Abandoning the four-year plan

The publication of the Autumn QEC certainly has created a stir this morning.  Having been an advocate of front-loading the adjustment albeit with nuance the ESRI have now expressed doubts about the four-year time frame.

I am bit puzzled by the shift in their position.  Based on the Institute’s evolving view of the economy, I would have thought the case for back-loading was actually stronger a year ago.   While already stressed, international credit markets were then more favourable to the “peripherals” than they became after the Greek crisis.   In addition, the ESRI were then forecasting what was effectively a V-shaped recovery.   This suggested room to avoid an excessively pro-cyclical adjustment.   (A basic principle here is that there is more scope to smooth temporary growth shocks than persistent shocks.) 

Now that credit markets have turned extremely unfavourable and the underlying output path looks closer to the dreaded L-shape, I actually see less room for manoeuvre.   (It is interesting that the ESRI are now focusing on their low-growth scenario from their Recovery Scenarios update, which itself might be viewed as in line with a modest V-shaped alternative, with average real growth of 3.2 percent between 2011 and 2015.)  Moreover, the need to establish credibility around a focal adjustment path has if anything increased – the most obvious being the 4-year path already agreed with the European Commission and the major political parties.   

From media reports, it appears that outside observers consulted by the ESRI are increasingly concerned by the poor outlook for growth.   But the main reason for the worsened outlook is the drag caused by Ireland’s balance-sheet recession.   While a contractionary fiscal policy will slow growth even further, I can’t see how extending the adjustment period is the best route to convincing investors that we can steer our way through this without default.   

79 replies on “Abandoning the four-year plan”

I think the intense focus on what happens in the later years of a four-year plan is misplaced.


“I think this point, that we need to credibly get back to sustainable levels of the deficit in the next year or two, is far more important than the other popular debate about whether we should have a four-year plan or a seven-year plan for getting back to 3%. Colm Keena correctly quotes me in today’s Irish Times as saying that I don’t think anyone believes that we are going to reach a 3% deficit in 2014. That’s been my experience, perhaps others know people who do believe this. Either way, the 3% is an arbitrary figure and when we reach it is not the crucial point.

Of course, if the Commission insists that all our plans end up with 3% in 2014, then that’s the way they will be written. However, what’s far more important is that we can convince people that the deficits for 2011 and 2012 are going to be well below the starting point we’re looking at right now.”

My own calculations suggest our starting point is a 14% deficit in 2011 prior to any adjustments. The question is what level is likely to be seen as a credible start. If the answer is 10%, the original target for 2011, then that will require €7 billion in adjustments.

Perhaps some people think we can miss the original target for 2011 and still be on a credible downward path than stabilises the debt at managable levels. I’m not so sure.

I must say that I don’t understand the ESRI’s shift in position either. The very optimistic V-shaped recovery they previously projected was predicated on a strong improvement in cost competitiveness. The improvement that has materialised so far is disappointingly weak, which (so far as it is possible to tell from the data) is being reflected in substantial continuing net job losses in internationally traded industries, with multiplier effects throughout the rest of the economy.

To the extent that the fiscal adjustment is focused on spending cuts, it is likely to be one of the most effective levers available to drive down costs in the economy. Undertaking the adjustment over a total period of 5 or 6 years is already pretty slow and measured. It’s hard to understand how it can make sense to stretch it out even longer, which, aside from the funding problems, will delay the recovery in cost competitiveness that we need to come out of this in a V rather than an L.

Is it time that we started asking the question:
Is this worth it?
This target is clouding our judgement alot. The most important point is not to remain a member of some club but to eliminate waste and return this country to a sustainable path.
Our approach to our deficit must be similar to the UK’s. We must target quango’s and we must eliminate waste. But there is no point doing this if increased interest rates charged by money lenders on the bondmarkets eliminate all our gains. IF this happens it is just loss, loss, loss as the cuts do not translate into less borrowing.
If Europe is serious about this club (and I don’t think it is) then it should support our economy with a low interest credit stream over the next 6 years (at least) to help us reach our targets. That way savings are real and not obliterated by a percentage increase rise at the whim of the bond speculators.
This has to cut both ways.
There is no point in making us toothless, thick and sick just to please Hans in Frankfurt.
Remember the Germanic temperment is not known to be forgiving. An extension is likely to be coupled by sanctions. The IMF would, in fact, be alot more benevolent than our German fellow Europeans

Karl, I disagree.   While it is true that we need to make a bigger upfront effort than we might have hoped, I think making credible commitments to actions in years 2, 3 and 4 really do help.   Examples: putting in train a valuation-based property tax now; raising the VAT rate for 2012; legislating a phased reduction in tax credits, etc.   While the 4-year/3% targets were arbitrary, they have become a focal point for credibility and action.   It makes no sense to abandon them now.   It is not an either/or when it comes to the need for a significant upfront action and credible commitments to the out-year actions.  While I see where the Minister is coming from with the comment about revisiting the targets later, I don’t think such comments are helpful at this stage

Perhaps the ESRI have a point in that by not cutting as deeply earlier on, it might give the economy a chance to grow a bit faster over the next year therefore automatically giving the deficit cutting plan a helping hand a couple of years on rather than strangling an economy already on the floor.

