Here's the deck for comparatives between Iceland and Ireland. You can click on every slide to enlarge. Enjoy!
Sunday, October 27, 2013
27/10/2013: Financial Repression, Economic Suppression & Budget 2014
This is an unedited version of my Sunday Times article for October 20, 2013.
With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.
Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.
In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?
Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.
From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.
Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit. Still, there is no tangible delivery on this.
However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.
The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.
The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.
And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.
Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.
On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.
The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.
The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.
We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.
In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.
History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.
Box-out:
The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.
With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.
Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.
In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?
Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.
From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.
Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit. Still, there is no tangible delivery on this.
However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.
The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.
The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.
And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.
Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.
On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.
The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.
The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.
We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.
In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.
History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.
Box-out:
The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.
Saturday, October 26, 2013
26/10/2013: Confidozac Failing to Cure Euro Area's Policy Risks
While the euro leaders are happily slipping into dream-like state of amnesia, engaging in esoteric discussions and debates about the US spying scandals, wasting summit time on chatter and fluffing of feathers, the region's trials are not going away.
Debt overhangs remain persistent in the public, non-financial corporate and households domains; incomes remain stagnant and declining in real terms; unemployment is sky-high; deficits are sky-high; lending is stuck in 'reverse' gear; depositors are getting taken for a ride by the banking system malfunctions; and so on... Aggregate levels of uncertainty/risk in the system are not abating back to the levels of pre-crisis bliss, no matter how much intensive Positiviagra, Hopium and Confidozac have been pumped into the airways...
Proof?
Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com
Higher numbers above imply higher uncertainty. September is showing reversion to trend, up... Good news is that we are on downward trend. Bad news is that we've been in these 'false bottoms' before (Q3 2009 and Q4 2010-Q1 2011). Worse news is that the we are nowhere near the levels of uncertainty that we've reached at the peak of 2000s recession and dot.com bust, let alone the levels of 'normalcy'.
26/10/2013: Local Authorities Loans Arrears
While we know about the crisis in mortgages extended by the banks, we have very little information on the housing loans extended by the local authorities. These are not reported, nor published. The figures are hidden out of view of the public. Last week, Irish Independent made public the latest aggregate data on these. read the article here: http://www.independent.ie/irish-news/twothirds-of-local-authority-homes-loans-are-in-arrears-29696111.html
Aggregate numbers are horrific: of total 20,277 local authority loans, 6,275 are in arrears of at least 90 days. No data was provided on arrears under 90 days. In ordinary owner-occupier mortgages, 'only' 12.7% of accounts were in arrears 90 days or longer in Q2 2013.
Keep in mind, local authorities loans were supplied on the basis of exceptional discounting of prices on underlying properties, implying that local authorities can simply convert loans into rent schemes back and cover the interest costs of property carry... hopefully... unless...
It is extraordinary that there is no reporting of and accounting for the potential losses carried by the local government in Ireland.
26/10/2013: Europe's Structural Deficits & Ireland's Headache...
As you know, I prefer not to blog extensively on economics matters over the weekend. However, due to work time constraints this week, I have accumulated lots of interesting material that requires some catch up blogging... so here are some new posts on economics matters...
First up: an interesting chart summarising neatly the problem of Irish fiscal consolidations to-date and the reasons why we are not out of the woods yet.
The above plots structural deficits in the EU (in other words the deficits that would have prevailed if the economy was not in a cyclical recession or downturn), as estimated by the EU Commission. Less questionable are those deficits derived using the IMF methodology:
According to IMF estimates, Ireland's structural deficits are the fourth largest in the EU and are second highest amongst the 'peripheral' states.
For comparative, consider also the primary deficits (removing the cost of interest on government debt):
Ireland is the worst performer in 2013 in the EU (this might improve to the second worst given reclassification of EUR700 million in licenses sales from 2012 into 2013). Notice that Greece is already running primary surplus, while Italy is close to doing so.
The above clearly shows that the Exchequer in Ireland is far from achieving sustainable deficits trajectory and that any claims that Ireland is close to completing fiscal adjustment required to restore its public finances to health should be subject to serious reservations.
Friday, October 25, 2013
25/10/2013: WLASze Part 1: Weekend Links on Arts, Sciences and zero economics
This is the first WLASze: Weekend Links on Arts, Sciences and zero economics post of this weekend.
