10/10/15: IMF’s Macro Data and That “Iceland v Ireland” Question, again

Recently, I posted some data from the IMF Fiscal Monitor for October 2015 comparing fiscal performance of Iceland and Ireland and showing the extent tp which Iceland outperforms Ireland in terms of fiscal deficits and Government debt metrics. You can see the full post here.

Now, consider economic performance, especially of interest given recently strong performance by Ireland in terms of GDP, GNP and even Domestic Demand growth rates.

So let’s take a look at IMF's latest economic data and revisit that "Iceland v Ireland" question.

Let;s first take a look at the real GDP per capita, setting peak pre-crisis levels of 2007 (for both countries) as 100 index reading and tracing evolution of the real GDP per capita. Both countries are expected to regain their pre-crisis GDP per capita levels in 2015, with Iceland reaching 0.17% above the pre-crisis peak and Ireland reaching 0.29% above the same measure.

We are not going to dwell on the gargantuan (20%+) GDP/GNP spread or the fact that Irish Domestic Consumption per capita is nowhere near pre-crisis peak (see here). In pure real GDP per capita terms, Iceland is doing as well or as badly as Ireland so far.

The same applies to GDP per capita expressed in current prices and adjusted for differences in exchange rates and price levels (the Purchasing Power Parity adjustment). Iceland is at 112.9 index reading in 2015 forecast, Ireland at 113.1 index reading. For 2016, Iceland is forecast to be around 117.5, Ireland at 117.8. Neck-in-neck.

However, when it comes to the labour market performance, the close proximity between two countries vanishes.

Unemployment rate in Iceland rose from 2.3% in 2007 to a peak of 7.525% in 2010 and is expected to be at 4.3% in 2015, falling to forecast rate of 4.1% by 2016-2017 before rising to 4.4% in 2020. Ireland is faring much worse. Our unemployment rate was double Iceland’s in 2007 - at 4.67% and this peaked in 2012 at 14.67%. Since 2012, the rate fell, with 2015 outlook set at 9.58% - more than double Iceland’s rate, falling gradually to 6.9% in 2020 - more than 50 percent higher than Iceland’s.

Employment rate also tells the story of Iceland’s outperformance. And worse - dynamically, this outperformance is set to continue deteriorating for Ireland. In 2007, Iceland’s total employment ratio to total population was 57.5% against Ireland’s 49% - a gap of 8.5 percentage points. This year, per IMF projections Iceland’s employment ratio will be around 55.8% against Ireland’s 42.2% - a gap of 13.6 percentage points. In 2016 (the furthers forecast by the IMF), Iceland’s employment rate is projected to be 56.5% against Ireland’s 42.7% - a gap of 13.8 percentage points.

Since the beginning of the crisis, Irish policymakers extolled the virtue of our open economy and exports as the drivers for economic recovery. Aptly, we commonly regard ourselves to be a powerhouse of exporting activities. Which means that we should be leading Iceland in terms of our external balances performance. Reality is a bit more mixed. Iceland’s current account deficit stood at a whooping 22.8% of GDP in 2008 on foot of strong ‘imports’ of capital into the banking system. Ireland’s was more benign at 5.73% of GDP. However, since the peak of the crisis, both countries achieved massive improvements in their current account balances, with 2014 ending with Iceland posting a current account surplus of 3.41% of GDP and Ireland posting a current account surplus of 3.62% of GDP. However, in 2015, IMF forecast for current account balance shows Iceland pulling ahead of Ireland, with current account surplus of 4.61% of GDP against Ireland’s 3.2% of GDP. This gap - in favour of Iceland - is expected to persist (per IMF) through 2020.

Table below summarises the sheer magnitude of positive adjustments to pre-crisis and crisis worst points of performance on all metrics above, through 2015 for both countries:

In summary: 

• In absolute terms, both Ireland and Iceland have made big adjustments on low points of performance pre-crisis and at the peak of the crisis through 2015. 
• Iceland clearly outperforms Ireland in labour market terms. 
• Ignoring the caveats on composition of Irish GDP, Ireland and Iceland perform basically in similar terms in terms of economic activity recovery. 
• In terms of external balances, Iceland currently leads Ireland, after having lagged Ireland through 2012. 
• Iceland solidly outperforms Ireland in fiscal metrics of Government debt and deficit dynamics.