However, with the focus on having the markets give us a more favorable interest rate when we return to borrowing in the new year, the ESRI’s new tune doesn’t accommodate this.

There is selection bias in the bond market in terms of a Keynesian or Austairian outlook. It is Political Economy after all and the knee-jerk reaction is the latter.

There is more bias in this respect in the vocal analysit community than among portfolio managers who have less need to be heard saying the “right” things.

Irl is an extreme case though, in which bond analysts have to entertain the idea that not replacing private sector borrowing with public sector borrowing might actually do what the Keynesians predict. Hence the realisation that front-loading might not work.

However, Irl is stuck with its debts and new borrowing in what is essentially a foreign currency, so even the back-loading option starts to look a bit like a classic emerging market debt crisis and bond investors will not be keen.

My own view is that the country needs to get real about things like the Croke Park Agreement and the level people in (superficially sheltered) employment insist on being paid as they wait for anybody else to take the hit of a competitiveness adjustment or hold out for a quick V in GNP. That and introduce a more sensible way of dealing with mortgage write-offs and negative equity.

If not then start the debate about re-scheduling and maybe a different currency.

@ John/Karl

i think we have to assume we will be required to hit the targets for 2014, and maybe we’ll get lucky in 2013 and they’ll let us extend somewhat.

As such, as John says, frontloading alone will not do the trick (though its the most important part), there has to be a credible plan in place right to conclusion. I’ve been saying all summer to guys i work with/deal with that what was required was far more detail on how exactly we were going to make the necessary adjustments, a “firm committment”, though no doubt sincere, was no longer considered good enough. And on Sept 30th, when Lenny announced the “4yr plan” i immediately said that was the big announcement that would make or break everything. Lenny made the right call, now he has to follow through on it.

@ John

The 3% target won’t be abandoned. It probably won’t be met either. Multi-year commitments put in place now will have limited credibility given that the current government won’t be around to implement this.

Anyway, you get my point. More focus on the four month plan rather than four year plan is called for.

As Karl Whelan notes, our actions over the next year or two, and in particular over the next 3 months, will speak louder than the words in the four year plan.

The ESRI’s contribution is not hugely helpful. Tell us something we don’t know, as the saying goes! Perhaps the ESRI believes that the arbitrary requirements of the growth and stability pact can be as detrimental in a bust as in a boom. It seems unlikely that people need the ESRI to tell them that at this stage. Then again, people can be pretty stupid.

Just to clarify. I’m not against a four-year plan and coherent mult-year budgeting. In fact, I’m all in favour of it and have been. I just think the focus on what exactly happens in the later years of the plan is misplaced.

Make a plan and stick to it.

The continued pussyfooting around is terrifying people. We even have a government TD saying this week people need to be frightened. He must not get out much. People are frightened and it is the absence of any sign of leadership that is frightening them.

Along with sending out the message that we are serious about tackling our economic situation, would it not also be a good time to think about more fundamental reforms of the way we govern in Ireland.

If, in this four year plan, we said that we were setting up a Council of Economists to guide policy in the future, would that not send the right message that we are serious about getting things right in the future. Along with this we could move to introduce a list system allowing qualified people to make the ‘right’ decisions without fear of re-election.

Surely, in the long run, this sends as positive a message as a deficit reduction plan. Yes, cutting the deficit and keeping the State open for business is the number one priority but we also have to think about what we want the place to be like when we come out the other side of this mess.

Any takers on the quid-pro-quo idea?
If we do this we need to get a low interest credit stream from Europe.
Otherwise this won’t work.
You guys are forgetting that this is a Euro problem with the unchecked flow of liquidity to the periphery. Europe need to be part of the solution.
I grew up with the punt. It wasn’t that bad. And always left you with options. I preferred the currency speculators to the bond ones – you just devalued or messed around with interest rates a bit.
The growth we had with the punt was real stuff.
I don’t think much of this Euro at all!

I think I hear the sound of the penny dropping. Ireland is going to be put on the rack to protect the EU political project. The EU needs more monetary, fiscal and economic cohesion and coherence if it is to punch its weight in the company of the BRICs. The Greeks forced the pace, but they’re out of the game in the treatment room. There is no way Ireland is going to be allowed to screw things up. If you mess around and get too cocky when you’re playing with the big boys you’re going to get a serious hiding every now and then.

Axcel Merks article was interesting yesterday – he is expecting a low growth/ strong currency Euro area.
He believes that it is a advantage to have separate weak treasuries and one uber central bank unlike the US.
I believe this is extremely disturbing for Ireland .
The ECB has effectively imposed a equality between bank and gov paper – @eureka
There is no quid pro – Europe is a bankers paradise.
The periphery of Europe will re wild as it is indeed more efficient to produce at the core then the edge.
Their goal is to rundown the edge to fortify the interior.
The mechanism is no default of bank paper from the edge to increase the wealth of the interior – it is working.
We cannot produce credit when banks are broken – yet the interest on the vehicles that blew up the credit bubble are still extracting interest from a money supply that is decreasing.
Ireland is a malthusian playground for the ECB or maybe
we are a battlefield between the US and Europe and we are expendable.

