Posen on stimulus

but how can i ireland stimulate. i’d put the ‘can’ in italics if i knew how. we dont have our own currency, we’re borrowing just to stay afloat and pay what bills we have, we have to cut more just to convince our creditors to keep financing us. stimulus would be great, i just don’t see how ireland can do it.

@ de roiste
i agree with you but thats other countries. if people are saying we should stimulate our own economy, not cutback, then i would like to know how.

@de roiste
sorry, i know this article is about the hope we should have that other countries will not follow us into austerity, i just believe those within our own country looking for internal stimulus shouldnt be listened to. that’d be folly

@Kevin O’Rourke

Last week’s news was terrible. I felt even more depressed.

JTO again:

I am deeply sorry that Kevin is feeling depressed. Luckily, I have never felt depressed in my life myself (except briefly after Dublin’s fluke victory over Tyrone in July), but I know some people who have been, and it is not nice. If Kevin went to a therapist to lift his depression, I’m sure that she’d tell him to look at the broader picture and to think positive. In this vein, here are some positive items from the last week or so. I’m sure that Kevin will feel much better when he reads these.

Friday 24 September:

CSO report merchandise exports up 12.1% in July over July 2009 and the merchandise trade surplus at an all-time high 0f 4,421.7 million euros.

Wednesday 29 September:

CSO report that the seasonally-adjusted number on the live register fell by 5,400 in September.

Wednesday 29 September:

CSO report that milk output was up by 12% in August as compared with August 2009.

Wednesday 29 September:

CSO report that agricultural prices were up by 10.9% in July as compared with July 2009, while input prices were down 1.4%, giving an unprecedented increase in agricultural terms of trade of 12.4% in July, as compared with July 2009.

Friday 1 October:

CSO report that the volume of retail sales was up 1.3% in August, as compared with August 2009.

Friday 1 October:

SIMI report that new car sales in August were 93.8% higher than in August 2009.

Sunday 3 October:

Media leaks that CSO figures to be published in a few weeks will show a big rebound in the number of foreign tourists in Q3, up 15% seasonally-adjusted as compared with Q1 and Q2.

Monday 4 October:

Department of Employment report that the number of redundancies in September were at the lowest since 2007, down 29.6% as compared with August 2009, and little more than half their peak in early 2009.

Monday 4 October:

Department of Finance report best exchequer returns since 2007. Tax receipts up 11.4% in September as compared with September 2009. Tax receipts above target (profile) for the third consecutive month, again the first time this has happened since 2007. The amount by which tax receipts are short of target (profile) has fallen from 1.6% in June, to 1.4% in July, to 0.7% in August, to 0.2% in September.

Tueday 5 October:

Department of Social Welfare report that, for the second month running, the number of PPSNs issued to foreign nationals in September was up on a year ago, 14.1% higher than in September 2009.

If people turn a blind eye to positive news, no wonder they get depressed. True of economics. True of life. I pray that Kevin is feeling a lot better now after reading the above.

Re the stimulus, I agree that it is a good idea in the US, Germany, Japan etc. I hope they go for it. Ireland would benefit. But, pointless to try an artificial stimulus in a small open economy like Ireland, where exports and imports are now each over 100 per cent of GDP. Ireland’s stimulus must take the form of competing successfully and increasing sales in world markets in respect of manufacturing, services exports, agriculture, tourism. The figures for manufacturing, merchandise exports, tourism, and agriculture above show that this is happening. Virtually all the wealth-producing sectors are now in all-out growth mode. The figures for the live register, redundancies and PPSNs above show that this growth is stabilising the labour market. The figures for tax receipts above show that this growth is stabilising the government’s finances. The next step should be to get some of this growth into consumer spending. The last thing that we need right now is a mass outbreak of depression, as a result of people totally ignoring all positive developments in the economy, leading in turn to a fall in consumer confidence and spending, even while the wealth-creating and exporting are booming.

@KO’R
I’m a little confused. Mr. Posen is arguing for Central Banks to do more of the heavy lifting. This seems to me an argument less for stimulus, than for, effectively, debt relief – Central Banks buying assets and taking losses on them.