The evidence above is sufficient to reject the claims that Ireland outperforms Iceland in recovery.

10/10/15: IMF: Un-Clued on U.S. Monetary Policy Normalisation

For all the positivity chatter about the return of the U.S. growth and 'normalisation' of the interest rates environment pushed into the world of unsuspecting journos by the IMF in its latest WEO Regional Outlook: Western Hemisphere, there is a nagging suspicion that something is strangely amiss.

Take the pesky problem of the U.S. monetary policy being exceptionally loose (or accommodative) since 2008. Chart below shows this by plotting a rate gap between policy rate and the 'neutral rate' with negative values indicating accommodation. Note, neutral rate is defined as the rate consistent with the economy achieving full employment and price stability over the medium term. Note also that adding in QE (over and above simple policy rate) pushes the metric of accommodation well beyond all historical comparatives in size (depth) and duration (length of time accommodation is present):

Now, naturally, one would expect these 'accommodative policies' to create a vast sea of surplus (relative to 'natural rate' consistent) liquidity (aka: money) in the U.S. system. And, naturally, one would expect that any 'normalisation' in the monetary policy would entail removing this surplus over time. Which, again, naturally, should translate into higher rates.

IMF obliges, providing us with this handy chart tracing forward expectations for U.S. policy rate:

The lift-off suggested in the chart above is rather steep and is steeper than the lift-off suggested by market pricing of futures (red line). In a sum, the chart above says: We have no idea what 'normalisation' will look like, but let's hope it will be more benign than the Fed signals and Primary Dealers Survey have been.

But here is a pesky little thing: You won't spot the same dynamics in IMF WEO forecast for either inflation or Libor rates. And the reason is pretty obvious: the more aggressive the Fed path in the chart above, the lower are growth projections in the chart below:

IMF forecasts from 2016 out to 2020 fall squarely in line with 2010-2015 averages for GDP growth (aka inflationary pressures) but are in excess of the 2010-2015 average for inflation itself.

In simple terms, despite all the talk about 'normalisation' of rates, the IMF is really saying that through 2020, we can expect the monetary environment (and with it the interest rates outlook) to be more benign than over pre-crisis average. Worse, inflation is expected to accelerate even though growth is expected to slip.

How does any of this square well with the idea of the Fed rate going to 3.75% as projected in the second chart above? Does any of this square well with projected 2016 interest rates for the Fed going to 1.2-1.3% against Libor under 1.2%? Does any of this square well with forecast inflation jump from 0.906% in 2015 to 1.404% and inflation outlook heading toward 2.322% by 2020?

In short, IMF expectations on both Libor and the Fed rate can be very tight.  Especially over the 2016-2018 horizon. If the Fed does stick to its signalled path (chart 2 above), growth will suffer relative to IMF projections (last chart above), despite already heading toward 2010-2015 average by 2019.

In the mean time, none of the IMF forecasts are consistent with Fed policies addressing in any reasonable way the built up of monetary policy excesses of the past.

Welcome to the world of forecasting after ZIRP. Shall we call it Fudge?..

10/10/15: IMF: "Honey, we've Japanified the World"

Much has been written this week about IMF’s World Economic Outlook and the belated catching up the IMF are performing to the reality of

1. Faltering Emerging Markets, but improving Advanced Economies
2. Flattening Global growth, but momentum recovery in the Euro area (that depends on the World demand for its exports); and
3. Largely still-ignored, but nonetheless hanging like a dark shadow over the IMF's forecasts, secular stagnation.

Now, with some time lapsed over all that media circus, let’s take a look at hard numbers.

Here is the breakdown of IMF changing forecasts.

First up, World real GDP growth forecasts. How did these evolve over the recent years?

Yep, that’s right. Back in October 2012, IMF was projecting 2015 growth to come in at 4.418%. This gradually fell back to 3.847% forecast in October 2014. This week outlook for 2015 full year global economic growth is 3.123%. All along, the IMF has been signing praise to structural reforms, ownership of various programmes (IMF-run programmes) and monetary policies efforts. Year after year, after year cheerleading the world to ‘next year things will be great’. Do observe how every forecast starts with the premise that "next year, there will be an uptick in growth". And the end game is 1.295 percentage points lower growth outrun for 2015 in October this year than back in  October 2012.