@ KeIth
If what you say is true then is it time to prepare for leaving the Euro.
Mechanism would be difficult.
I stand to be very seriously corrected here but we are largely self sufficient domestically in food. Our biggest problem would be importing oil. (Am sure somebody could point out loads more) but we need a drive to energy self sufficiency anyway.
Its beginning to seem that the price we’re paying to be members of this club is just too high.

Absolutely. The boy who cried “no wolf” is not to be taken seriously once the flock have been savaged.

“there is no point doing this if increased interest rates charged by money lenders on the bondmarkets eliminate all our gains. ”
Ooookay. So where do we get the money to not do it? Not cutting means borrowing more. You can’t say that you want to keep the current level of spend unless you can find an alternate source of borrowing or income. And not in three years when multipliers kick in, but in three months when we go back to the bond markets.

To me high bond yields say absolutely that we should be borrowing less. Not because they are unfair, but because they are high.

I confess to being a little confused by the ESRIs position too. Are they saying “jeepers, this is going to hurt quite a bit”? And they’ve only realised that now? It’s a shame they didn’t stick the boot in two years ago when it might have made a big difference to push through some structural reforms. We might be seeing the benefit of them now. The same old hoary chestnuts – pensions, health costs, welfare costs, the protected sector, state charges are avoided every time.

“I stand to be very seriously corrected here but we are largely self sufficient domestically in food.”
Not even close. Look at what you buy in the shops. Look for an Irish alternative to them.

This is not to say that in terms of calories we don’t produce enough to feed ourselves (or can’t), it is just that it isn’t what you tend to put in your shopping basket.

I am not averse to Austrian type solutions at least to some degree in various economies but the Austrian school is completly useless in a debt based monetory system.
Our savings will just be used by people with debt money who will accumulate more interest income.
A hard debt currency such as Volkers Dollar in the early 80s and now the Euro will merely deindustrialise the exterior of Europe and transfer production to the core and Asia.
As I have said many times Banks cannot create wealth they can just transfer or decaptilise a economy.
Given total governance to these high priests will be catastrophic for Ireland –
I feel the polticans in this country do not understand the new nature of money and are naively believing in a conservative manner that the pain will be worth it – it will not – it will transfer wealth elsewhere.

For all you wannabe macro types: I think you need to think about the time inconsistency problem. If you can’t credibly commit to a plan you can’t credibly commit to a plan. The actions that you take now (the forthcoming budget) will have a material impact on growth in years 2, 3 and 4 of your 4 year plan. The target you hope to hit in year 4 depends on what you do in year 4. And years 2, 3 and 4. If what you do now means you can’t hit your 4 year plan under any reasonable circumstances you ain’t got a 4 year plan. The front-load frenzy is rendering the 4 year target less and less credible. Like I have said, many many times, this just can’t be done.

It simply is stupid to say let’s adopt a target we have no hope of meeting. How credible is that? If the plan is to cut the arse out of the economy in 2011 and hope for the best we would be better admitting to that. I think it’s called constrained optimisation: the constraint is that Brussels and the Bond market give us zero degrees of freedom and that any debate around ‘choices’ is simply utterly dishonest.

With regard food self suffencey we could invite maybe 500 Dutch market farmers into this country – give them free NAMA land on condition that they develop market farms around our cities.
It may sound crazy but things are getting really serious and the executive here needs to think outside the box.

Listening to McCarthys false conservatism again on RTE.

People are being led a down a path of complete tyranny – the “markets” are destroying western civilisation yet we must genuflect to these new Gods.
If we has a central bank that represented its own treasuries it would destroy all risk bank debt and replace it high powered money.

Hopefully Lenny has a postit somewhere with:

‘Rip up the Croke Park Agreement and start making savings not asking for them’

written on it.

This is simple stuff – credit is static or declining yet interest does what it always does – it goes exponential.
Yet we cannot default on debt !!
This is a simple transfer of wealth and nothing else.
The economists have a duty to tell the Irish people the futility of this and any sacrifices will just transfer our surplus to the holders of capital that should have went down in flames 2 years ago.

Doesn’t sound crazy to me – but maybe that’s just me.
Dutch herbalists and could diversify into pharma too!

If you are not alive in the short term your are dead in the long term.

If our governement (unlikely) had the courage to make the necessary cuts now then we could proceed, at least people would know were they stand. Given current saving balances there is no real shortage of money in the country.

Uncertainty is killing us at every point, also you could add that Fianna Fail are killing us at every point, but there is nothing new in that.

Why do we need to wait until November/December for a budget when we know what needs to be done….now. The sooner done the better.
What is the point in a four year plan when we look like we will be fecked within 12 months maximum anyway?

A key issue seems to be the assumption or belief on the cause of the recession in Ireland. If we view it as a temporary recession then temporarily high spending to cushion the economy may make sense. The classic Keynes.

