kehoe (1996) and others. Thus, the problems these “bad equilibria” present are not resolved by attempts to rule out such investor runs. Instead, high interest rates can be self fulfilling because they imply a slow but perverse debt dynamic. Our results highlight the importance of fiscal policy rules and debt maturity in determining whether the economy is safe from the threat of these slow moving crises."

21/8/2013: FinReg Appointment

The Central Bank announced the appointment of the new FinReg. Announcement is here:
http://www.centralbank.ie/press-area/press-releases/Pages/NewDeputyGovernorFinancialRegulationAppointed.aspx

My (sketchy) views on the appointment are here:
http://uk.reuters.com/article/2013/08/21/ireland-regulator-idUKL6N0GM1AF20130821
and here:

Critically, I do not know Mr Roux stand on key points of regulatory and strategic affairs relating to the financial services in Ireland and Europe, including:

1. Role of competition in provision of services and securing systemic stability;
2. Role of consumer protection in delivering the same;
3. Role of implicit and explicit state subsidies to the incumbent institutions and the issue of TBTF institutions;
4. Legacy debt, risks and business strategies and the regulatory approaches for dealing with these;
5. Capture risk of regulatory and supervisory systems in the environment of social partnership and closely linked society, such as Ireland;
6. Recent regulatory activism, e.g. shorting bans;
7. Recent policy shifts toward centralised regulatory oversight and controls, unified banking supervision and regulation, FTT, etc.

There are other potentially important questions to be asked in days to come. 

I most certainly hope Mr Roux can continue with the competent and professional work that Mr Elderfield has started. 

To the credit of its top management team, the Central Bank today is a different institution, transformed from at the top, and still being transformed down the ranks (it takes long time to work through rank-and-file cadre pool). The transformations that took place to-date are for the better and serve as an example of what can be achieved in the rest of Irish public sector. This is not to say that the CBI is free of criticism, but to point out that there have been strongly positive changes in the institution that started with Mr. Elderfield and Prof. Honohan's appointments.

21/8/2013: Ireland's Potemkin Village (Knowledge) Economy

This is an unedited version of my Sunday Times article for August 18, 2013.


This week two news items offered significant implications for the framing of the budgetary policy direction for 2014-2015 and beyond.

First there was the revelation that the Revenue Commissioners are setting up a specialist unit to monitor the use of R&D tax credits by Irish and international firms. The second item was the publication of the Times Higher Education league tables ranking universities on their ability to attract corporate research funding. Both items are linked to the flagship of Irish economic policy that aims to establish R&D and innovation as the drivers of our future economic growth. Both touch upon our sacrosanct Potemkin village: the knowledge economy.


Since the Finance Act 2004, and throughout the crisis, governments have been keen on expanding Irish R&D activities amongst the indigenous enterprises and within the MNCs-dominated sectors. Over the last ten years, the main mechanism for doing so has been through the tax credits that allow the firms to claim R&D related spending. In Budgets 2012 and 2013, the current government significantly broadened the scope and the size of the scheme, and allowed new tax relief for key employees engaged in R&D activities.

Major consultancy firms providing supports for inward FDI, our state development agencies and business lobbyists – all have heralded these tax credits as visionary and imperative to making Ireland an attractive location for R&D.  Such framing of the policy debate makes this week’s news from the Revenue Commissioners significant. In truth, R&D tax credits are long overdue some serious scrutiny. The little evidence we do have suggests that the policy has failed to foster a pro-innovation culture in Irish economy after a decade long application of the scheme.

Firstly, tax credits-supported R&D activities remain too small to make any significant difference at the economy level. In 2004-2010 use of credits rose from EUR80 million to EUR225 million and at their peak, the credits amounted to less than one sixth of one percent of the Irish economy.

This is hardly a result of the scheme being too restrictive. In Ireland, firms are allowed to claim up to 25 percent of their R&D expenditure in credit. In the UK, the maximum is set at just 10 percent for the SMEs. The UK scheme is even more restrictive for larger enterprises. Furthermore, the UK applies strict criteria for SMEs that can qualify for such credits. Yet, UK R&D tax credits cover five times the share of GDP compared to Ireland.

Secondly, our tax credits scheme, along with the rest of the existent R&D and innovation support systems have failed to deliver any serious uplift in the R&D and innovation activities. Instead, these support systems have become a magnet for tax arbitrage by the multinationals and business cost optimization by Irish SMEs.