Guess what, every year from 2015 on, current forecast shows lower growth than that expected in the earliest WEO report containing such a forecast.

Ditto for the Advanced Economies, as shown in the chart below

Things are no better for the Euro area, despite the already low aspirations that the IMF had for the common currency area from the start:

And for the Emerging Markets - ditto.

You wonder how on earth can these 'rosy forecasts --> ugly reality' picture can be consistent with IMF ever-expanding 'sustainable' lending to the states in trouble? It doesn't, of course, for IMF growth projections simply do not support the lending the Fund is doing. Instead, it is the efforts of the Central Banks at printing money to monetise debt that make this pile of Government-backed junk 'sustainable' for now.

Now, 2010-2011 were pretty awful years overall for the global economy. Still, it managed to squeak out 4.828% average rate of growth in these gloomy days. Now, we have a global recovery, and volumes of structural reforms written, re-written and re—re-written. IMF is now virtually running half the planet and majority of Government are obligingly ‘owning’ their programmes. Beyond, we have tens of trillions of printed/minted/QEd/instrumented/engineered debt and cash instruments flooding the markets.

And yet:

• In 2015-2020, per IMF latest projections, Global economic growth is going to be lower than 2010-2011 average in every year.
• The same is true for the Advanced economies;
• The same is true for the Euro area; 
• The same is true for the Emerging Markets.

Actually, the rot has been ongoing since 2012. Here is the cumulative growth that has been achieved (through 2014) and is forecast to be achieved (from 2015 through 2020) since 2010 across the main regions:

You can’t make this up: even with the Euro area contained within it, Advanced Economies group outperforms Euro area group by almost 3/4rs.

The chart below slices the same data slightly differently, by looking at cumulative growth the IMF projected for 2015-2017 period.

Abysmal? You bet.

Based on 2010-2011 average, we should see Global economy expanding by 15.2% over the three years of 2015-2017. Instead, IMF projects growth of 10.86%. Advanced economies should grow by 7.4% based on 2010-2011 averages, but current forecast implies growth of 6.58%. Euro area economy should grow by 5.6% based on 2010-2011 averages, but current outlook implies growth of 4.87%. Emerging Markets should be growing by 22.1% under 2010-2011 average rates, and are now projected to expand by 14%.

Amidst all this, talking about Governments around the world ‘owning’ more reforms, as the IMF continues to do might be as close to Einstein’s famous dictum about insanity as one can get.

In the entire IMF review of the Western Hemisphere (that includes NAFTA states), there is only one, cursory mentioning of the phrase “secular stagnation” even though the entire WEO database published by the Fund screams it from every data set imaginable. But there are plenty of mentions in the WEO and the Fiscal Monitor and the GFSR for the need for the Euro area to harmonise more. Presumably because all this harmonisation before has not led us to where we are today - running an economy that is growing by margins statistically pretty darn indistinguishable from zero. There are admonitions by the IMF for the Emerging Markets to get onto the bandwagon of structural reforms too. Because the IMF prescriptions have worked so well in Europe, the dynamism of the continent is now overwhelmingly... err... what's the word here?... suffocating?..

Truth is, folks, we are now all Japanified. Time for the IMF to catch up with that trend and think up real reforms, such as

• Dealing with debt overhangs not by bleeding households and companies dry, but by restructuring these, 
• Dealing with slacked investment and enterprise creation not by shoving more cheap funds into the banks, but by using monetary firepower (the little that is still left floating around) to free households from debt and giving them lower taxation burdens, while providing proper risk and tax treatment of debt,
• Dealing with excessive policies harmonisation and coordination by encouraging the states to take the route to greater financial, fiscal and economic management independence, and
• Promoting not the divisive, Us-vs-Them types of quasi-regional trade deals recently welcomed by the IMF under the US-led TPP and TTIP, but inclusive trade negotiations under the WTO umbrella.

Because, as Japan's example has taught us so far, Japanification can't be cured by printing presses and fiscal stimuli. And it is sure as hell can't be cured by the IMF 'structural reforms'...

9/10/15: Subsidies and Irish Agriculture: 2014 Data

Per latest data from CSO, Net Subsidies accounted for 59.6% of agricultural income in Ireland in 2014, ranging from 105.3% in the Midlands to 40.6% in South-West.