If we view the recession as a structural event and a permanent loss of output in the economy then cushioning makes far less if any sense. The lost output will not return in any meaningful timeframe and high spending just loads more debt onto the remaining productive parts of the economy.

At the moment it looks as if the ESRI now views the recession as a temporary event and are expecting a V shaped recovery. If we consider that it’s more likely to be an L than a V then isn’t maintaining excessive spending likely to help turn the L into an ongoing \ ?

A 20% drop in output takes a long time to replace at 3% growth….our debt is accumulating a a much faster rate and charging much higher interest. More borrowing doesn’t seem a good bet.

Again, the current govt spending level was largely based on taxation of activity caused by huge private borrowing. The private borrowing was unsustainable since it was invested in value destroying activity. It has stopped, and worse, it’s been turned into a stock of state debt.

If we now replace the flow of private borrowing with a flow of public borrowing then unless the economy grows strongly (and why would it?) then that too will quickly become unsustainable. It may already have become unsustainable.

Any discussion may have to accept that the options are all bad and that none of the futures are rosy.

If we have a short sharp austerity shock it may well cause misery immediately and a second sharp fall in output. My hope & expectation is that because we’re a small country on the edge of a rich-ish strong currency area that trade will remain, that we can avoid a long depression, and that the economy could recover sooner rather than later.

If we borrow to avoid a short sharp shock then my fear is that we may simply postpone and magnify the eventual shock, or cause a much longer recession both on the way down and on the way back up.

A choice between lots of misery for a short time or lots of misery for a long time is not a nice choice, but it is a choice.

If we could default painlessly then I’d hope the govt would arrange it.

I doubt we can, and the prospect of having to follow Kieth and Eureka’s ideas, to live on Irish-grown potatoes and turnips and to burn turf to keep the house warm does not fill me with enthusiasm.

Meantime, are there forecasts anywhere that can be graphically visualised – to get a feel of their credibility? (a la the Aidan Kane historical curves that we can see at https://spreadsheets3.google.com/a/google.com/ccc?key=t_Ls5IutKMhwkmRrtPfBfig&authkey=CJnk5PYE&hl=en&authkey=CJnk5PYE#gid=0 )

Don’t knock it. We also produce dairy, apples and if we bring in the Dutch we’ll have cheap tulips and recreational drugs.
Would be better than the processed crap we’re eating now anyway.
Seriously though even without the Euro we do have an economy.

3 months ago, the ESRI published a high and low growth scenario report. Their High now seems to be pie in the sky and even the Low seems hopeful. It would be cheaper to phone Psychics Live and they know it (the psychics, that is). Their Low scenario is what really bugs me – it should not look overly ambitious so quickly. They need to address these credibility issues. My opinion is we could see GDP growth, but it mightn’t translate into jobs or tax revenue.

The aggregate public and private debt may yet prove too large. We’re like a snake that has swallowed a horse – there’s every chance our meal will do us in and if not, it’ll take us a damn long time to digest. Lenihan’s ‘cheapest bail-out, so far’, which closed off the main avenue of reducing the aggregate debt, should not be forgotten.

It is worth bearing in mind that there is scope for greater losses to come from the banking bust. In effect, we’ve only addressed big developer debt and a bit more for Anglo. Even the developer debt hasn’t necessarily been resolved in full. I’m not clear on where the finance will come from for Irish located NAMA assets. We’ll have BOI and AIB offering a range of lending and a few other lenders offering resi mortgages. These lenders will want to shrink their assets, so who will lend / and how much to borrowers that want to acquire NAMA related assets.

The 15bn adjustment seems daunting but realistic (this time I’m not inclined to ask if it’s enough). I’d prefer doing the biggest adjustment now. I’d ask why we didn’t start earlier.


The “markets” are not destroying anything. It is only when we revert to a market discovery of prices, especially labour costs and interest rates that we will be able to rectify this mess.

No Socialist (Keynesian) solutions exist. I am sick of ignoramuses suggesting that Capitalism is the culprit in this scenario.

What we need to “stimulate” this economy is the removal of impediments to business activity. This means the end of VAT, income Tax, all employment taxes. The consequent reduction in Revenue receipts will require the State to pull out of the areas it now occupies, such as health service provision, social welfare provision, education and all “quango’s”.

Tax that is needed should come from land/property taxes.

Banks that are not solvent should be liquidated. There should be be no consideration given to socializing private debt.

We must not be so impressed with the Euro elites. They too are robbing their populations blind and have no answer to the problem of generating growth.

@Macro types
Why are you all so surprised that contractionary fiscal policy is having a negative effct on the economy? Why are you all so surprised that future fiscal tightening is having an effect now?
It is commonplace to assert that this will only work if global growth is vigorous. Just so we have our facts staright, our growth is disappointing, today, while the world economy is doing very nicesly, today.

Ok, Anglo tender: 20 cents on Euro (vs 30 cent current market price), and if enough people agree to it (not sure if its 50%, 66%, or 75%), Anglo basically gets to wipe out the outstanding holders (ie the ones that didnt accept) for 1 cent in every €1,000. Pretty ingenious, no default-event, and much much tougher response from the current Anglo Mgt/Irish govt then previous tender. Game theory just went into overdrive, and even if you figure not enough will accept it as is, legislation is also a potential to come further down the line…

@Mokabaybob: I sense you are a tad vexed. Yes?