Without a reduction in fiscal costs, governments will increasingly be constrained by their debt load and their interest bills. For example, even on an optimistic scenario of a return to trend growth next year and lower than currently expected banking costs Ireland will be paying 5% of GDP on interest costs by 2014. The numbers for other countries are equally stark.

This is before one looks at consumer (probably another 4% of GDP in the case of Ireland) and corporate (another what, 3%?). So 10% of GDP paid in interest before any capital payments. Who says debt doesn’t matter? Who believes it?

It is not enough for Central Banks to buy assets at inflated prices, they must be prepared to forego interest on them. In contrast to Mr. Posen, it is not high-quality assets that should be purchased, it is the very lowest. These are the damaging assets that need to be purged from the system. There is a ready market for high quality assets.

Raising inflation expectations without raising inflation is a smoke and daggers act. It is neither logically consistent nor rationally expectant. Nobody believes it. QE is a panacea for nothing because it is doing nothing other than damaging the signals from the bond market (the signals Mr. Posen says are showing no inflation expectations!).

Debt is the problem. There are three solutions to debt – pay it, deflate (bust it) or inflate. Choose one, but don’t claim that there is a middle-way between them that avoids the pain of the others.

Bloody hell, I’m turning into Peter Schiff…

@JTO

I genuinely felt better after reading your post. This gave me pause for thought. What you say is correct, these numbers look good, we have to look on the bright side. However (bet you didn’t see a however coming) this is despite of, not because of that which makes me worry. The vast overspending by our government makes me worry. Banks make me worry. The lack of action makes me worry. All the good things you talk of happen in spite of, not because of the reasons for which I am worried. Your positivity makes we want to go and buy something in the hope I can make some money out of it in the next 12 months. Reality tells me cash is king for the next 12 months.

@Justin Collery

Your positivity makes we want to go and buy something in the hope I can make some money out of it in the next 12 months.

JTO again:

Are you talking about investment when you use the phrase: “hope I can make some money out of it”?

Fair enough. You have to be certain of market conditions before splashing out on some major investment that you hope to make money on. You know your business infinitely better than I do, and I wouldn’t dream of advising you to go ahead.

But, I was thinking more of consumer spending rather than investment. That is, items from which one hopes to derive pleasure and enjoyment rather than to make money. Computers, furniture, tvs, holidays, restaurant meals, cars, etc etc. Naturally, I would always consider my own financial situation when deciding whether or not to purchase such an item. But, I wouldn’t dream of holding back on such a purchase, and depriving myself of much-needed enjoyment and pleasure, just because some idiot journalist or economist was telling me that things are going to get so bad that I’ll need the money to buy food parcels in a year or two. I’d consider that on a par with locking myself in the cellar at 9pm on 31 December 1999.

In the spirit of JTO optimism!

John Sisk & Son, the construction arm of the SISK Group, has begun work on high profile contracts worth in excess of €300 million in Britain in the past nine months.

Founded in Cork in 1859.

Not everyone in construction made eejits of themselves

Ireland has been ranked 8th in the world for quality of research in Materials Science over the past decade, according to Thomson Reuters. Ireland’s ranking of 8 out of 162 countries is well ahead of larger nations such as France, Canada, Australia and Japan. Materials Science is the study of the characteristics and uses of materials and includes

Nanoscience, the study of materials at very tiny dimensions. The data comes from the Essential Science Indicators database of Thomson Reuters and covered the period January 2000 to April 2010.

Of Ireland’s top 20 research papers, 14 came from researchers in Trinity College Dublin.

Austerity

There should be a distinction between short-term austerity and long term structural reform.

A government of a well-governed country could potentially get some leeway on short-term stimulus by implementing structural reforms that would take effect in the medium to long term.

In the US, short-term stimulus has become politically toxic because there is deadlock in Congress on how to address looming fiscal problems which are expected in the next decade.

The public want federal spending but no taxes to pay for it.

The best illustration of this situation is Alaska from where politicians rail against Washington but the state gets most federal dollars per capita.

Correction – the Albigensian or Cather crusade not the third crusade.

This crusade was waged to preserve the integrity of tax revenues of Rome which was threatened by the princes of rich Languedoc which used a alternative ideology which threatened Romes monopoly.