High as a kite on subsidies, Irish agriculture nonetheless managed to improve, thanks in part to lower euro valuations, its value added relative to subsidies. In 2012 net subsidies counted for 72.1% of total operating surplus (or income) in the sector, falling to 63.4% in 2013.

Key computational definition here are for GVA (Gross Value Added) and Operating Surplus (Income):

GVA at basic prices = Agricultural Output at basic prices – Intermediate consumption
Operating Surplus =    GVA at basic prices – Compensation of employees
                              –  Fixed capital consumption
                              + Other subsidies less taxes on production

Net value added in Irish agriculture in 2014 was EUR1.463 billion, up on EUR1.316 billion in 2013.

For the politicians claiming immense importance of the sector to Ireland, a quick reality check: Gross Value Added (which includes all labour inputs and capital spending in the sector, as well as subsidies net of taxes) stood at EUR2.192 billion in 2014.

And of that, subsidies accounted for 69.4 percent of total Gross Value Added - more than 2/3rds of Irish Agricultural Value Added came via a cheque from Europe, not from customers buying the goods.

In fact, claims about Irish Agricultural Sector contribution to the economy are often wildly off the mark. Per CSO data, the highest metric of this sector activity - Agricultural Output at Basic Prices is EUR7.328 billion for the entire 2014 and of these 20% (one fifth) were net subsidies.

9/10/15: Is Economics Research Replicable?… err… ”Usually Not”

An interesting, albeit limited by the size of the sample, paper on replicability of research findings in Economics (link here).

The authors took 67 papers published in 13 “well-regarded economics journals” and attempted to replicate the papers’ reported findings. The researchers asked authors of the papers and journals for original data and codes used in preparing the paper (in some top Economics journals, it is a normal practice to require co-disclosure of data and empirical models estimation codes alongside publication of the paper).

“Aside from 6 papers that use confidential data, we obtain data and code replication files for 29 of 35 papers (83%) that are required to provide such files as a condition of publication, compared to 11 of 26 papers (42%) that are not required to provide data and code replication files.”

Here is the top line conclusion from the study: “We successfully replicate the key qualitative result of 22 of 67 papers (33%) without contacting the authors. Excluding the 6 papers that use confidential data and the 2 papers that use software we do not possess, we replicate 29 of 59 papers (49%) with assistance from the authors.”

In other words, even the authors of the original papers themselves were not able to put the results to re-test.

“Because we are able to replicate less than half of the papers in our sample even with help from the authors, we assert that economics research is usually not replicable.”

This is hardly new, as noted by the study authors. “Despite our finding that economics research is usually not replicable, our replication success rates are still notably higher than those reported by existing studies of replication in economics. McCullough, McGeary, and Harrison (2006) find a replication success rate for articles published in the JMCB of 14 of 186 papers (8%), conditioned on the replicators’ access to appropriate software, the original article’s use of non-proprietary data, and without assistance from the original article’s authors. Adding a requirement that the JMCB archive contain data and code replication files the paper increases their success rate to 14 of 62 papers (23%). Our comparable success rates are 22 of 59 papers (37%), conditioned on our having appropriate software and non-proprietary data, and 22 of 38 papers (58%) when we impose the additional requirement of having data and code files. Dewald, Thursby, and Anderson (1986) successfully replicate 7 of 54 papers (13%) from the JMCB, conditioned on the replicators having data and code files, the original article’s use of non-confidential data, help from the original article’s authors, and appropriate software. Our comparable figure is 29 of 38 papers (76%).”

A handy summary of results:

So in basic terms, economists are not only pretty darn useless in achieving forecasting accuracy (which we know and don’t really care about for the reasons too hefty to explain here), but we are pretty darn useless at achieving replicable results of our own empirical studies using the same data. Hmmm…

9/10/15: Quantitative Scaring & Secular Stagnation

One very important point being raised in this article from the Economist: "Controlling for the range of things that influence interest rates, from growth to demography, economists have attempted to gauge the impact of reserve accumulation. Francis and Veronica Warnock of the University of Virginia concluded that foreign-bond purchases lowered yields on ten-year Treasuries by around 0.8 percentage points in 2005. A recent working paper by researchers at the European Central Bank found a similar effect: increased foreign holdings of euro-area bonds reduced long-term interest rates by about 1.5 percentage points during the mid-2000s."