Capitalism is not the culprit: Yep. Neither are the virtual structures we call The Markets. But specific individuals, who used institutional attributes for personal and corporate gain ARE most definitely responsible! Also, it would appear that there were (and still are) significant elements of fraud involved in different areas. Any legal proposals to ensure no reprise?

Now please think carefully on this. We cannot, really, really cannot, become ‘competitive’ ever again. The global workforce has increased by millions and millions. And if you subscribe to the Religious Canons of the Received Economic ideology of Permagrowth – then you believe (with all your heart and soul) that there is such a thing as Supply and Demand and a empirical relationship between price and quantity. OK?

So: Supply of labour has gone exponential, so price of labour goes … … ooops! Now conjure up our predicament here in IRL. We have to ‘drive down’ wages and salaries for all (except for the already obscenely well paid, you understand!). Better have a good narrative as to where those who about to be impoverished will get the disposal incomes to pay all those taxes we need!

Permagrowth is dead. Our economy is Regressing. We will land (temporarily) on a terrace approximating mid-1990s, before dropping off and bumbing down to the next lower level – my guess is mid-1970s. And on it will go. May take a generation, but we will get there. The US is worse off than we are – if that’s any consolation.

Whats’ “market discovery’ by the way? Enronesque spin?

And – some of you are really getting the picture! We will not be able to pay what we owe. Interesting times!

Brian P


… simply stamping on the hairs of the tail of the elephant … this could have been backdated, and a lot closer to its head.

@Brian Woods.

I take it you have read Douthwaite’s “The Growth Illusion”?


Anglo Sub buyback is announced today? Is somebody trying to shift the focus away from Noonan’s €7bn and the lack of Sarah Carey’s much derided “consensus”?

@ Rob

the rest is the really really long dated (perpetual?) stuff, no rush on that and trades at 10 cents. You could deal with that stuff in 2020 if you were really minded…


A sovereign default doesn’t wipe out sovereign debt – this money is still owed. There might be some merit in getting outsiders to manage the economy.

I cannot understand why any economist would be puzzled by the ESRI admission. It is clear and obvious to see for everyone: bringing the deficit down to 3 percent by 2014, given the absence of growth, is simply not possible. What is surprising is that the ESRI are admiting the impossible. 2014 and the 4 year strategy is a political deadline. The politics of this adjustment state 4 years whereas economic circumstance should state – invest, invest, invest and worry about the consolidation as a by product of getting your economy off the life support machine. Cutting to reach the 2014 target is the equivalent to turning the life support machine off. The ESRI should have stated this political reality a long time ago. We need an active interventionist programme for economic recovery, growth and jobs.


Price discovery is where the market works out prices of goods and services including labour and interest.

In the case of labour, if there is a significant distorting factor (say a minimum wage set by the State or a union rate) the discovery of these prices are impossible and unemployment follows. Removing these distorting effects allow the filling of all labour needs in the economy across the widest range of labour rates. Unemployment would be largely eliminated. Labour, contrary to what you assert, is a scarce resource and the more employment there is the more this fact plays out to the benefit of those offering their labour to the market.

In the case of the Interest rate – the same thing applies. I forgo current goods for future goods. The compensation paid by borrowers is the interest rate. Market discovery is knowledge of what interest may be available from a variety of institutions. In a market that is distorted by a Central Bank maintaining an uneconomic interest rate- such as zero percent currently from the USFed. no market discovery is possible. The result is huge dislocation of business calculations due to rampant credit expansion and all its attendant negative spin offs. In the bust that follows, de-leveraging of the debts is the remedial process which restores markets to a saner disposition.

As far as fraud – excluding the potential for corruption that the State offers, the primary temptation lies in the banking sector. Here we have the most pernicious activity, one that was recognized by the Romans in the form of the abuse of the “tantundem” by banks. Here the irregular deposit of the most fungible commodity, money, is abused by the bank. Part or all of the deposit is used by the bank in order to allow the banker do his own deals for interest. He hopes to be able to return the deposit in time so as not to be discovered. His activities are fraudulent – we call it embezzlement. This activity yields handsome returns for the fraudster. However, he risks not having sufficient funds to repay all his demand deposits in the event of a run. In roman times this might have cost him his head.

The history of banking in Europe is the history of this abuse becoming the norm and the subsequent development of the Central Bank to offset its negative effects on bankers.

The most important result of fractional reserve banking is the creation of money out of thin air, not backed by any saving. We are in the end phase of the ultimate unwinding of this fraud. The Romans failed to recognize this important consequence of fractional reserve practices and paid the ultimate price eventually.

The abolition of fractional reserve banking would remove the greatest potential for fraudulent behavior.

Permagrowth I think implies a continuous state of credit expansion. This is certainly not possible. However, growth is possible. We must strike a path towards market freedom. The growth that follows will be based on far more efficient use of scarce resources and capital than we currently experience.