Maybe the ECBs true agenda is to impoverish us into peasants again before a alternative monetory belief system takes hold withen the populace of its more remote provinces.

@ JtO: “the next step should be to get some of this growth into consumer spending.” Hey John – we’re busted man! Savin’ all we can.

@ Hoganmahew: “(bust it) or inflate. Choose one, but don’t claim that there is a middle-way between them that avoids the … (dreadful distress and penury) … of the others.” Now where have I seen this writ (sic) before? No argument with this.

Gets worse. Energy and food costs are slowly increasing. Totally outside our control.

@ KC: “All stimulus and no nutrition” Nifty!

If Labour have any testicles they will force FF and FG to form the next coalition gov. Let the pair of them sit in their own mess.

Brian P

@JTO
there’s depression and there’s denial and sometimes denial can help fight depression.
So the cows are more productive, the volcano has stopped erupting and the live register is being pared by emigration.
The car sales are because of Lenny looking after his legal eagle mates through NAMA and are effectively an Irish stimulus for Germany. Tax receipts are just as bad as the Government said they’d be (great!).
Forgive me but the little silver linings do not take from the fact that this is a fairly serious cloud.

I see many signs that there is a large gap between what the gov’t is saying and what they are doing. I do not look for these gaps so there must hundreds if not thousands of gov’t actions that are contrary to their stated policy. One is the postal code expenditures and the second is building a footpath along an abandoned railway line from Tralee to Fenit which started this week. The pandering to the locals and the cronies continues unabated and is certain to end with the IMF dictating policy to our gov’t. Unless of course SF and Labour win the next election and declare bankruptcy. That of course would impose discipline on subsequent gov’ts since the foreign bond market would be locked to Ireland. That has turned out very well for Argentina although China coughs up the odd few billion of short term loans in return for future delivery of soybeans. On balance though the Argentinian default has worked out very well for them.

@ Mickey,Brian
Why is it superior to pay a unsustainable debt load that fuels consumption in the financial centres and elsewhere and not increase the gross capital of the country.
Do you think high paying tourists come here to see Bungalows or to have a nice time on a canal boat ?
The truth is that the IMF and their minions have dictated policey here since at least 1987 but have done so more effectively with the help of their Irish priests.

They prefer to use their local minions as it preserves the illusion of local control.
Let the IMF come here and dictate policey directly – then at least the people of this sad broken country can have a clear view of the chain of command.

@Keith:
“Do you think high paying tourists come here to see Bungalows or to have a nice time on a canal boat ?”

No (to both).

I can supply a list of the canal-boat hire-firms that are no longer in business.

bjg

http://www.nakedcapitalism.com/2010/10/dc-waking-up-to-escalating-foreclosure-train-wreck-grayson-calls-for-fsoc-to-examine-foreclosure-fraud-as-systemic-risk.html

Debt Jubilee USA?

@Kevin O’Rourke – “Unless the cavalry comes charging to the rescue, is what.”

What? Like Custer?

All I hear is lots of “let’s get back to the way things were” – inflation, debt, bubbles, etc. I fail to see how we can expect to keep everything going up all the time in a world of finite resources (and the Chinese seem to be making a pretty good fist of trying to grab most of those). It’s got to give some time.

Suck it up dudes. So Ireland is no longer the richest country in the world! Deal with it.

@Pat Donnelly

Maybe, I guess everybody has a dominant narrative jumping around his little head and mine is the history of Europe since the fall of the Roman Empire and I believe that has been a power dynamic between the princes who had official control of their subjects and the priests who control peoples minds.
This maybe the beginnings of a new reformation where a independent prince takes the views of a new puritan populace seriously although to believe there is any puritans left in this country is to border on the delusional.
However the papacies created since the start of the reformation are showing their age and their arrogance maybe a chink in their armour.

@hogie
“What do you mean ‘work’? The job to do is to close the deficit and prevent the state from going bust.”

That’s precisely what debt deflation will prevent you from doing. Can’t be done. Sorry.