Take a look at the latest data on private sector R&D spend. Total R&D Expenditure by all enterprises in Ireland in 2012 stood at just EUR1.96 billion or 1.5 percent of our GNP. Between 2009 and 2012 this share of GNP has barely increased, rising only one percentage point, despite the large-scale increases in tax credits and other supports. The miracle of our 'knowledge economy' is, put frankly, quite feeble.

The achievements of 'Innovation Ireland' programmes are even less impressive when we consider what types of activities the R&D investments are being backed by tax credits. In 2007-2012 labour costs and current expenditures associated with R&D activities went up 29-31 percent, just as the economy was undergoing the alleged 'internal devaluation' normally associated with declines in these costs. In 2009-2012, costs associated with Payments for Licenses on Intellectual Property rose 357%. Total capital spending on R&D activities has fallen 30 percent over the same period. All in, CSO data shows that there might be significant cost shifting taking place via R&D tax credits being used to fund companies labour expenditures, as well as to optimise transfer pricing.


From economy's point of view, tax credits are one of the least efficient tools for stimulating investment in R&D and innovation. Research from the EU, published in February this year, examined the effectiveness of special tax allowances, tax credits and reduced income tax rates on R&D output. In assessing the quality of R&D projects, the authors looked at the R&D innovativeness and revenue potential. Using data on corporate patent applications to the European patent office, the authors found that a low tax rate on patent income is instrumental in attracting high quality innovative projects. In contrast, R&D tax credits and tax allowances were not found to have a significant impact on project quality.

International evidence shows that in general, all three forms of incentives are effective in raising the R&D activity. Ireland is one exception. Here, spending on R&D did not increase significantly in 2009-2012 period, rising in nominal terms by just EUR93 million for all companies and in real terms by 1.5 percent. The share of indigenous enterprises in total spending remained relatively stagnant at under 29 percent of total R&D spending. Total increase over 2009-2012 period in R&D spending by Irish-owned firms was only EUR14.5 million.

Tax credits are also reducing the overall transparency in the Irish economy when it comes to our firms performance and Government policies. Irish Government routinely references R&D tax credits as an example of pro-growth enterprise-focused policies. Yet there is no evidence directly linking economic growth, employment and enterprise outcomes to the tax credits.

In a welcome departure from our usual group-think, New Morning IP, the intellectual capital consultancy firm, recently published a report that argued that data shows no link between the introduction of the R&D tax credit and increased patenting activity by indigenous Irish companies. New Morning IP went on to state that “in our experience this tax credit has been used as a way of getting 'free money'…" It was a rare moment of truth in Ireland’s policy Byzantium, where interest groups routinely game the system for quick fixes, subsidies and protection, while ritualistically claiming unverified successes for such policies.

More distortions to the assessment of R&D tax credits effectiveness are induced by the fact that more than three quarters of R&D spend in Ireland is carried out by the MNCs. In some international studies, world-wide R&D investments by MNCs-based in Ireland are counted as if they take place here. One good example is the EU Industrial R&D Investment Scoreboard which ranked Ireland in top 10 EU countries for R&D investment in 2012. Per report, Ireland was host to 14 of the top-spending companies for R&D, but 11 of these were foreign companies and these accounted for 88.5 percent of all R&D spending attributed to Ireland.

In contrast to such reports, the European Patent Office data for 2012 put Ireland in 26th place in terms of total number of patent applications and in per-capita indigenous innovation terms, right between New Zealand and Cyprus. Not quite the achievement one finds promoted in Irish Government speeches and promotional brochures extoling the virtues of ‘Innovation Ireland’.


The above data on R&D investments and patenting activities in Ireland, correlates with the poor performance by the country academic institutions in attracting private sector research funding. The two problems are conjoined twins, born out of the lack of real innovation culture in Irish business.

This week's study by the Times Higher Education, ranked Ireland at the bottom of global league table in terms of private sector funding per academic researcher. Irish academics get an average of just over €6,000 from business research grants and general funds, or 12.5 times less than the world leader, South Korea. These numbers, of course, should be taken with a grain of salt. Lower rankings for Ireland, as well as for a number of other countries, can be in part explained by much broader academic research taking place in our universities, as well as in the bias in funding volumes in favour of specific technical disciplines. They are also reflective of the anti-innovation ethos of Ireland’s domestic enterprises. However, it also highlights the simple fact that Irish academics are often lacking policy and regulatory supports necessary to attract larger research grants.