As for tax; the productive sectors of society need to be relieved of these taxes. I mean. get rid of VAT, Corporate taxes, PRSI, Income tax etc.
This will work well and we will get a strong recovery. Taxes should relate to land/property exclusively and should be for the sole purpose of maintaining the safety of the citizenry.

The spin off benefit is that we eliminate the Welfare State in this transformation.

A strong recovery does not imply a boom as in the inevitable outcome of Keynesian business cycle.

@Hugh Sheehy & Mokabaybob.

This is not a market – talks of keynesian or monetarist solutions to our problems is indeed futile.

Again lets keep it simple – the “Markets” will not allow us to increase goverment debt and thus socialise debt and a monetarist solution is not viable because the banks cannot create credit.
What happens in a debt based economy that cannot write off debt in this circumstance – it implodes.
Why – the debt as always is exponential by nature and if allowed to continue will eat up all human activity until nobody is left alive.

Talks of desperate efforts to feed ourselves may in fact be somewhat optimistic under the above conditions.
No what we are dealing with is a psychopathic ECB that wants to keep the value of the Euro down against Gold AT ALL COSTS.
Your efforts to make savings while admirable are impossible under this monetory system – it needs real money for that system to work.

Interesting re Anglo debt – can the govt tender for sovereign bonds in the same way or is that a really dumb question?

I don’t understand the sentence that follows your “Let’s keep it simple”.

Just think of a XY graph with a straight line going across from left to right which symbolises outstanding credit in the economy and another concave line which symbolises debt compounded over time.

It is mathematically certain that Ireland will default under these conditions – it just takes time.
When the debt goes vertical the end is quick.


Yes. We have no gold!

We have to pull down the Social Welfare State and institute free markets.

I also think we have about a ten year window to get two nuclear plants built. An all out effort and we might become a net exporter of electricity. Energy is also a commodity that will give us at least a snowballs.

How to finance this? Borrowings! How else? Sneak in a few tonnes of the yellow metal as well if possible.

I take it from Osborne’s budget that the Brits have realized the truth at last. They have to get a free market economy going and dismantle the Keynesian State. Before they go down completely. There are sixty five million of them. How will they feed themselves?

Don’t despair. The end is in sight. The worst government in the history of the state is on the way out.
And there is a dichotomy ahead – either we get the low credit from Europe we need or we return to the punt. And before we do that we can tell the sovereign bondholders to take payment of 50% in the Euro or wait to be paid in the new currency (think they’ll pick the Euro somehow).
So the endgame is here. It will be messy but it’ll be more black-and-tans than Cromwell.

The way to gain credibility is to consistently under-promise and over-deliver. This government has consistently over-promised and under-delivered. Credibility is gone and won’t come back as a result of any actions in this budget, since these actions are just the execution of decisions made in Brussels, Paris and Frankfurt, and are being forced, not chosen. Left to itself the government gave us, 18 months after the initial crisis, the Croke Park deal – which, as succinctly phrased above, asked for reforms rather than made them; compare this with the UK – there is no Twickenham deal. Figures and forecasts have been consistently wrong, and far too many corners have been turned. The credibility battle with respect to Dublin is over and has been lost.

The credibility battleground has now moved to Brussels and whether the Euro area can successfully deal with the huge imbalances within it. Ireland does not have the tools or ability itself to solve the problem. Germany’s arrogance lately has been stunning. When asked about the imbalance problem recently a German official said that the EZ is balanced overall therefore there is no problem – reminiscent of pronouncements from Beijing on ‘internal matters’. Ireland is a pawn in a much larger struggle and is likely to suffer significant collateral damage. Unless the underlying imbalances within the EZ are addressed, Ireland will continue to struggle with an uncompetitive cost structure and without the ability to devalue which would normally go alongside such huge austerity cuts. This is a basically political problem rather than an economic one. If there are to be automatic penalties on excess deficits there should be the same on excess surpluses, for example. It is the same argument as that which applies to the imbalances between the USA and China, which have resulted in the hollowing out of huge sectors of blue-collar American industry and which manifests itself in movements like the Tea Party.

Huge cuts by themselves in Dublin won’t solve the problem in isolation since the underlying dynamic of the Euro imbalances will remain, and will be seen to remain to the Spring 2011 bond-buyers that we are so assiduously courting.

@Mokabaybob @Eureka
Well the Irish central bank had 11tons + back in 1990 , now it has 5.5 tons.
Where it has gone I do not Know – anyway at current monetory values Gold is not suitable to pay down debt.
As for a free market – there has never been one in the History of mankind although perhaps the States in its youth was closest to that ideal.
Free markets are always under the influence of Governance as we have brains for a reason – simple free markets would just lead to entropy.