I agree that monetary policies can remain easy. The challenge for central banks now is impotency. Several comments overnight, let alone the past few days or weeks, suggest that even forceful actions may not have much impact, and the markets are trading that way too.
So it is no surprise to see Posen argue that “if QE is less than effective due to persistent excessive liquidity preference and deflationary expectations, economic theory says that money financed fiscal stimulus is the right response”. It can be worth a try for the larger economies. But even Posen qualifies this (if in a footnote): “In the long-term of more than a few years, the credibility of … the government to fiscal discipline matter.
We are now into our fourth year of crisis. We can muddle through another few years. As we do so, the credibility of governments with respect to fiscal discipline become an ever bigger issue. And more so in the smaller countries.
Kevin O’Rourke has at times called on this blog for a continuation of expansionary fiscal policies in Ireland. Contrary to what some academics here have been writing, I believe Ireland has been running a massive budget gap. There is no prospect of cutting it, unless forceful political action is taken (growth itself will not suffice). On top of it all, there is a government that wants to protect certain local banking and property interests, imposing additional costs on the taxpayer.
I’ve never had any doubt that pump priming was entirely the wrong prescription for a SOE, that 1) couldn’t afford it 2) is not getting value at all for its profligacy. Indeed the longer term value may well have been negative, and will be negative shortly if not corrected. Kevin O’Rourke sees positive multipliers (from previous posts), and the differences with me are partly time frame. Slashing the deficit would of course be massively contractionary at first, but may still end up being “good value”, and certainly better value with each day that passes, until strong political resolve convinces us otherwise.
Like the IMF argues – and I fully agree and have been writing the same – there are several ways of reinforcing fiscal credibility but with little upfront cost (e.g. pension reform, property and wealth taxes, etc). They could even possibly allow Ireland continue notching up large public deficits without too big a penalty. The wonder is the incumbent government is so slow in showing evidence of commitment.

Austerity is baked in the cake and needs to happen – the central question is who benefits from the surplus created.
Will it be the powers that inflated the money supply and are now collecting the interest on their fradulant schemes or will it be real capital building withen our society.
People who think we can plug into a expanding credit system again and get the scraps off the table are delusional.
This is now a zero sum game of diminishing resources so therefore it is us or them in this monetory system.
The solution lies in two steps – who gets the remaining smaller surplus to consume and in what amounts and what if any of this pie will be used to increase or at least stabilise the remaining capital.

@KO@R
Is the following correct?

If the public sector is moving to balance, from current large deficit, the only way this can happen is for the private sector to also move to balance, from it’s current large surplus. This, given current circumstances, is unlikely to be a voluntary affair. Hence, the only way we can force the private sector to reduce its surplus is to destroy its income.

@Keith
” the central question is who benefits from the surplus created.”
Blankfein

The Irish model of a priest ridden society with the population in thrall to the religious hierarchy is now outmoded. A few weeks ago a Kerry man told me that the parish church in Listowel is now locked outside of the times there are activities in the church, masses, devotions, baptisms, weddings, funerals and so on. As depicted by the Kerry man there is no respect for man nor beast and the church was not immune. Vandalism and theft has spread to the point where nothing is sacred, places of worship, the old, the young, the frail, hospitals……… If he was talking about Dublin it would be perfectly understandable but when social cohesion is lost in small towns it does not augur well for the future.

@Mickey Hickey.

One form of papacey has simply been replaced by another – the banking hierarchy has recruited a new generation of priests , bishops and cardinals to do their bidding
They just need to refine their moral authority again and they can resume their wealth transfer scheme without puritanical interference.

We’re talking about the erosion of social capital, aka peace and common decency. The 30 year credit driven consumer wave has profoundly changed rural Ireland. It was never an Arcadia, but it had a lot of good values.

The old monastries had economic as well as religious functions. They were the state, such as it was. Our universities have achieved a good deal, but they walked us right into this crisis, while they were paying their senior staff in such creative ways. Patrician chat, fancy dress and Big Dinners.
The L’Oreal factor.

No hope of creating fiscal space as long as that sort of stuff is taken seriously.