The main point of all the data is that Irish policy supports for these high value-added activities are excessively focused on targeted tax incentives and are insufficiently aligned with the needs of the innovation-intensive sectors, businesses and entrepreneurs. Over-stimulation with targeted tax credits and exemptions is no substitute for the creation of a real culture of entrepreneurship and innovation.

To develop such culture, Ireland needs more flexible, more responsive public policy formation capable of supporting knowledge-intensive and rapidly evolving sectors, such as biotech, stem cells research, content-based ICT, remote medicine, human interface technology, customizable design and development technologies and so on. While we do have a benign corporate taxation regime, we also need a benign income tax regime to attract and anchor professional researchers and investors in innovation. Equally important are active state policies promoting start-ups and early stage enterprises. These require agile state systems for helping enterprises with issues relating to access to markets, IP, legal and regulatory matters and so on. Last, but not least, Ireland requires more streamlined and investor-friendly equity funding systems, tax laws and regulations and more open systems of IP and business ownership.

Box-out:

The latest report on the European construction industry, published this week by the German Ifo Institute shows that the residential construction sector in Europe will remain on course for further cutbacks with activity expected to hit a 20-years low in 2013-2014. The Institute forecasts show no pick up in residential building sector in Europe until 2015 and the market for new construction bottoming out at 45% below the level in 2006. The proverbial silver lining in the report comes in the Ifo forecasts for Ireland. Ifo experts see residential construction sector here switching to a 5.5% growth in 2014, followed by a 10% expansion in 2015. According to the report, “…it is encouraging that Ireland, which also had to overcome a major crisis in residential construction, is no longer a problem child.” Lets put these seemingly rosy forecasts into perspective. Currently, residential construction in Ireland is down 93 percent on peak year activity, marking the largest drop of any country in the EU. If the Ifo projections hold, by the end of 2015 Irish residential construction sector will be returned to the activity last seen in 2011. Not exactly encouraging, is it?

19/8/2013: 'Tax Haven' Ireland in the (2009) news again

I've been tracking articles relevant to the debate on the tax haven status of Ireland in relation to corporation tax for some time now.

Here's the last link which sets the chain of previous links on the topic:
http://trueeconomics.blogspot.it/2013/06/1062013-corporate-tax-haven-ireland.html

And since the above, I had couple of posts relevant to the subject:
http://trueeconomics.blogspot.it/2013/06/1662013-minister-in-northern-ireland-is.html
and
http://trueeconomics.blogspot.it/2013/07/2272013-g20-spells-out-squeeze-on-tax.html

Here are couple of most recent ones:

The Guardian covers 2009 case of Vodafone in two stories:
http://www.theguardian.com/business/2013/aug/18/vodafone-tax-deal-irish-office
http://www.theguardian.com/business/2013/aug/18/tax-vodafone-dublin
while the Tax Justice Network responds to the OECD Action Plan on corporate tax avoidance, explicitly identifying Ireland as a 'tax haven'
http://blogs.euobserver.com/shaxson/2013/07/19/press-release-response-to-oecd-action-plan-on-corporate-tax-avoidance/
and lastly the editorial in the EUObserver that also labels Ireland a 'tax haven':
http://blogs.euobserver.com/shaxson/2013/05/02/the-capture-of-tax-haven-ireland-the-bankers-hedge-funds-got-virtually-everything-they-wanted/

Note 1: The Guardian article references EUR67 million rebate on EUR1.04 billion in Vodafone dividends booked into Luxembourg. The dividends were paid on underlying revenues that were booked into Irish GDP and, thus, into our GNI (netting out transfers of royalties etc).These, in turn, required a payment of 0.59% of GNI-impacting activities to the EU Budget. While is is hard to exactly assess how much Irish Exchequer unnecessarily paid into the EU budget due to Vodafone activities, the amount is probably in excess of EUR 5 million and this compounds the transfers of EUR67 million referenced by the Guardian.


Note 2: I am not as much interested in the legal definitions of a tax haven (there are none and, thus, technically-speaking no country can be definitively labeled a tax haven) or in specific groups' definitions of the tax haven (the OECD definition is so convoluted, it virtually makes it impossible for any country with any global political clout - including that acquired via membership in the EU - to be labeled one, while the Tax Justice Network definition is broad enough to potentially include a large number of countries). I am concerned with the spirit of the concept - rent-seeking via tax arbitrage, and with the potential fallout from this in terms of distortions to economic development models and risks arising from same.