I would be happy with the rule of law and justice – Bank bonds should be toast- private bank capital is much bigger then Gov debt (I refuse to call it sov debt) – we do not need to default on our goverment debt given the huge scale of financial debt which also pays higher interest for apparently equal risk.
In a series of articles about the euro crisis last week the FT concentrated completly on fiscal debt.
However there was a very interesting graph on the bottom right which showed complete Euro debt since 2000.
Sovereign debt has been stable over the last decade until there was a slight blip during the economic crisis – however financial and corporate debt has exploded during that decade and household debt increased substantially yet the entire 3 articles concentrated on fiscal debt – unbelivable.
Our goverments are slaves to the ECB whose only clients are private banks – the last functioning semi- republic on this planet – France – was the only executive to fight the ECBs malicious 3% deficit rule as they rightly beleived it was a attack on their sovereignty.
This is not some misfortunates fault – most people cannot do the extremely complex tasks required in a economy with over valued debt money – the only other jobs are in basic service jobs that do not increase wealth – if most peoples only job is to service richer people it does not matter if they decide to remain on the dole.
They are playing us for fools – they might be correct.

@ Bryan G
Germans are not imperialists. They are parochial zenophobes at heart whose innate sense of superiority is all too ready to come to the fore.
Never before has any country achieved world domination by just being boring. The Germans are not going to buck that trend
The EU was invented to keep them from destroying their smaller neighbours. It worked for 50 years.
These guys had no problem sending their fellow Europeans to the ovens – do you think they’d blink twice at watching the Irish degenerate into abject poverty.
All we’re short of hearing from the ECB is Arbeits Machts Frei Irland!
Time to say aufwiedersehn!

@Celtic Phoenix

Yes that’s the most detailed article yet on this phenomenon. I think the ability to shift such large sums of money into and out of Ireland should be a function of how much money the company in question spends in Ireland on payroll and on local goods and services – e.g. for every €1 spent locally you get to launder €10 through to Bermuda. The IDA can do the sales and marketing job on this.

This is not the Germans fault – it was the ECBs and flawed Bundesbank’s culture.
The 3% deficit rule forced the surplus countries of the core to direct their savings into flawed monetory vehicles that blew up the periphery with little sustainable revenue from capital construction.
The ECB is at the core of this crisis – Germany is benefiting now but when a central bank is finished with a country it burns it like any other in the past.
Germany’s surplus should have been directed to energy independence through Nuclear development and other technologies – however it prefered to give up its independence in favour of cheap gas from Russia.
The wheel always turns against countries that court central banks.


One of the weapons used in the battle should certainly be reminders of historical context.

I recently watched the BBC series Love Of Money (on events of the Sept 2008 crisis) and it was noticeable what, in a very diplomatic way of course, Darling and Lagarde had to say about Brian Lenihan’s solo run on the blanket guarantee – it is clear they thought it was a very poor move, and made overall EU solutions more difficult. I think from that point on there has probably been quite a bit of latent hostility floating around the corridors of Brussels, waiting for opportunities to show itself.

@Ahura Maza

@ Bryan G
I know its more complex than my simple analysis but to be honest – at this stage I’ve given up analyzing this thing
Economies are all about swapping really. If one guy makes all the stuff and lends to the other guy to buy it from him in the end of the day it’s going to be a bit of a disaster all round.
To be honest the guarantee was brought about by Jean Claudes assertion that no bank should fail (in the same programme).
The EU has always been an inefficient mess (anybody speak Esperanto) it just took us to expose the core weakness. Jean Claude Trichet was a compromise candidate for that post. He wouldn’t even buy a decent suit for himself – how can he grasp that an appetite for consumption is as much a part of a healthy economy as the means of production.
The Euro is a completely farcical creation – a glorified Deutschmark. Fair play to the British for staying out.

Major correction – my imaginary debt curve would describe a parabolic trajectory of course rather then a spherical one –
Now that I think about if debt could form a circular trajectory we would not have any major problems with debt.
For some reason Fred Zwickys famous quote regarding spherical bastards comes to mind when I think of bankers.
Must remain rational…………

@ Hugh Sheehy
Your full post above was brilliant.

”If we borrow to avoid a short sharp shock then my fear is that we may simply postpone and magnify the eventual shock, or cause a much longer recession both on the way down and on the way back up”

Many seem to be focusing on growth in the economy and impact of the cuts in the short term. Of course the cuts will inhibit growth, this is a no brainer. It will cause pain and job losses, I think nearly everybody agrees on this if they are honest.

But the focus needs to be what will the overall debt be in 4,5,6…15 years time and what will the interest payments be.
As Hugh says above if you postpone the shock you will have a very slow decline (buffered by borrowing) but the debt mountain accumulated to avoid or postpone the shock could be a drag for decades to come.

Lenihan is quoted as saying:

“It might be that, after a few years, we would get a further extension, but only after we have demonstrated that we are already on a credible track way forward.

Old line: “manageable”

New line: “something will turn up”

I jest, a little. Mind you, something or other will almost certainly turn up before 2014. We may not like the look of it though.


The idea is based upon an assumption that this is a mere recession. Since the pain will increase, and no one likes a successful messenger, bearing bad news, most economists are ignoring the reality of a depression. Thus, front loading or cutting and imposing most of the assumed adjustments early, will have more beneficial effects than leaving all the work to the next administration.