@All

At the global level, for big independent economies, Posen makes some sense, ……… based on my vulgar knowlege of macroeconomics …

… as usual the lead would come from the USA, but the political class in the US is also frozen, as the ideology that largely caused this financial crisis remains in control of the Republican Party (and a fair bit of the Democrats) – and have sidelined the ‘pragmatic republicans’ one would expect to work with the Democrats …… [American Pragmatism, which I have a good bit of time for, in other words, also in crisis] TripleA Austerity reigns supreme in German dominated EZ ….(thank you ECB)…. Let’s hope Posen is taken seriously in the U.K. (by the Lib Dems in particular) as this is one branch of the cavalry that might assist here ….

Locally, 4 yrs of austerity will destroy ‘productive capacity’ in indigenous sector which reduces future growth potential ……… so think a bit of serious discussion on how one can ‘maintain it’ over the next few yrs … as it is cheaper to maintain than to try to create again later ……… any industrial economists around?

@Eureka
“I’m not a conspiracy theorist but when I hear some professor proposing Peter Goldman Sachs Sutherland for a place in our cabinet Ive really got to wonder”
Careful – you will raise the hackles of the GS wanna-work-for-bes on this site. Who suggested that?
It is bad enough that they are retained by NTMA as Gov bond dealers http://www.ntma.ie/Publications/2010/GoldmanSachsPressRelease12Feb2010.pdf

In the old days inveterate fraudulent practices would disqualify – is it now a criterion?

The venerable Sir Samuel Brittan (77), is rather sanguine about deficits.

He said yesterday in his FT column: “There is indeed not all that much urgency to cut the deficit, when economic recovery is far from assured and output is well below optimal capacity rates. But government expenditure is probably too bloated and needs to be curbed on its own merits or rather demerits. The logic of this position is that expenditure curbs should be offset by tax cuts.”

In a past column in a review of Charles Dumas’ book Globalisation Fractures, he commented: “There is a third route to lasting world recovery, mentioned but not particularly endorsed by Mr Dumas. This is to accept long-lasting structural budget deficits in the US and some other western countries as the counterpart to the surpluses of the savings glut countries. There is incidentally no need to finance such deficits by market borrowing. That well-known leftwing radical Milton Friedman suggested in his Framework for Economic Stability that deficits incurred for stabilisation purposes should be financed by newly created Fed dollars.

On “beggar-my-neighbour” economics coined by the leftwing Cambridge economist Joan Robinson, he said: “It is no accident that beggar-my-neighbour trade policies are associated with what I have previously called Tory Bourbonism in fiscal policy, by which I mean treating the national budget as if it were the budget of a private citizen that has in some sense to be ‘balanced’. If so-called Keynesian policies for using fiscal policy to manage demand are disavowed and monetary policies prove inadequate, we are left with only export promotion and import discouragement to promote recovery.”

On “beggar-my-neighbour”, Japanese economist, Tadashi Nakamae, said in the FT this week that: “Even if the yen was overvalued in 1995 there is little doubt that the yen is currently undervalued. Japan’s currency is now at a similar level to its peak in 1995, when it hit Y79 against the dollar. During the past 15 years while Japan’s consumer price index (CPI) fell 1%, CPI in the US increased 42%. So Japanese prices came down 43% more than American prices.”

Low interest rates have kept zombie companies alive and the problem for the yen is that Japan’s neighbours have kept their currencies below 1997 fx rates against the US dollar despite having grown strongly since.

The Wall Street Journal reports today that Asia’s fx reserves climbed 3.1% to a record in September as the region’s central banks bought dollars aggressively to temper the rise in their own currencies: Reserves reported by 11 key Asian central banks, excluding China’s, rose to $2.963 trillion at the end of September from $2.875 trillion at the end of August, as compiled by Dow Jones Newswires.

China, by far the world’s largest reserves holder, reports its totals quarterly. It had $2.454 trillion at the end of June and will release its next estimate later this month.

Asian reserves are heading towards 40% of US annual GDP.

@Eureka – it’s been happening for years here in Ireland.

@ Joseph Ryan

‘Are modern day economists so imbued with the free market economics that have crashed world economies that they are unable to consider income disparity as a leading reason for the present crisis?’

They are. The Middle Class gets increasing insecurity, while more of the wealth is retained by the top 5%. The wage earner has to place his/her bet in a rigged property game. I owe I owe it’s off to work (or to the boat) I go.

That’s the model which the US has exported, and which is reflected in the orthodox economics curriculum. Plutocracy.