Note 3: A 'thank you' is due to a number of people who reminded me - in the context of the Guardian articles linked above - that Ireland charges a 25% corporate income tax on non-trading income. TY to @jameseyryan @Gerpf @JeremyTaxman @seamuscoffey

18/8/2013: A Baby Recession for Europe?

An interesting and forward looking study from the Eurostat on the demographic fallout from the current crisis predicting a so-called 'baby recession' in Europe. The paper is downloadable here: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-13-013/EN/KS-SF-13-013-EN.PDF

The main thesis is that "Fertility is commonly assumed to follow the economic cycle, falling in periods of recession and vice-versa, though scientific evidence is still not unanimous on this. This report looks at fertility trends in 31 European countries against selected indicators of economic recession… in 31 European countries, the economic crisis spread in 2009, while decreases in fertility became a common feature in Europe with a time lag. … In 2008, there were no falls in the rate compared to the previous year, but by 2011, the TFR had declined in 24 countries."

TFR refers to the total fertility rate.

All of this sounds reasonable, and there are some signs that fertility rates might be signaling a crisis-related decline and that such a decline might be coming. However, there is a slight hick up in the data on a number of fronts:

1. The average TFR is running at 1.595% for the 31 countries sample in 2010-2011 against 2000-2009 average of 1.527%. In other words, the decline is not evident so far, except in one year of 2011.
2. On country-average for 2000-2009 period, 11 out of 31 countries have been running ahead of average. In 2010-2011 period, same 11 countries run ahead of 31 countries-average. So there is no compositional change on under-performance relative to average.
3. Over 2010-2011, TFR average for countries was ahead of 2000-2009 average for 24 out of 31 countries. 
4. Countries that saw TFR decline from average for 2000-2009 to lower average for 2010-2011 were: Cyprus (not in crisis in 2008-2011), Luxembourg (not in crisis in 2008-2011), Hungary (in a crisis), Malta (not in crisis), Portugal (in crisis), Romania (in crisis), Latvia (in crisis), suggesting a very mixed evidence on the links between TFR and crisis to-date.
5. The weak link is further reinforced by the fact that other crisis-hit countries have fared much better in terms of TFR: Estonia, Ireland, Greece, Spain, Italy, Slovenia, UK, Iceland all posted increases in terms of 2010-2011 average compared to 2000-2009 average.

Charts below illustrate (data from Eurostat report, charted and computed by myself):

Note: in the case of Ireland, weather events had potentially significant impact on 2008 and 2010 birth rates. Adjusting for these effects, 2011 reading of TFR for Ireland is hardly a significant decline.

17/8/2013: Long-Term Great Unwinding for ECB?..

On foot of David Rosenberg's pressie on Long-Term Inflation strategy switch (link here), here's the ECB Monetary Policy dilemma illustrated.

First, the steep hill 'walking':

Per chart above, the wind-in-your-face breezing down the interest rates slopes for ECB is more severe than the Fed trip so far. And the duration of this episode is longer in the ECB-own historical context:

In fact, we are into 55th month now of staying away from the mean and that is for the euro era (already too-low by historical metrics) mean. Last two episodes of deviations lasted 30 and 33 months respectively. In severity terms: average overshooting post-revision in previous downward episode (June 2003 - June 2006) was -46 bps and in this period (since March 2009) it is currently running at -146 bps or 317% of the previous episode.

Good luck to anyone believing that ECB policy (repo) rate is not going to head for 3.75-4.0%...

16/8/2013: David Rosenberg Breaks Consensus on Long-Term Inflation

The most important note on the market written in the last 12 months, if not longer (and for those forward looking - the most important note written about the next 5 years plus):

http://www.gluskinsheff.com/Assets/Documents/Musings%20and%20Special%20Reports/Special%20Report%20-%20From%20Inflation%20to%20Deflation%20And%20Back%20-%20August%2014-2013.pdf

And 11 core snapshots from the ppt:

A must-read stuff!

16/8/2013: US Mint gold sales: H1 2013

In the previous post I covered July 2013 monthly sales figures for US Mint Gold Coins. As promised, here is a more stable trends analysis using H1 aggregates from 1987 through June 2013.