Which brings us to the idea of the 'savings glut' over the 2000s. I covered this in this article concerning the twin threats of supply and demand side-driven secular stagnation.

The Economist give us one side of that equation: Sovereign Reserves

All of which has two implications:

1. The commodities bubble bursting will have a second order effect on longer-term expected cost of Government borrowing in the advanced economies by removing the surplus of savings accumulated in the official accounts in the Emerging Markets. Which makes unwinding monetary policy excesses (from the balancesheets of the Central Banks in the advanced economies) so much harder. The knock on effect of this will be lower solvency of the Western pensions funds in the longer run; and
2. Depletion of savings on the sovereign side will require increased savings on the private sector side. Which will have compounding effect on demand.

Both points reinforce the adverse impact on global growth prospects.

7/10/15: IMF's Latest Fiscal Data and That "Iceland v Ireland" Question

You know, there’s always fun to be had with the IMF’s Fiscal Monitor updates. If only because they throw some light onto yet to be published WEO updates. But this time around, I was given a mission. Someone few weeks ago on twitter suggested that I should revisit some comparatives between Iceland and Ireland. And so here we are, fresh Fiscal Monitor at hand, let’s crunch the numbers.

Take General Government Overall Balance as % of GDP. In 2014, Ireland (best pupil in the Euro class) had a deficit of 4%. This year, IMF forecasts a deficit of 2% (significantly outperforming our Troika allowance). Which is great news. Iceland (the ‘bad pupil in class’ judging by its desire to burn bondholders in the past) had deficit of 0.2% of GDP in 2014 and is forecast to post a surplus of 1.3% in 2015. Add two numbers together and you get 2 years cumulative deficit of ca 6% for Ireland and cumulative surplus of ca 1.1% for Iceland. Iceland will be posting its first full budgetary surplus in  2015 according to the IMF latest figures, Ireland will get there in… well, not any time before 2021 as IMF projects our best performance to be 0% deficit in 2018-2020. Who’s that pupil at the back row?..

Now, take General Government Primary Balance (so stripping out the pesky payments of interest on debt). Ireland had a deficit of 0.6% of GDP in 2014, moving onto a forecast surplus of 0.8%. So net over two years, roughly 0.2% primary surplus. Take Iceland now: 2014  primary surplus of 3.5% and 2015 projected primary surplus of 4%. Net over two years, roughly 7.5% surplus. Which is, sort of, kind of 37.5 times better than Ireland?.. But wait, Iceland reached its first primary surplus in 2013. Ireland will reach its first primary surplus in 2015. Best, you know, in the class… may be not quite in the school, but…

Onto Cyclically-adjusted Balance (government balance accounting for business cycles). Ireland to start with again: -2.5% of potential GDP deficit in 2014 and -1.4% of potential GDP deficit in 2015. Not bad. Poor Iceland: cyclically adjusted deficit of 0.1% in 2014 and projected surplus of 1% in 2015. Cumulative two years for Ireland: deficit of ca 3.9% of GDP, for Iceland: surplus of 0.9% of potential GDP.

Soldier on. Next up, Cyclically-adjusted Primary Balance. Ireland: 0.9% surplus in 2014 and 1.3% surplus in 2015. Iceland: 3.8% surplus in 2014 with projected surplus of 4.1% in 2015. Two years cumulative: Ireland’s surplus of ca 2.2% of potential GDP, Iceland’s surplus of 7.9% of potential GDP.

Both countries took on hefty debt beating in the crisis. Back in 2006, Gross Government Debt in Ireland was 23.6% of GDP and in Iceland it was 29.3% of GDP. Iceland was underperforming Ireland. In 2014 gross government debt in Ireland was 107.6% of GDP and in Iceland it was 82.5% of GDP. In 2015, as IMF projects, the figures will be 75.3% of GDP for Iceland and 100.6% for Ireland. Oh dear… but perhaps things are going to catch up for us in the medium term future? Ok, IMF projects Gross Government Debt out to 2020. This is, of course, no guarantee, but the best we can go by. In that somewhat not too distant future, Iceland’s Gross Government Debt is projected to be around 54.9% of GDP. Ireland’s - at 82.9% of GDP. Here’s a bit of farce: at the peak of debt crisis for both Ireland and Iceland - in 2012, our debt to GDP ratio was 27.5 percentage points higher than that of Iceland. Per IMF projections out to 2020, the difference will be… 28 percentage points.