Enjoy!
Beautiful series of landscape photography from around the world:
http://www.theguardian.com/culture/gallery/2013/oct/21/awards-and-prizes-photography?CMP=twt_gu
From sublimely still:
To overpoweringly dynamic:
Best bit, the above link also offers links to 2010, 2011 and 2012 competitions.
From modern photography where every detail is given its prominence in light, motion and depth, to the first photograph ever that depicted people:
http://www.businessinsider.com/first-picture-of-people-2013-10
Irony is - the traces of people were all erased by the length of exposure… all but two...
I recently wrote about 3D and 4D printing (see here: http://trueeconomics.blogspot.ie/2013/10/4102013-wlasze-part-1-weekend-links-on.html). I even spoke about these two technologies as the signifies of the incoming change in global economic relations between core inputs of capital, labour and financial investment at a recent event… and now, art raced us all ahead of the reality:
http://www.dezeen.com/2013/10/20/mycelium-chair-by-eric-klarenbeek-is-3d-printed-with-living-fungus/
Living material interacting with 3D printed structure to reinforce it… the boundless capacity for tech innovation meets the boundless capacity for creative narration. And loses to it…
While on the topic: see this article about the emerging future of architecture in the age of 3D printing… http://www.dezeen.com/2013/09/25/3d-printed-buildings-to-become-reality-in-the-not-too-distant-future/ Will we print our homes of the future? Sure we will. Will they look like a spiders-infested cave of post-apocalyptic plastic universe that reverses Lego into a fly-like dimensionality of human existence?.. I hope not…
Spare me this 3-bed penthouse…
It might look cool in dramatic light (no - it does not) but semantically and aesthetically it is equivalent to Zaha Hadid's obsession with curvature sprawled over any space to bury any dimensional proportionality to the living space around it... sort of like the image below, only taken through the filters of design:
And think about the cleaning bills… or the cost of watches and jewellery lost in all these twigs and twists of the surfaces of the 3D-printed cob-web-building… Then there are family dinners, with kids… Yeeks!
Let's get back to the clean(er) world of science and thought… JPL imagery of Saturn: the colorized mosaic from NASA's Cassini mission shows an infrared view of the Saturn system, backlit by the sun, from July 19, 2013. http://www.redorbit.com/news/space/1112979062/new-backlit-infrared-saturn-images-101813/
And for less dynamic imagery that is dead-cool: Saturn's satellite, the 'Death Star'(Moon) Mimas
Awe-inspiring...
Enjoy!
Beautiful series of landscape photography from around the world:
http://www.theguardian.com/culture/gallery/2013/oct/21/awards-and-prizes-photography?CMP=twt_gu
From sublimely still:
To overpoweringly dynamic:
Best bit, the above link also offers links to 2010, 2011 and 2012 competitions.
From modern photography where every detail is given its prominence in light, motion and depth, to the first photograph ever that depicted people:
http://www.businessinsider.com/first-picture-of-people-2013-10
Irony is - the traces of people were all erased by the length of exposure… all but two...
I recently wrote about 3D and 4D printing (see here: http://trueeconomics.blogspot.ie/2013/10/4102013-wlasze-part-1-weekend-links-on.html). I even spoke about these two technologies as the signifies of the incoming change in global economic relations between core inputs of capital, labour and financial investment at a recent event… and now, art raced us all ahead of the reality:
http://www.dezeen.com/2013/10/20/mycelium-chair-by-eric-klarenbeek-is-3d-printed-with-living-fungus/
Living material interacting with 3D printed structure to reinforce it… the boundless capacity for tech innovation meets the boundless capacity for creative narration. And loses to it…
While on the topic: see this article about the emerging future of architecture in the age of 3D printing… http://www.dezeen.com/2013/09/25/3d-printed-buildings-to-become-reality-in-the-not-too-distant-future/ Will we print our homes of the future? Sure we will. Will they look like a spiders-infested cave of post-apocalyptic plastic universe that reverses Lego into a fly-like dimensionality of human existence?.. I hope not…
Spare me this 3-bed penthouse…
It might look cool in dramatic light (no - it does not) but semantically and aesthetically it is equivalent to Zaha Hadid's obsession with curvature sprawled over any space to bury any dimensional proportionality to the living space around it... sort of like the image below, only taken through the filters of design:
And think about the cleaning bills… or the cost of watches and jewellery lost in all these twigs and twists of the surfaces of the 3D-printed cob-web-building… Then there are family dinners, with kids… Yeeks!