In H1 2013, US Mint sold 629,000 oz of coinage gold, marking the 5th highest ranked H1 in sales terms since H1 1987. Year on year, H1 2013 sales were up 86.1% and relative to crisis period average, sales were up 22.0%, while relative to the pre-crisis period (2001-2007) H1 2013 coinage gold sales were up 261.5%. For comparison, historical H1 average sales are currently at 336,520 oz.

In H1 2013, US Mint sold 1,088,500 coins, marking the third busiest H1 sales period since 1987. For comparison, historical average sales for H1 are at 592,615 coins.

In terms of average gold volume per coin sold, H1 2013 came it at 0.578 oz/coin, which is relatively moderate, given the historical average of 0.577 oz/coin.

Chart below to illustrate the above:

Chart above shows that both coins sales and oz sales of coinage gold remained in H1 2013 on the upward trend established since 2007 and the overall 2009-2013 activity for H1 period remains at post-1999 highs. There is little indication of any serious long-term slowdown in demand for US Mint coins in the data and H1 2013 strengthened the trend away from such moderation. The correction sustained over 2011-2012 has now been more than reversed and H1 2013 numbers in terms of coins sold is sitting comfortably above previous post-1999 maximum attained in 2010.

At the same time, demand for coinage gold (oz sold), while partially correcting upward in H1 2013 remains below the local maxima set in 2009-2010.

The above is consistent with restricted buying-on-the-dip behaviour, with some upward momentum being sustained by considerations other than price movements. This is further supported by changes in correlations between sales and the spot price of gold (average of closing monthly prices in USD):

• For price vs oz correlation, correlation between H1 1987 - H1 2012 stood at +0.22 and this rose to +0.29 for the period H1 1987 - H1 2013, implying (recall that price fell for H1 2013 to USD1,484.50/oz compared to H1 2012 at USD1,664.00) some limited buying-on-the-dip behaviour.
• For coins sold vs price, correlation H1 1987 - H1 2012 stood at +0.04 and this rose to +0.11 for the period H1 1987 - H1 2013, also implying limited buying-on-the-dip behaviour.

It is worth noting that H1 2013 figures were driven largely by January )month 1 of Q1) and April (month 1 of Q2) sales. This dynamic did not replicate in July (month 1 of Q3), so we should tread cautiously in expecting robust continuation of the H1 sales in H2.

16/8/2013: US Mint gold sales: July 2013

It has been some time since I updated the data on sales of US Mint Gold Coins, so let's take a quick run through the data for July 2013.

• US Mint gold coins sales in July 2013 stood at 50,500 oz, dow 11.4% m/m (though there is little point looking at monthly figures which can be volatile) and up 65.6% y/y. The sales were close to historical average at 57,239 oz and below the crisis period average (since January 2008) of 88,694 oz.
• US mint sales of coins in July 2013 stood at 90,000 coins, down 20.4% m/m and up 97.8% y/y. This compares agains 100,286 coins sold on average per month over historical period and 124,731 coins sold on average per month over the crisis period.
• Average volume of gold sold per coin in July 2013 stood at 0.561 oz/coin, which is 11.2% ahead of June 2013 and 16.3% behind July 2012. In historical comparatives, July sales were behind 0.59 oz/coin monthly average over the historical period and well behind 0.77 oz/coin average for the crisis period.
• 24mo rolling correlation between volume sold (oz) and gold price (end of month spot price) stood at 0.009 in July 2013, up on -0.045 in June 2013 and ahead of -0.09 average rolling correlation for the historical period covered by data, but virtually identical to the 0.01 average rolling correlation for the crisis period. In basic terms, the zero correlation between gold coins sales and gold spot price remained intact in July 2013.

Charts to illustrate:

Overall, analysis above confirms a short-term trend toward increased demand for gold coins, driven by changes in prices. This trend is more directly evident in 6mo sales data (next post). In total coins sales, there is a nice reversion to the up-sloping trend (first chart above), while oz/coin sold remains below the longer-term up-sloping trend line, potentially reflective of speculative purchasing running at more subdued volumes (second chart). Per third chart, there is a clear negative correlation between demand for coinage gold and the price of gold, suggesting some 'buying-on-the-dips', although this correlation is weak (last chart above) and is getting weaker (in absolute terms). There is a long-term trend toward positive (or at least much less-negative) correlation between the price of gold and coins sales.

Tune in for the H1 2013 cumulative data analysis next.