Of course, nowadays it is fashionable to remind ourselves that despite having lots of debts we have some assets (AIB shares and stuff). IMF partially accounts for these by estimating Net Government Debt. So let’s take a look at that metric. Per IMF data, peak of net debt levels in Iceland and Ireland took place around 2012 (for Iceland) and 2013 (for Ireland). Back then Icelandic Net Government Debt was 25 percentage points lower than our Net Government Debt. This year, IMF projects, it will be 31.6 percentage points lower (50.8% of GDP for Iceland and 82.4% of GDP for Ireland). But may be we are on track to watch up with Iceland by 2020? Not really, per IMF forecasts, our Net Government Debt will be 29.6 percentage points higher then than Icelandic Net Debt.

So I’ll sum up for you the IMF latest data in 2 charts. Self-explanatory. In both charts, positive values showing Iceland outperforming Ireland in fiscal metrics. Enjoy:

While Ireland did deliver impressive adjustments on fiscal side post-crisis peak, it is simply incorrect to identify our adjustments as being consistent with achieving performance better than that found in Iceland over the same period.

7/10/15: Bubbles Troubles and IMF Spectacles

As was noted in the previous post (link here), IMF is quite rightly concerned with the extent of the global financial bubbles that have emerged in the wake of the years-long QE waves.

This chart shows the extent of over-valuation in sovereign debt markets:

But the following charts show the potential impact of partial unwinding of the bubbles. First up: bonds:

Then, equity:

Per IMF: “The scenario generates moderate to large output losses worldwide” as chart below shows changes in the output in 2017 under stress scenario compared to benign scenario:

And here’s what happens to projected Government debt by 2018:

         Toasty!

7/10/15: On the Illusion of Financial Stability

IMF’s Global Financial Stability Report for October 2015 is out, titled, predictably “Vulnerabilities, Legacies, and Policy Challenges: Risks Rotating to Emerging Markets”.

It is a hefty read, but some key points are the following.

“Th e Federal Reserve is poised to raise interest rates as the preconditions for liftoff are nearly in place. This increase should help slow the further buildup of excesses in financial risk taking.” As if this is something new… albeit any conjecture that the Fed move will somehow take out some of the risks built up over years of aggressive priming of the liquidity pump is a bit, err… absurd. The IMF is saying risk taking will slow down, not abate.

“Partly due to con fidence in the European Central Bank’s (ECB’s) policies, credit conditions are improving and credit demand is picking up. Corporate sectors are showing tentative signs of improvement that could spawn increased investment and economic risk taking, including in the United States and Japan, albeit from low levels.” So, as before, don’t expect a de-risking, expect slower upticks in risks. The bubbles won’t be popping, or even deflating… they will be inflating at a more gradual pace.

All of which should give us that warm sense of comfort.

Meanwhile, “risks continue to rotate toward emerging markets, amid greater market liquidity risks.” In other words, now’s the turn of EMs to start pumping in cash, as the Fed steps aside.

In summary, therefore, that which went on for years will continue going on. The shovel will change, the proverbial brown stuff will remain the same.

Still, at the very least, the IMF is more realistic than the La-La gang of european politicians and investors. Here are some warning signs:

1. “Legacy issues from the crisis in advanced economies. High public and private debt in advanced economies and remaining gaps in the euro area architecture need to be addressed to consolidate financial stability, and avoid political tensions and headwinds to confidence and growth. In the euro area, addressing remaining sovereign and banking vulnerabilities is still a challenge.” You wouldn’t know that much, but the idea of rising rates and rising cost of funding has that cold steely feel to it when you think of your outstanding mortgage…
2. “Weak systemic market liquidity… poses a challenge in adjusting to new equilibria in markets and the wider economy. Extraordinarily accommodative policies have contributed to a compression of risk premiums across a range of markets including sovereign bonds and corporate credit, as well as a compression of liquidity and equity risk premiums. While recent market developments have unwound some of this compression, risk premiums could still rise further.” Wait a second here. We had years of unprecedented money printing by the Central Banks around the world. And we have managed to inflate a massive bubble in bonds markets on foot of that. But liquidity is still ‘challenged’? Oh dear… but what about all this ‘credibility’ that the likes of ECB have raised over the recent programmes? Does it not count for anything when it comes to systemic liquidity?..
3. The system is far from shocks-proof, again contrary to what we heard during this Summer from European dodos populating the Eurogroup. “Without the implementation of policies to ensure successful normalization, potential adverse shocks or policy missteps could trigger an abrupt rise in market risk premiums and a rapid erosion of policy con fidence. Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes. Under these conditions, a signifi cant—even if temporary— mispricing of assets may ensue, with negative repercussions on fi nancial stability.”