Let's get back to the clean(er) world of science and thought… JPL imagery of Saturn: the colorized mosaic from NASA's Cassini mission shows an infrared view of the Saturn system, backlit by the sun, from July 19, 2013. http://www.redorbit.com/news/space/1112979062/new-backlit-infrared-saturn-images-101813/
And for less dynamic imagery that is dead-cool: Saturn's satellite, the 'Death Star'(Moon) Mimas
Awe-inspiring...
Thursday, October 24, 2013
24/10/2013: Fiscal Policy: To Bail Directly or Via Project Finance?
New paper "Macro Fiscal Policy in Economic Unions: States as Agents" by Gerald Carlino, and Robert P. Inman (NBER Working Paper No. 19559 published October 2013) argues that ARRA (the American Recovery and Reinvestment Act) was the US government’s fiscal policy (as opposed to monetary policy QEs programmes) response to the Great Recession. "An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments."
The study "reaches three conclusions.
- "First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately." Note: I have argued that in the current extreme case of debt overhang on household side, monetary policy can act directly to monetize debt (effectively cover household debt write downs) instead of attempting tod sliver support for deleveraging via traditional channels (banks --> firms & households, or government --> firms & households).
- "Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years." Again, direct injections to households will work better than indirect stimulus via 'infrastructure projects' or neo-Keynesian 'digging of the trenches'… However, this effect for the US is obviously linked to the less open nature of the US economy than say in the case of smaller economies of Europe.
- "Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support."
From the paper: Federal Aid, Federal Purchases, and Federal Net Revenue: 1947 - 2010*
(Per Capita, 2005 Dollars)
24/10/2013: Irish Tax Regime Hits the News, Again...
News on the Corporate Tax Haven front for Ireland:
You can follow the trend of links to various articles on Irish corporate tax status and scandals from here: http://trueeconomics.blogspot.ie/2013/10/4102013-tax-haven-ireland-is-trending.html
- On foot of Budget 2014 removing one of the more visible tax loopholes: http://gigaom.com/2013/10/16/ireland-will-shut-apples-tax-holy-grail-but-leave-loopholes-wide-open/
- A link to the paper arguing why Ireland is not a tax haven: http://www.esr.ie/article/view/78
- Official Department of Finance paper on Ireland's international tax strategy: http://budget.gov.ie/Budgets/2014/Documents/Department%20of%20Finance%20International%20Tax%20Strategy%20Statement.pdf which basically argues that everything is fine... except:
- In Budget 2014 the Government explicitly admits that at least one of the loopholes existed via which Irish-registered companies were free to avoid paying any taxes: http://finance.gov.ie/documents/speech2013/spmn234.pdf see page 5.
- So Ireland is not a tax haven because it has 12.5% tax, but companies were evading that tax by using the scheme that the Government is now shutting down (de facto admitting that Irish law permitted tax minimisation to zero liability), yet per above links this is going to make virtually no difference to the practice... hmm...
- Excellent piece from FT: http://www.ft.com/intl/cms/s/0/1a5d3a4e-3cb6-11e3-a8c4-00144feab7de.html#axzz2ieiDHKTX on Ireland's launch on the road to tax reforms, which according to the Government Ireland does not need because Ireland is not a tax haven.
You can follow the trend of links to various articles on Irish corporate tax status and scandals from here: http://trueeconomics.blogspot.ie/2013/10/4102013-tax-haven-ireland-is-trending.html
24/10/2013: SCSI/IPD Ireland Property Index Q3 2013
SCSI/IPD Ireland Q3 2013 report is out for commercial property markets and the data is returning some interesting news.
Summary:
- Irish commercial property (down 65% since the pre-crisis peak) rose 0.3% in Q3 2013 - the first time capital values were up in 23 quarters.
- Per SCSI/IPD, the drivers were: improving sentiment relating to the value of discounted properties (bottom fishing is on) and "gradually increasing occupier demand".
