Ants, grasshoppers and the London Underground

Martin Wolf has a really nice column here. For those of you who can’t access the article, the bottom line is that German and Asian savers have (via their banks) invested their savings in an exceptionally foolish manner — that is, by lending to the likes of us, to finance our excessive consumption habits. There is a clear possibility that they are, sooner or later, going to lose a lot of money as a result.

This brings to mind Keynes’ famous line that

“If the Grand Trunk Railway of Canada fails its shareholders by reason of legal restriction of the rates chargeable or for any other cause, we have nothing. If the underground system of London fails its shareholders, Londoners still have their underground system.”

At least 19th century Britain was investing in overseas railways, rather than in overseas housing bubbles!

One wonders whether the threat of ‘restructuring’ will eventually prompt the ants of Germany and Asia to start investing more of their savings in domestic investment projects, which might provide them with the foundations of sustainable growth.

24 thoughts on “Ants, grasshoppers and the London Underground”

  1. Hans-Werner Sinn of the German IFO Institute made a similar point in the Handelsblatt on Monday. He would like to see the money come back to stimulate domestic demand within Germany. However, he was arguing that the 750bn rescue package will result in the money continuing to flow in the wrong direction. He makes the valid point that the rules by which the grasshoppers (sticking with the Wolf analogy) will behave like ants will be negotiated after the bailout is given and so he has no confidence in the grasshoppers changing their behaviour.

  2. Maybe Michael Martin will organise a Chinese tour of the glass bottle site and the ghost estates? Some are on the beautiful Ring of Kerry, might be a small consolation for their misplaced trust. This bailout rewards the Grasshoppers for their profligacy now they don’t have to call elections because the bottom line is the EU will underwrite their incompetence. Moral hazard is also diminished.

  3. The irony is, perhaps, that some ant-like behaviour was exhibited in Ireland from, say, 1987 (during the recovery from the last bout of fiscal incontinence) up to, say, 2000 – supported, of course, by two devaluations. There seems to be some evidence that the docility required to behave like ants again exists, but we seem keen to export the more enterprising ants – they might disturb the cosy power structure in the ant-hill, you see, repaying the legacy of grasshopper-like behaviour is grinding down the remaining ants and new ant colonies have taken the space we vacated while we went outside to play the grasshopper.

    A new power structure in the ant colony might tame the grasshopper-like tendencies, but the lowly worker ants are too burdened to recognise this – or to realise the power they have to change it. And the clever ants who pontificate from the higher slopes of the ant-hill have no incentive to engage in any change of the power structure.

    Today’s UK Guardian – even if it relies on the usual suspects – provides a sobering assessment:
    http://www.guardian.co.uk/world/2010/may/26/ireland-economic-collapse

    Though I do have to smile when I see the ESRI described as “independent”.

  4. this really emphasises the foolishness of goverments taking on private sector debt in the peripheral countries.

    it is more difficult for the peripheral countries to walk away from soverign debt then it is to walk away from private sector debt

  5. I was just talking to one of our BA students about a recent paper by David Laibson on a related topic. In this paper, domestic consumption bubbles trigger trade imbalances. The main conclusion is below.

    “We have shown that country-level appreciation in residential real estate alone explains half of the variance in current account de…cits during this period. Consumers with notionally healthy balance sheets went on a spending boom that started in the late 1990’s. Now that the bubbles have burst, it is clear that those households spent beyond their means. We anticipate that those international imbalances will eventually disappear as households in the bubble economies gradually scale back their lifestyles to match their much-reduced wealth.”

    http://ideas.repec.org/p/nbr/nberwo/15759.html

  6. Of course the moral of this story is that the easy cash will not be available to the likes of Ireland for the foreseeable future.

    Maybe the ESRI should add a few new variables to its Hermes model.

    The forecasts of annual growth zooming up to as much as 5% between 2012 and 2015 seem fanciful – – almost exclusively dependent on demand from advanced economies.

    Exports to China are less than to Switzerland; we export more to Hungary than to India and that’s very little.

    The pre-crisis world of asset bubbles and easy credit is not going to return soon.

    @ Paul Hunt

    Paul,

    In pre-web days reading stories in the likes of Time Magazine about Ireland, made one wonder what to believe about far-off places one wasn’t familiar with.

    It’s interesting that most of the hysterical commentary on the Eurozone comes from the US and again one can only wonder as to what a lot of them really know about the world beyond their shores.

    Foreign journalism on Ireland during the bubble was usually the superficial stuff about the miracle economy and now it’s as formulaic.