16/8/2013: H1 2013 Trade in Goods & Balance Dynamics for Ireland

On foot of my post detailing Irish cumulated figures for trade in goods for H1 2013, some asked me to post on the relationship between exports and trade balance. Here are few charts, taking snapshot from H12000 through H1 2013:

First, two charts showing levels of exports and trade balance for trade in goods:

Note that in the first chart, there is barely any difference between the 2000-2013 average level of exports (at EUR44.145bn) and 2009-2013 period average (at EUR45.077bn). The gap is only 2.1% of EUR932mln. At the same time, the second chart shows that there is a massive gap between the average trade balance over the period of 2000-2013 (EUR17.184bn) and for the period of 2009-2013 (EUR20.728bn) -  a gap of 20.6% or EUR3,544 mln. The core reason for this is that much of the 2009-2013 'stellar' performance in our trade surplus was driven by collapse in imports, rather than a rise in exports. 

To see this, let us plot exports against trade balance:

The last chart clearly shows that in 2009-2013, on average, exports were tracking changes in trade balance, but they were not doing so 1:1.

More interestingly, the chart shows that trade in goods in Ireland is in trouble. In 2009-2013 period, Irish Government policy has been to rely solely on exports (of goods and services) in driving the economy toward recovery and debt sustainability. This hope rests on growth in exports and simultaneously positive trade balance and growing trade balance as the key parameters for consideration when it comes to both economic growth and debt sustainability.

Alas, in years 2010, 2012 and 2013 (in other words in 3 out of 5 years), measured by H1 figures alone, Irish goods traded operated in the 'pain spot' region - the region of shrinking exports and shrinking trade surpluses.

In other words, in terms of levels our merchandise trade is performing well. But in terms of growth it is performing poorly. And this is despite a huge drop-off in imports, something that is not likely to last when the economy goes back to capital investment (imports of capital goods will rise) and/or consumption recovery (imports of consumption goods will rise).

15/8/2013: H1 2013 Trade in Goods data for Ireland

Latest data for Merchandise trade for June 2013 allows us to make some comparatives for the first half of the year. Here are some stats, all covering only merchandise trade:

• Total Imports rose in H1 2013 by 3.12% on H2 2012 and were down 2.39% on H1 2012. Imports were up 3.11% in H1 2013 compared to the 6 months cumulative averages over the three years from H1 2010 through H2 2012. H1 2013 levels of imports were 23.2 below their peak for any 6 months period since H1 2000.
• Total Exports fell in H1 2013 by 4.35% on H2 2012 and were down 6.55% on H1 2012. Exports declined, in absolute terms by EUR3.045 billion year-on-year. This marked the largest 6-mo cumulative drop in exports since H1 2003, marking the H1 2013 the worst year-on-year 6 months period since then.
• Exports were down 4.48% in H1 2013 compared to the 6 months cumulative averages over the three years from H1 2010 through H2 2012. H1 2013 levels of exports were 12.43% below their peak for any 6 months period since H1 2000.
• Trade Surplus fell 12.62% on H2 2012 and was down 11.47% in H1 2013 compared to H1 2012. In level terms, trade surplus was down EUR2.442 billion in H1 2013 compared to H1 2012, marking the worst 6 months period since H1 2005.

Charts below illustrate the trends:

Good news, per chart above, Trade Surplus is still running above 2000-present average, although Exports are now running below their 2000-present average. Bad news, the above chart does not adjust for inflation.

Not-too-good news is, exports are now in the negative territory in terms of y/y changes. Remember, we need positive growth in total (merchandise and services) exports of ca 5% per annum to maintain any semblance of sustainability. Here's the tricky bit:

As chart above shows, we really need rapid, very rapid growth in services exports to return our total exports and trade balance to where we need them to be to maintain economic activity at the levels that will be consistent with long-term gradual reduction of public debt.  Over the last 5 years, merchandise exports in Ireland grew on average at 0.59% y/y and over the last 10 years this growth was 0.94%. Owing to the recent collapse in our imports, our trade balance grew on average at 11.73% in the last 5 years. However, over the last 10 years the growth in our trade balance was much less dramatic 3.18%.

8/13/2013: Sunday Times, August 11: Wither Middle Ireland

This is an unedited version of my Sunday Times article from August 11, 2013.