- Total quarterly return on commercial real estate were at 2.6% - highest since the end of Q3 2007.
- Per release: "Demand for offices in central Dublin, from both investors and tenants, are driving returns, while recovery across the retail and industrial sectors is slower." So things are very much compressed into few sub-zones of Dublin and the 'bottom-fishing' ain't that good in the rest of the nation.
- Office capital values rose 0.9%, while capital returns to industrial and retail property were still down at -0.5% and -0.3% respectively.
- All property annual income returns were 9.7% in September 2013, the highest measured globally by IPD and much higher than 6% in the UK.
- Annual income returns were 10.2% for offices, 12.2% for industrial properties and 8.5% for retail.
- Alas, rental values fell 0.4% overall on weak retail demand (down 1.9%), offices rents were up 0.5% nationwide and 1.0% in central Dublin. Industrial rents are up 0.3%.
Summary:
Tuesday, October 22, 2013
22/10/2013: Keiser Report this week
Latest Keiser Report (E513) show with Stacy Herbert: Irish Bailout 'Exit', Greek Bailout 3.0, UK's China Model and the End of Pax Americana... with my contributions... http://www.youtube.com/watch?v=E20ycoQMEpY&feature=youtu.be
Monday, October 21, 2013
21/10/2013: Sovereign Debt & Banking Crises: Emerging Markets Evidence
Recent (March 2013) CEPR Discussion Paper No. 9369 by Sylvester C. W. Eijffinger and Bilge Karataş, titled "Three Sisters: The Interlinkage between Sovereign Debt, Currency and Banking Crises" argues that "the sovereign debt default and the linkages from banking and currency crisis have been rarely explored in the crisis literature." The study attempted "to dive into this unexplored area by applying panel data binary choice model on a sample with 20 emerging countries having monthly observations for the years between 1985 and 2007. The non-linear linkages from currency and banking crises to sovereign defaults are explored by using the interactions of these crises with international illiquidity, appreciated real exchange rates and real international monetary policy rates."
The sample is clearly not applicable directly to the advanced economies, such as the euro area, but the findings still remain interesting.
"It is discovered that currency, banking and debt crises tend to occur simultaneously [an increase in the indebtedness of the public sector, overvalued exchange rates and financial as well as political riskiness of a country plays a role in predicting sovereign default].
"Prior occurrence of a currency crisis increases the sovereign default probability through appreciated real exchange rates, and in countries with high short-term indebtedness the occurrence of banking crisis raises the probability of a debt crisis."
Source: www.cepr.org/pubs/dps/DP9369.asp
21/10/2013: Household Debt Crisis: Social Drivers
Recent CEPR Discussion Paper No. 9238 (December 2012) titled "Household Debt and Social Interactions" by Dimitris Georgarakos, Michael Haliassos and Giacomo Pasini looked at social determinants and drivers for debt accumulation amongst households.
According to the authors, "Debt-induced crises, including the subprime crisis, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey, representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing - especially among those who consider themselves poorer than their peers - and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects."
More specifically, the authors find that "the higher the perceived income of the social circle is, the greater is the tendency of respondents to take up loans and borrow sizeable amounts. This is true both for uncollateralized (consumer) loans and for collateralized loans…"
The above effect is "stronger for those who perceive themselves as having lower income than their social circle." In effect, this is keeping up with the Joneses effect, magnified by within-reference group peer effects.
"The tendency of households to take up uncollateralized and collateralized loans, controlling for the perceived average income of the social circle, is partly related to perceived spending ability or (computed) housing assets of members of the social circle."
"Moreover, we find that expectations about (the minimum) next period’s income are statistically significant for collateralized loans, pointing to a ‘Tunnel Effect’, but do not render perceived income of the peers insignificant. This is consistent with the idea that borrowing behavior is influenced by peer income not only because it conveys some information regarding the respondent’s own future, but also because of some comparison or envy effect." Notice - this is about basic human psychology, as co-determined by external (not internal or own-control) factors. In other words, any corrective policy will have to address the issue of peer effects, not only 'own effects'.
"Finally, the role of such comparisons is not confined to the tendency to borrow and to the level of borrowing conditional on participation, but it seems to extend also to financial distress."