    According to O’Toole, nothing and no one in Ireland said “enough”. Voters did not tell politicians to stop,

    I suppose we all thought Charlie Haughey was a saint in the 1980s and like mice everyone danced to the tune Arise and follow Charlie.

    The majority governs. It does not mean it is right or the minority does not exist.

    McWilliams also argues that Ireland’s attachment to the euro, and the EU, is born of the establishment’s traditional desire to eschew the British, who are still Ireland’s biggest trading partner.

    Why spoil a good pub argument with the facts.

    Irish exports to the Eurozone are more than double the level to the UK.

    Let it, says McWilliams: if it fell by 40%, suddenly Ireland’s wages would be 40% less than its rivals. Investment would flood into Ireland; exports would be super-competitive.

    Wasn’t it terrible that during the Great Recession that every country didn’t behave apparently rationally as they did during the Great Depression.

    The UK economy must be a nirvana by now given the plunge in sterling.

    Surely Greece should have hit the jackpot with its 2 devaluations during the 1980s.

    But Bertie Ahern’s 10% devaluation in 1993 triggered the Celtic Tiger; after all exports boomed for years after.

    Why spoil the story with Intel, Dell, HP, Microsoft, Pfizer and son on that had SFA got to do with Bertie Ahern?

    Why worry about the high import content of the exports made by the foreign-owned firms in Ireland? It would all turn out grand.

    There would be no inflation nor high interest rates.

    Maybe we would do well selling fresh milk into Europe but people who have experience in business selling finished products should tell McWilliams that the world is different from what he sees from Ireland, with his limited or non-experience of export markets.

  7. @PH MH

    John Fitzgerald of the ESRI was not very convincing on Newstalk this morning in his rebuttal of Morgan Kelly’s arguments. I can’t help but get the impression when listening to him that he’s bogged down in figures and models and doesn’t see the bigger picture. Maybe somewhere in this vastly complex Hermes model there is a plus inserted instead of a minus as they are distinctly rose-tinted in appearance and I believe the association with Austin Hughes diminishes the credibility of their quarterly reports significantly and jars with their claim of independence.

    http://dublinopinion.com/2010/04/14/austin-hughes-super-economist/

    These reports are high profile and always prominently positioned in the media and I’m sure most people would like to hear the unvarnished story as the truth will tend to reveal itself eventually.

    http://www.independent.ie/national-news/economy-on-the-road-to-recovery-esri-predicts-213526

    It doesn’t take a genius to figure out that there are large fault lines developing among Irish economic commentators and the need for robust critical analysis is as great as ever.

  8. @Michael H

    I don’t think we’re diagreeing. I merely offered the Guardian piece as an indication of how Ireland is perceived from abroad safe in the knowledge that the readership here is well able to separate the wheat from the chaff. And I think it does convey the sullen resignation and the sense of helplessness.

    I think where our views dove-tail best is on the issue of governance. The voters in what I consider the founding core of the EU – plus the Scandinavians – were sold a pup in the Euro by Mitterand and Kohl. Despite being reasonably well governed individually the EU elites drawn from these countries were flying on a wing and a prayer that the Euro would somehow transmit the good governance and fiscal discipline they took forgranted to the PIIGS. Chancellor Merkel is now left dealing with the inevitable outcome of the hubris of the EU elites, woeful misgovernment in the PIIGS and an angry German electorate convinced they were duped.

    I don’t think the best system of democratic governance could have prevented the lunacy that too hold in the PIIGS since joining the Euro. (Even in the US, which I would consider well governed – and has an ability to renew itself when things start to go off the rails, Bill Clinton was finally convinced to ignite the bonfire of financial regulations that blazed fiercely during the two Bush administrations.) But it would have restrained the excesses, modified the extent of the collapse and left the economy in a better shape to recover.

    As I’ve mentioned previously, in the space of less than a century from 1916, Ireland has come almost full circle from being a colony of the then dominant imperial power, through quasi-independence to being a protectorate of the European Council, Commission and the ECB.

    And perhaps a majority of Irish people are happy with this, since home-grown governance is so inept and corrupt.

  9. @ Tim,

    If you can’t depend on the ESRI to deliver robust critical analysis (that will actually be used) who are you going to look to?
    (not a criticism of comment, just wondering where else would you look)

    I don’t ever read too much into these critical analysis of our economy and take it as the gospel. I do, however, take it as a guideline to work from, however so much of it deviates from reality at persent that I wonder about the quality of output from such places.

  10. from a lay point of view Keynes is like a breath of fresh air. Nice to see common sense prevail.
    Economic parameters are now more important in judging the success of an administration than the quality of life of it’s people.
    It would benefit everybody it the focus shifted back to real people with real lives and not indices and figures.
    As Einstein said not everything that counts can be counted and not everything that can be counted counts!