Recent data from Irish retailers, aggregate services indices as well as household surveys paints a picture of an economy divided in misery and fortunes. Following an already unprecedented five years of straight declines, domestic demand, stripping out one-off effects, such as weather, continues to shrink. This is the paralysed core of our economy. At the opposite side of the spectrum, pockets of strength remain within some demographic groups – namely the young and mobile professionals and debt-free older households. These form a de facto sub-economy only marginally attached to Ireland’s long-term future. With personal consumption still accounting for over half of the total annual GDP, a society torn between these two divergent drivers of domestic demand, savings and investment, is an economy at risk.


On the surface, CSO data through H1 2013 shows that Irish retail sales (excluding cars) grew modestly in June 2013 when compared to the same period a year ago. Much of this growth was due to weather effects and these are likely to strengthen even further in the third quarter. However, removing food, fuel and bars sales, core retail sales were down 1.7 percent in value and were up 0.8% percent in volume in April-June 2013, year-on-year. In other words, core sales are still being driven primarily by price declines rather than by organic growth in demand.

Meanwhile, aggregate data released this week, covering services (as opposed to sales of goods alone) showed annual declines in June 2013 in accommodation, and food and beverage services activities.

The bad news is that five years into the process of reducing household expenditures, Irish consumers are still tightening their belts. Not only discretionary spending is dropping, but demand for staples is contracting as well. At the end of H1 2013, retail sales were down on 2007 levels for both durable and non-durable household consumption items, as well as food.

This data is largely consistent with the analysis of the household budget surveys released earlier this month.  These surveys showed that compared to 2009, Irish households have cut deeper into their bills in twelve months through Q3 2012. Demand for groceries, clothing and footware, recreation, health Insurance and education saw continued cutbacks. For example, in the 24 months prior to June 2011, 56 percent of Irish households cut down on food purchases. Further 51 percent cut spending in the 12 months through September 2012. Despite these already severe cutbacks, industry surveys show that Irish households are still concerned with high cost of basic consumables.

Households’ propensity to cut costs has risen in the twelve months through September 2012 compared to the 24 months period to June 2011 as those still holding onto their jobs are now shifting into deeper cost savings mode. This busts the myth that the only people forced to severely cut their spending are the unemployed and the poor. The largest proportion of severe cuts in the earlier part of the recession fell onto the shoulders of the households where at least one person was jobless, followed by students. Back then households in employment were the category second least impacted by household budgets cuts. Last year, households still in employment were the second most likely to reduce spending. Significantly - households with some members on home duties, retired or not at work due to illness or disability posted the shallowest average cuts of all demographic groups.

The above explains why the data from multiples retailers in Ireland has been showing a V-shaped pattern of changes in consumer demand, with higher demand witnessed in lower-priced categories of own-brand goods supplied by discount retailers, such as Aldi and Lidl, and the premium own-brands of traditional multiples, such as Tesco. Demand for mid-range priced goods usually purchased by the middle class continued to fall.

Ditto for the luxury end of the market, with exception of Dublin, as sales of food and drink in specialist stores have fallen almost 20 percent on pre-crisis peak. Exactly the same pattern of shift away from the middle of price range sales emerged in the demand for electrical goods.


The drivers for the above trends are crystal clear. Middle Ireland is under severe pressures financially, while Happily-Retired and Yappy Irelands are having a relatively easy recession or living through the good times. The main force working through the Irish domestic demand is that of polarization of households not along the lines of employed v unemployed, but along the more complex and fragmented demographic lines.

The average number of spending cutbacks in 12 months through September 2012 for households with no person at work stood at 2.6 categories of spending. The same numbers for households with one and two persons working were 3.3 and 3.2 categories, respectively.

This pattern of cutbacks and income distribution changes across the households is also strengthening over time. In effect, due to Government policies, Ireland is becoming a country with severely polarised distribution of financial well-being. This polarisation is contrary to the one witnessed in normal economies and is different from the one that majority of out policymakers and analysts have been decrying to-date.

The Great Recession has finally exhausted ordinary savings of both working and unemployed households, while lack of income growth has meant that even those in employment are now sinking under the weight of debt and tax and cost inflation driven by the State budgetary policies to-date.

Last week, CSO reported distribution of the households by their ability to manage bills and debts over 12 months prior to July-September 2012. Of households with at least one adult aged 65 and over, up to 28 percent were experiencing difficulties in managing their debts and bills. For households with all adults under the age of 65 the corresponding number was up to 46 percent. Up to 69 percent of the families with children were in the same boat. The older the respondent was, the less pressure on paying their bills their reported.