To reinforce the argument above that the drivers of borrowing crises are social, not just individual (and hence any responsibility, liability and policy actions on this front have to be co-shared): "Our study has uncovered a potential for social influences on borrowing. By observing that others have higher average incomes, the household not only tries to emulate their
spending, as earlier studies have found, but also decides to borrow more, only partly because of expectations of higher future own income. Such decisions may be encouraged by a massive and unprecedented housing boom associated with high collateral values and expectations of continuing house price trends. The policy implication of our finding that social comparisons matter for debt behavior, after controlling for fundamental characteristics
of the household and region-time trends, is not to interfere with the process of forming social circles or perceptions regarding them, but rather to decouple perceptions of income or spending differences with peers from any decisions to borrow without proper account of the associated risks."
My view: let's cut puritanism bull**&t and recognise that debt crises are not solely driven/caused by the reckless behaviour of individuals taken in an isolated setting, but are social / societal phenomena. This realisation should lead us to a recognition that dealing with prevention of future crises and with the fallouts from the current ones requires co-shared responsibility and liability.
Source: for earlier version (free to download) http://arno.uvt.nl/show.cgi?fid=127996
21/10/2013: Uneasy Links: Banks and Sovereign Bonds Exposures
IMF recently warned about growing own-sovereign exposures of European banks when it comes to government bonds holdings. FT echoed with an article: http://www.ft.com/intl/cms/s/0/9b6fb558-3270-11e3-b3a7-00144feab7de.html
Per FT:
- "...Government bonds accounted for more than a 10th of Italian banks’ total assets at the end of August, the last month for which data are available. That is up from 6.8 per cent at the beginning of 2012, according to data from the European Central Bank."
- "In Spain the proportion has risen to 9.5 per cent, up from 6.3 per cent over the same period…"
- "… in Portugal it has increased to 7.6 per cent from 4.6 per cent."
"By far the majority of the increases – which occurred steadily month-on-month – are in holdings of bonds issued by banks’ own governments." So overall, "Government bonds, as a percentage of total eurozone bank assets, have grown to 5.6 per cent from 4.3 per cent since the beginning of 2012."
Lest we forget, there is a strong momentum building up in Europe to do something about the problem of European banks over-reliance on sovereign bonds - a momentum driven by lower debt countries with significant exposures to Target 2 imbalances. At the end of September, ECB's Governing Council Member Jen Weidmeann said that "The time is ripe to address the regulatory treatment of sovereign exposures," Weidmann wrote in an opinion piece published on the website of the Financial Times. "Without it, I see no reliable way of breaking the sovereign-banking nexus." (see here: http://www.efxnews.com/story/20978/ecb-weidmann-time-end-preferential-treatment-gov-debt?utm_content=bufferffb97&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer)
Basically, removing automatic zero risk weighting on sovereign bonds, especially for the weaker peripheral sovereigns will be a major problem for the European banks and can precipitate a strong sell-off of the sovereign bonds. I suspect it will be unlikely to take place in the current environment. But gradual shift toward such an approach can easily take place.