In summary, then, lots done, nothing achieved: we wasted trillions in monetary policy firepower and the system is still prone to exogenous and endogenous shocks.

“In… an adverse scenario, substantially tighter fi nancial conditions could stall the cyclical recovery and weaken confi dence in medium-term growth prospects. Low nominal growth would put pressure on debt-laden sovereign and private balance sheets, raising credit risks.

• Emerging markets would face higher global risk premiums and substantial capital out flows, putting particular pressure on economies with domestic imbalances. 
• Corporate default rates would rise, particularly in China, raising fi nancial system strains, with implications for growth.
• Th ese events would lead to a reappearance of risks on sovereign balance sheets, especially in Europe’s vulnerable economies, and the emergence of an adverse feedback loop between corporate and sovereign risks in emerging markets. 
• As a result, aggregate global output could be as much as 2.4 percent lower by 2017, relative to the baseline. This implies lower but still positive global growth.”

Note, the IMF doesn’t even mention in this adverse scenario what happens to households up to their necks in debt, e.g. those in Ireland, the Netherlands, Spain, and so on.

So let’s take a look at a handy IMF map plotting their own assessments of the financial systems stability in October 2015 report compared to April 2015 report. Do note that April 2015 report covers the period right before the ECB deployed its famed, fabled and all-so-credible (per IMF) QE.

Just take a look at the lot. Market & liquidity risks are up (not down), Risk Appetite is down. Macroeconomic risks improved, but everything else remains the same. That is a picture of no real achievement of any significant variety, regardless of what the IMF tells us. Worse, IMF analysis shows that risk appetite deteriorated across all 3 sub-metrics and as chart below shows, market & liquidity conditions have deteriorated across all 4 sub-metrics.

Meanwhile (Chart below), save for household risks, all other credit-related risks worsened too.

Meanwhile, markets are sustained by debt. That’s right: stock prices remain driven by debt-funded net equity buybacks and domestic acquisitions:

Meanwhile, Government bonds are in a massive bubble territory, especially for the little champions of the Euro:

You can see the extent of IMF’s thinking on the topic of just how bad the financial assets bubbles have grown in the following post.

The basic core of the IMF analysis is that although everything was made better, nothing is really much better. In the world of financial stability fetishists, that is like saying we have a steady state of no steady state. In the world of those of us living in the real economy, that is like saying all that cash pumped into the markets over the last seven years and across the globe has been largely wasted. 

7/10/15: Of Island of Scholars...

A very interesting set of interactive charts showing the impact of the crisis on third level funding and student numbers across various European states: http://eua.be/activities-services/projects/eua-online-tools/public-funding-observatory-tool.aspx.

One shocking conclusion: whilst Ireland experienced a robust increase in the number of students during the crisis, Irish public funding for universities fell at a second highest rate in the EU (after Greece). You can see where these comparatives put us in contrast to, say, Iceland.

7/10/15: Irish economic Activity & PMIs: 3Q 2015

Irish quarterly PMIs for 3Q 2015 posted a marginal improvement in growth conditions compared to 2Q 2015, further strengthening on the already fast pace of economic activity expansion. This overall momentum was driven solely by gains in growth momentum in Services sectors.

Manufacturing PMI averaged 55.2 in 3Q 2015, down marginally on 55.8 in 2Q 2015 and marking the slowest pace of activity expansion since 1Q 2014. 3Q marks second consecutive growth of weakening PMIs. Still, current running rate signals strong growth in the sector.