  11. What would a world of ant colonies look like? Who would buy the fancy german technology?

    What happens to the grasshoppers who cannot face down their ant creditors like the americans? What happens to their ant creditors?

    What happens if the ants do not like being faced down?

    Also, on the Keynes quote, ants who lent to grasshoppers have done relatively well over the last 50 years – particularly Asian ants.

    On ants generally, super colonies of ants aren’t at all tolerant of other super colonies.

    Marxists might say that capitalism is flawed and will always end in crisis. Capitalism showed with the great depression that it can “reset” and move on from crises. The big question is can this be done without war and destruction.

  12. @zhou: What happens if the ants do not like being faced down?

    This is why the British geopolitical theorist Harford Mackinder said around 100 years ago that if you wanted to be a creditor nation you needed a large navy!

    “ants who lent to grasshoppers have done relatively well over the last 50 years – particularly Asian ants.”

    But, the lending is a fairly recent phenomenon; for most of the postwar period international capital mobility was quite restricted (which was itself a policy response to the Great Depression)

  13. @zhou_enlai – “The big question is can this be done without war and destruction.”

    I would suggest war is a prerequisite.

    Nobody thinks about how badly their personal pension fund or share portfolio is doing when there’s incoming and useless politicians can wrap themselves in a patriotic flag for protection. I believe they are also supposed to be good for banks and that industrial-military complex thing.

    And that whole death-birth-life cycle whatsit (that creates a lot of consumption) gets a big lift afterwards as governments encourage the populace to go forth and multiply to replace all those people lost. Plus all that going without during war helps to get the austerity thing done a bit quicker and a bit deeper and people are just grateful for what little they have left when the guns stop.

    But we will be OK – we’re neutral 🙁

    Anyway, isn’t that what Hillary Clinton is currently trying to drum up in the Koreas at the moment? It sure sounds like it. I suppose if they can see regime collapse on the horizon there it might be better to start a war and have 20 million starving North Korean refugees run away from the guns (into China) than to have them descending on the South Korean economy.

  14. In the early eighties, in his first stint in Finance, Ray McSharry said that negative talking was hampering the economy. Instead of “Doom and Gloom,” we needed to hear more, “Boom and Bloom”. Pick yourself up! It sounds eerily familiar doesn’t it. “Is that a Green Jersey I see before me? Yes, It Is!!!”

    The deep cynicism and pessimism of the eighties has not yet been reached but hyping what will be a long, difficult journey back to full employment is the best way to guarantee its return.

  15. @Kevin O’Rourke

    But, the lending is a fairly recent phenomenon; for most of the postwar period international capital mobility was quite restricted (which was itself a policy response to the Great Depression)

    I believe the EU should introduce internal capital controls to the Eurozone. Each Eurogroup member should be required to limit the percentage of GDP that is lent out from its economy to the rest of the Eurozone. There would probably also have to be limits on what the rest of the Group can lend to a particular creditor country, to prevent a ferocious credit bubble from breaking out in one small country, then another. (All this wouldn’t necessarily mean that banks couldn’t lend and take deposits in different member states: they could just be required to keep the capital raised in each member state in a different “bucket”.)

    Of course, what the EU is currently debating is a drive to control member states’ public debts. You can look on this as something like the mirror image of internal capital controls, since all lending is borrowing. But it has two huge problems as such. First, it’s glaringly obvious (certainly from where we’re sitting!) that it’s necessary to control member states’ total, public and private, external borrowing/lending. Even somehow to overlook that first problem, the assignment of incentives and responsibilties is still perverse. If Germany has a vital need to control its foreign lending, then it’s self-destructive for Germany to rely on collective action by Portugal, Ireland, Italy, Greece and Spain to achieve this. And once the failure of control does occur, it’s not clear why (for example) the Irish government should be the sole subordinated bagholder when it comes to bailing out German banks which overlent to Irish commercial banks. By contrast, lending limits are more likely to retard credit bubbles, and better at assigning responsibility if (when) the limits are circumvented and a credit bust results.