Another recent article highlighted the shift away from foreign lending by European banks on foot of the growing sovereign debt exposures: http://www.voxeu.org/article/impact-sovereign-debt-exposure-bank-lending-evidence-european-debt-crisis
Based on Forbes data,
- BNP Paribas has total assets of USD2,668 billion, with USD43.1 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.62% of total assets);
- Deutsche Bank has total assets of USD2,545 billion, with USD16.2 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
- HSBC has total assets of USD2,468 billion, with USD6.7 billion in peripheral (ex-Cyprus) Government bonds (0.27% of total assets);
- Barclays has total assets of USD2,328 billion, with USD29.2 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.26% of total assets);
- RBS has total assets of USD2,266 billion, with USD3.5 billion in peripheral (ex-Cyprus) Government bonds (0.15% of total assets);
- Credit Agricole has total assets of USD2,131 billion, with USD19.1 billion in peripheral (ex-Cyprus) Government bonds (0.89% of total assets);
- Banco Santander has total assets of USD1,610 billion, with USD69.6 billion in peripheral (ex-Cyprus) Government bonds (4.32% of total assets);
- Lloyds has total assets of USD1,546 billion, with USD0.1 billion in peripheral (ex-Cyprus) Government bonds (0.01% of total assets);
- Societe Generale has total assets of USD1,512 billion, with USD9.7 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
- Unicredit has total assets of USD1,232 billion, with USD54.3 billion in peripheral (ex-Cyprus) Government bonds (4.41% of total assets)
Two charts highlighting the plight of Spanish and Italian banks in terms of their sovereign bonds exposures (first) and the levels of LTROs exposures:
21/10/2013: IMHO Submission on Minimum Competency Requirements 2013
Irish Mortgage Holders Organisation submission to the Central Bank on consultation paper on Authorisation Requirements and Standards for Debt Management Firms and the Amendment of the Minimum Competency Code is now available on the Central Bank page here: http://www.centralbank.ie/regulation/poldocs/consultation-papers/Documents/CP70/IMHO%20submission.pdf
Sunday, October 20, 2013
20/10/2013: Oscillator: Long and Short-run Cycles
Some months ago I gave a presentation at the Science Gallery on the topic of cyclicality in social and economic data. I focused on more philosophical issues and longer cycles. Someone just sent me the link to the video... http://www.youtube.com/watch?v=ChiVez1IlMc
FISCAL CYCLE: FROM NANOSECOND TRADING TO GENERATIONAL OSCILLATIONS
Saturday, October 19, 2013
19/10/2013: Debt Bias and Wealth Taxes: Pesky IMF Ideas...
Nasty little bit from the IMF Fiscal Monitor - a box-out on page 49 of the report...
So the IMF basically reminds us that once things get desperate, wealth taxes (err... Irish pensions levy anyone?) or put differently - expropriation of private wealth - can be contemplated...
Reinhart and Rogoff have warned us all about the Financial Repression coming, so no surprise here. What is, however, surprising is the IMF estimate at the end of the box-out. "The tax rates needed to bring public debt to precrisis levels... are sizeable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent of households with positive net wealth".
Give it a thought - 10 percent on average for the euro area... for Ireland? 20%? 30%?.. And, of course, what will that do to households' debt?.. oh, wait, that does not matter in Europe...
Oh, and while on the topic of debt. I wrote recently (here) about the issue of 'debt bias' (incentives to hold debt over equity) in tax systems... Here's a chart from the same report (page 45) showing the impact of eliminating 'debt bias' in tax system on systemic stability of the country financial system:
Of course, Irish policymakers are keen to eliminate the bias - not because it can help repair the systemic instability of our financial system, but because eliminating the bias will increase state yields from debt-funded property loans (via closing of the mortgages interest relief).
Once again, the problem is that of legacy - what do such closures of 'debt bias' do to sustainability of mortgages debt already carried in the system? Once again, no one pays any attention to the issue...
19/10/2013: WLASze Part 2: Weekend Links on Arts, Sciences and zero economics
This is the second post of my WLASze: Weekend Links on Arts, Sciences, and zero economics for this week.
Enjoy and be warned, I do stray into 'some' economics (but only as 'science') in this one...
"By discovering a new set of solutions to the famous Maxwell equations governing electromagnetism, Hridesh Kedia of the University of Chicago and his colleagues have shown that light can be tied up in knots. Here the purple and gold cords represent the twisted magnetic field lines of knotted light." Ughh?.. No, really cool - read more here: http://www.scientificamerican.com/article.cfm?id=tying-light-in-knots-slide-show
And… "The same University of Chicago lab, led by William Irvine, also recently discovered a way to tie water up in knots. This photograph shows a basic knotted shape called a trefoil knot made of water, imaged by light scattering off tiny gas bubbles in the liquid."
Question for scientists… can anyone untie the knots of Irish policymakers' ideas? Like the following conjecture: to deal with the effects of the property bubble collapse, Budgets 2010-2014 introduced series of property markets tax incentives… Bet that'll be harder than Maxwell's equations…
But this is WLASze, so let us not dwell too long on matters of Irish policies. Even if for the purpose of advancing the science of the bizarre…
So back to sciences: "Society's techno-social systems are becoming ever faster and more computer-orientated. However, far from simply generating faster versions of existing behaviour, we show that this speed-up can generate a new behavioural regime as humans lose the ability to intervene in real time."