In normal economies it is the older families that face tighter budget constraints. In today's Ireland it is the younger and the middle-age families with children that are being pressured the hardest by the crisis. This bedrock of financial health in the normal times has been pulled from underneath the economy by the Great Recession.

At the same time, the crisis has generated a new class of the relatively well-off. Based on employment levels and quality, earnings, as well as regular and irregular bonuses data, three sectors in the Irish economy stand out as the winners during the crisis: the ICT services, specialist exports-focused services and international financial services. All three sectors are dominated by younger workers with high percentage of employees coming from abroad and working on a temporary assignment basis here. The demographic they represent is primarily from mid-20s through mid-30s, with smaller size families. These groups of employees are also heavily concentrated geographically, with exporting services sectors workers primarily living in Dublin, followed by a handful of other core urban areas.

Even as early as 2006-2007, market research has shown that these types of households favour premium consumption of convenience food, spend more of their income on going out and travel abroad, and less on purchases of durable goods, household goods, education and health insurance. They do not invest in this economy and hold off-shore most of their long-term savings. Their financial investments are also held and managed abroad and often include mostly shares and options in their own employers. Their children are not going to continue growing up in Ireland and will not be a part of our future workforce. The skills they accumulate while working here are transitory to the overall stock of Irish human capital. On a social level, their demand for entertainment is currently best exemplified by the booming restaurants and bars across the D2-D4-D6 areas of Dublin and stands in stark contrast to Middle Ireland’s hollowed out town centres and neighborhoods with empty storefronts and vacant building sites.


Today’s Ireland is a society where the middle class and large swaths of the upper-middle class have been dragged under water by the combination of the unprecedented crisis, compounded by rampant state-sanctioned cost inflation and legacy debt.

The data on domestic demand suggests that we might be entering a classic ‘Bull trap’. Here, tight rental markets in the leafy South Dublin neighborhoods fuels sales of rentable properties to service the needs of the Yappy Ireland. These pockets of activity are at a risk of generating inflated expectations of incoming prosperity. Don’t be fooled by this – the risks to the real Irish economy are still there, in plain view, in the streets of real Ireland.

Recognising this reality requires the Government to reconsider the tax increases that are impacting adversely the middle and the upper-middle classes. It also means that the State must reform, rapidly and thoroughly the semi-state sector to reduce the cost drag exerted by the Irish utilities, transportation, health and education services providers on Middle Ireland families’ balancesheets.  Lastly, prudent risk management requires for us to manage very carefully the process of mortgages arrears restructuring and debt work-outs. While many economy have survived sovereign and banking sectors busts, no economy can emerge from a crisis having destroyed its middle classes.

Box-out:

In Ptolemaic cosmology, astronomers believed that the Earth was the centre of the Universe. To balance this Universe, Ptolemists used to draw complex sets of larger and smaller circles - known as epicycles - to describes their orbits around the Earth. The problem with epicycles spelled the demise of the Ptolemaic cosmology in the end: as the known number of planets and stars increased, the system of superficial orbits rapidly collapsed under its own complexity. The Ptolemaic absurdity, however, is still alive today in Irish economic policies. A year ago, the Government had a clear choice of policy options: a site-value tax (SVT) that can be levied on all forms of properties, including land, or a residential property tax that can be levied only on structures. In a study covering all known forms of policy mechanisms used to fund public infrastructure around the world,  submitted to the Department of Environment, I have argued that one of the major advantage of the SVT over a property tax was that it would have incentivised more efficient use land, reducing land hoarding and speculation. There were multiple other advantages of SVT over the property tax as well. Alas, the Government opted for a property tax favouring under-use of land over all other properties. This tax suits the major lobbies influencing the State: farmers and well-off rural landed families. Fast-forward eight months from last December: this week, Dublin City Council called for a levy on unused vacant sites. Hundreds of sites lay vacant across the city - blotching the cityscape and posing a threat to personal safety to many workers, as well as an unpleasant reminder of the property bust and economy's dysfunctionality to the would-be foreign investors. Dublin City has been trying to force this land back into development since 2009, although no one in the city has a slightest idea where the demand for such development might come from. Thus, our Ptolemaic system of economic policies is about to draw yet another contrived, complex and inefficient balancing circle on the map of our tax policies to compensate for the Government's rejection of the site value tax. After all, managing the superficial complexity of a political economy that attempts to appease the landed classes, while satisfying the needs and demands of foreign investors and urban authorities is an arduous task