  16. I really don’t understand the economic models the ESRI and the EU are using to predict that Irish Growth will be in the 4-5% range next year significantly above the EU average. The facts are;
    1. Large reductions in Government Expenditures generally lead to a reduction in Economic activity.
    2. The driver for these reductions are generally caused by economic factors, internally or externally that are being forced on the Government of the time (There are some exceptions Cambodia under Pol Pot with his back to fields being a notable exception)
    3. The boom in Ireland from 2002 onwards was entirely debt driven.
    4. The government on its own admission has burnt between 15-25bn (10-20% GNP) on Anglo/INBS
    5. The Government needs to make another 3bn cuts this year on their admission.
    6. The chances of another debt fuelled boom given our current level of indebtedness and the current market view (whether you agree with or not or blame it on Moddys) on Irish Government and private bank (Sorry largely public!!!) bonds are about as likely as Eamon Ryan getting re-elected.
    These are the un-contested facts.
    Given these facts I think that if Ireland grows by 3-5% next year I think that every economic text book in the country needs to be burnt.

  17. We owe net about 150bn to Germany. German ants slaved away and their savings which were sent to the Emerald Isle. This massive sum equivalent to 100% of GNP was spent largely buying fields in Ballycomebuyme (which I suspect ended up in Swiss bank accounts) and building dead estates in Namaville as well as some reasonably profitable out of town shopping centers and cinema complexes. Where do we go from there.
    All we are hearing from the mainstream media and the government is a constant rehash of where is this money and what are we going to do about it.
    Serious employment industries are either ignored, taxed to death or given lip service if they are deemed to be “high tech”. This economic mass suicide is unprecedented in a modern democratic society.

  18. David McWilliams views which are held in such contempt in Ireland are actually fairly widespread among modern democratic societies which are generally built about a variation of capitalism with a socialist twist thrown in. I would say for example his views echo 90% of North Americans adults for example. The enterprising class are allowed to gamble because we all know that enterprise is the major source of wealth and income. This class is taxed to pay for social good and are allowed to complain about tax – but have to pay. If they fail they go bankrupt because we all know that accountants and lawyers are experts at flogging a dead horse particularly if horse is pumped full of public funds. In general discussion in modern democratic societies are about the degree of social twist and tax but in recent times the regulatory functions of banks have become important as it has become clear that these institutions are gambling with their customers funds.

  19. the sole subordinated bagholder

    Now this is unkind and ungracious. I should have recognised the ECB, which has been standing with us the whole way, destroying its own capital base to help our government and the banks to borrow more cheaply. It’s the Eurozone core which has a policy of wringing everything possible out of the periphery in the quest to recapitalise its banks.

  20. @ Tim Morrissey/Paul Hunt

    Goldman Sachs economists recently said that US growth in Q1 would have been O% but for emergency measures.

    Apart from high public debt in developed countries, the emergency measures have yet to be would down.

    With increased capital requirements and regulation, the financial sector will not return to pre-crisis times earning returns on equity of about 30%.

    Last May the ESRI forecast avg GNP growth of 5.9% in the period 2012-2015.

    In Ireland, employment at foreign companies is back to 1998 levels.

    But the Eurozone, the US and UK is still expected to power a strong recovery.

    Last January, Dr Alan Ahearne, adviser to the Minister for Finance said a number of factors gave rise to optimism. He said there was a 5% improvement in unit labour costs since the autumn. “This is already kickstarting growth. We are starting to gain market share but we need to do more as we lost our competitiveness during the boom years,” he said.

    The Micheál-Martinspeak presumably impressed some people…however, how could he have known about this instant gain in market share?

    Martin is in China this week as is the President of Finland.

    Yesterday at a joint clean tech forum, the Finns announced projects and agreements now worth €200m with potential of more than €1.5bn

    By 2005, nearly all large Finnish companies, in total around 200, already had units in China

    There is no easy route to renewed prosperity.

  21. @Michael H,

    Forget renewed prosperity. The PIGS (Italy seems to be trying to extract itself) are being kept in the EZ because to throw them to the wolves could cause the entire EU project to founder (and the credibility of the EU elite would be blown) and the Germans need to bleed them dry to recover the pension funds unwisely invested in these bubble economies.

    It’s payback time – and will be for the next decade. The jury’s out on how and how long it will take to get back to the pre-crash GDP level, but much of it is likely to be a jobless recovery. However, the pre-crash level of GDP per capita may be reached sooner, particularly for the sheltered sectors, as the population will be much smaller. The ’50s redux.

  22. “And the clever ants who pontificate from the higher slopes of the ant-hill have no incentive to engage in any change of the power structure”.

    It seems like an opportune moment to resurrect the story of my great grandfather Eamon Mansfield who played a significant role in the early years of the Irish State and became one of the Land Commissioners. It is worth reading the full transcript of this 1934 Seanad debate as it is very illuminating.

    http://historical-debates.oireachtas.ie/S/0018/S.0018.193402070004.html

    What I get from this is that a thorough knowledge of Irish Law and a strong conscience are a powerful combination and you would hope that those currently towards the top of the ant hill might reflect on this.

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