Ok, this is potent stuff. And where better to look for such 'machine outpaces mankind to defeat the entire purpose of the human-made system' than in financial markets (I can't shake off this year's 'Nobel' in Economics)… So: "Analyzing millisecond-scale data for the world's largest and most powerful techno-social system, the global financial market, we uncover an abrupt transition to a new all-machine phase characterized by large numbers of subsecond extreme events. The proliferation of these subsecond events shows an intriguing correlation with the onset of the system-wide financial collapse in 2008. Our findings are consistent with an emerging ecology of competitive machines featuring ‘crowds’ of predatory algorithms, and highlight the need for a new scientific theory of subsecond financial phenomena."
Here's the full article: http://www.nature.com/srep/2013/130911/srep02627/pdf/srep02627.pdf
Wanna see something really scary?
Or in different visualisation:
Ok, now that I am onto Financial Markets and their 'efficiency' - a compendium of links explaining this year's Nobel Memorial Prize in Economics. No commented from me:
- http://asociologist.com/2013/10/14/you-cant-beat-the-market-but-the-market-can-beat-you/
- http://delong.typepad.com/sdj/2013/10/a-note-on-the-2013-nobel-like-prize-in-economics.html
- http://afinetheorem.wordpress.com/2013/10/14/a-brief-word-on-the-2013-nobel/
- http://noahpinionblog.blogspot.ie/2013/10/lars-peter-hansen-explained-kind-of.html
- http://krugman.blogs.nytimes.com/2013/10/14/the-nobel/?_r=1
- http://johnhcochrane.blogspot.kr/2013/10/gene-famas-nobel.html
- http://blogs.ft.com/ft-long-short/2013/10/14/fama-shiller/
- http://simplystatistics.org/2013/10/14/why-did-lars-peter-hansen-win-the-nobel-prize-generalized-method-of-moments-explained/
Now I've done it… this was supposed to be WLASze and it is now more Finance & Economics than Arts or Sciences…
I recently wrote about the determinants of what makes content go viral on social networks (see link here). The study was based on Google+ - a network that Google seems to think is a major one, yet everyone else seems to think of as a 'may be one day' contender. Now, more real viral propagation visualisation via twitter:
Link: http://blogs.hbr.org/2013/08/visualizing-how-online-word-of/
As Apple is pushing ahead with the meat (USD5 billion) plan for new HQs in Cupertino, CA, here's an overview of the project: http://www.dezeen.com/2013/10/16/fosters-apple-campus-unanimously-approved-by-cupertino-city-council/
Yes, buildings of this scale are a challenge. Yes, aesthetics of the corporate identity at this scale are a challenge. Yes, Apple is strongly 'impositional' organisation with emotional attachment to 'eco-sthetics' and reality of a massive Death Star orb floating in alien space… so then, yes, the plans are perfectly befitting the client…
As a life-long fan of Apple (I still have a working-order first marketed laptop by the company in my collection and our household has a pile of interconnected Apple devices) all I can say is, sadly, with the shift in Apple's fortunes, the company is now running out of ideas… But wait, I am not alone: http://www.dezeen.com/2013/09/13/apple-has-reached-creative-saturation-says-steve-jobs-colleague-hartmut-esslinger/
On a beautiful side (to round off this week's WLASze): Gagosian Gallery is hosting a Willem De Kooning Ten paintings show, comes November 8:
http://www.gagosian.com/exhibitions/willem-de-kooning--november-08-2013
De Kooning is a master of light and contrast, depth and balancing extremal abstract expressionism with minimalism. His work is stark, striking, bright with simplified, distilled essence of countering colour and movement and space. These are his later works, right before his death in 1997.
The middle image above is taken from the coverage of the MoMA retrospective of de Kooning's works back in 2011.
It was not always thus, as you can see from his earlier works, such as Gotham News, 1955:
You can see more of de Kooning's works here: http://www.benditz.de/ and here: http://theartstack.com/artists/willem-de-kooning
Enjoy. De Kooning is a great master with deep, often disturbed depth of psychological insight alternating with organic capacity to surprise, to open up that momentary window into viewer's own imagination...
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