Services PMI posted a reading of 62.8 in 3Q 2015, up on already high reading of 61.8 in 2Q 2015. This is the highest reading since 2Q 2006 and marks second consecutive quarter of increases in the index. Overall activity signal from the 3Q PMI averages is for an outright boom in the sector.

Construction PMIs (with data only for July-August) fell in 3Q 2015 to 59.1 from 2Q 2015 reading of 62.1. Nonetheless, growth, as singled by PMI, remained robust in 3Q 2015.

Overall, PMIs continue to signal robust rates of economic activity growth in the Irish economy over the course of 3Q 2015. 

Usual caveats, however, apply to interpreting the links between PMIs and actual production and value added in the sectors. Historically Irish Manufacturing and Services PMIs exhibit statistically insignificant correlation with real activity in both sectors, as well as GDP and GNP growth. At the very best, Services PMI data is capable of explaining at most around 11 percent of total variation in GDP, while at the worst, Manufacturing PMI explains at most 5.6 percent of total variation in GNP.

7/10/15: Two Reports, One Ireland, Hundreds of Billions in MNCs' Profits

Two interesting headlines in recent days brought back the memories of recent hot-flash splashes of news regarding Ireland's position as a corporate tax haven. These are:

1. Irish response to the completion of the OECD review of the options for addressing the imbalances in the global corporate taxation systems: http://www.independent.ie/business/world/new-oecd-global-tax-proposals-target-corporation-tax-avoidance-31583371.html, and
2. A less publicised in Ireland study from the U.S. estimating to volumes of corporate tax optimisation/avoidance with honourable place reserved for Ireland in it: http://www.reuters.com/article/2015/10/06/us-usa-tax-offshore-idUSKCN0S008U20151006

Have fun tying them together... but here are some choice quotes from the Citizens for tax Justice study referenced in the Reuters article:

"The Congressional Research Service found that in 2008, American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. Yet these countries accounted for only 4 percent of the companies’ foreign workforces and just 7 percent of their foreign investments."

"For example, a 2013 Senate investigation of Apple found that the tech giant primarily uses two Irish subsidiaries — which own the rights to some of Apple’s intellectual property — to hold $102 billion in offshore cash. Manipulating tax loopholes in the U.S. and other countries, Apple has structured these subsidiaries so that they are not tax residents of either the U.S. or Ireland, ensuring that they pay no taxes to any government on the lion’s share of the money. One of the subsidiaries has no employees."

"Google uses accounting techniques nicknamed the “double Irish” and the “Dutch sandwich,” according to a Bloomberg investigation. Using two Irish subsidiaries, one of which is headquartered in Bermuda, Google shifts profits through Ireland and the Netherlands to Bermuda, shrinking its tax bill by approximately $2 billion a year"

A handy graph:

And another one:

Do note that per above table, Ireland is a conduit for the U.S. corporates' tax activities that amount to 42% of our GDP, while Switzerland (the country we so keenly like to tell the world is a 'real' tax haven) facilitates activities amounting to 'only' 9% of its GDP. 

You can read the entire report and see associated data here: http://ctj.org/pdf/offshoreshell2015.pdf

And while you are at it, here is a little Bloomberg piece from back 2014 on another whirlwind of activities: corporate inversions. http://www.bloomberg.com/news/articles/2014-05-04/u-s-firms-with-irish-addresses-criticized-for-the-moves What is notable in this article is that we are now having inversions of inverted companies, whereby new re-domiciling firms buy into previously re-domiciled companies to land themselves a PO Box presence in Ireland.

So back to that OECD reform proposal, therefore, that involves addressing the issue of the Base Erosion and Profit Shifting (BEPS) and is apparently of no threat to us in Ireland... You can try reading all the legalese here http://www.oecd.org/tax/beps-2015-final-reports.htm, or just give it a thought - tax optimisation by U.S. (only U.S.) MNCs via Ireland amounts to up to 42% of our GDP and likely less than 1-2% of the companies workforce is present here. How much of that 42% booked via Ireland is 'base erosion & profit shifting'? Ah, yes... let's not ask questions we don't want answered. Let's just have a breakfast at Tiffany's while repeating that "Ireland has a low rate transparent system and IDA insist on substance for any companies that it supports and I think those are the three pillars that supports our offering and I think Beps is about moving all international systems to a more transparent, clear system."

Don't laugh...