For the politicians, there is no point in inflicting pain if it can be avoided. So they avoid it, with their claque explaining why it is a good idea. Their claque is all those in public service!

This is therefore a rerun of the bubble years except that everyone now pretends that things will get better “soon”.

Intellectual fraud.

zhou_enlai Says:
October 21st, 2010 at 11:31 am

“It seems unlikely that people need the ESRI to tell them that at this stage. Then again, people can be pretty stupid.”


Those people who are frightened, are not stupid!


I hope you will credit all of those of us who drummed up the default tune? That has helped to insert a spine? Perhaps you are humble enough to admit to yourself, that you are learning something?

Brian P Woods

Agree! All these labourers will want oil! Seriously, there is enough oil etc for a couple more centuries! Check out Queenslands latest two coal seam gas producing enterprizes. We will sell it to the impoverished Irish, for a few of your well educated young…..

As I have said before, we are in an economic war. The pace has picked up a lot since 1999.

People thinking in terms of nationalities are way behind the curve, conical section!, but it is good to see some realization that well governed nationalities are net gainers in even bad times…

The point to consider is the actual weapons used in the war. Derivatives, for example?

Arbeit is necessary, and that has been missing from Ireland for some time. One of my buddies, Peter Ashe, at TCD, had a phrase: “Paddy will feck it”. The desire for easy acquisition of wealth has been the undoing of the Irish as it is t the heart of every con trick. Banking, if unregulated, is a con trick.

What evidence do we possess that the Irish can be trusted to govern themselves?

Regionalization is about to occur under the EU master plan. Divide and rule to some, but perhaps useful? One world government requires a break with old paradigms. More ferries to France and Spain ….?

Histrionic rejection of banking and government/public services is unlikely to catch on ……. Just pay up the extra taxes and smile! No one likes a whinger!

Arthur Morgan from SF:

“Now we have Ictu, Prof Karl Whelan and the ESRI supporting the case for a longer timeframe for economic recovery”

Misquoted again?

One of my buddies whose Dad and uncle fought in world war 2 said – There goes Fritz – destroying Europe again.
The Germans do not trade their surplus production – they either siphon it off to their military or lend it out as debt.
They seem fundamentally incapable of looking after anyones interests but their own.
Paddy is only guilty of being too quick to take the blame.

The Irish seem fundamentally incapable of looking after their own interests as they are so concerned about their own image abroad.

Sad really.
1. Lost fishing rights in the most productive seas in Europe outside Norway and Iceland.
2. Zero tax on fossil fuel extraction.
3. Facilitating massive capital flows in and out of the country causing massive misallocation of resources during the consequent boom bust cycle.
4. No labour controls over the people who follow this capital.
5. No logical energy policey.
6. Policy of running down utilities to facilitate foregin extraction.
7. General lack of self respect for ourselves – Example – Albert Reynolds coming back like a Irish chamberlain figure , jumping up and down about getting free money from Brussels – note to Albert , nothing is for free.

Mary Harney was being duplicitous with her Boston Vs Berlin quote – Hati Vs the Cayman islands seems more appropiate.

@ Keith
Agree – bit of a vicious cycle though.
Suppose that’s why Im giving it to the Germans. Just trying to point out that We are fundamentally no worse than anybody else but we have to start sticking up for ourselves.
We have got to get it into our heads that the world is not governed by some benevolent force to whom we must always try and ingratiate ourselves. The world is war. We have to start fighting.
Europe has been very seriously damaged by all of this. If it costs too much to belong then we leave!

Notice I do not advocate defaulting on our goverment debt – this will hopefully preserve relations with other goverments.
What I am advocating is a destruction of the shadow banking sector which now dwarfs and controls formerly sovergin goverment.
I am not against a Europe as De Gaulle envisioned which was based on
trade and technical cooperation of independent sovereigns.
The ECB has clearly created a massive shadow banking extraction sector during their reign with little capital creation.
This is coming back to haunt these bankers as their is little income to service their compound interest rate dreams.
However Banks will continue to run down capital as that is all they know.
Increasing credit aggregates above the long term growth of a economy is theft – pure and simple – these people are not fools who do not understand basic monetory theory – they are criminals
They are preparing to pauperise us – they want the Irish savings created during their credit bubble and will protect their clients at all cost.

Notice I do not advocate defaulting on our goverment debt – this will hopefully preserve relations with other goverments.
What I am advocating is a destruction of the shadow banking sector which now dwarfs and controls formerly sovergin goverment.
I am not against a Europe as De Gaulle envisioned which was based on
trade and technical cooperation of independent sovereigns.
The ECB has clearly created a massive shadow banking extraction sector during their reign with little capital creation.
This is coming back to haunt these bankers as their is little income to service their compound interest rate dreams.
However Banks will continue to run down capital as that is all they know.
Increasing credit aggregates above the long term growth of a economy is theft – pure and simple – these people are not fools who do not understand basic monetory theory – they are criminals
They are preparing to pauperise us – they want the Irish savings created during their credit bubble and will protect their clients at all cost.

A European central bank that represented treasuries rather then commercial banks would destroy all risk bank debt and compensate the treasuries of the core treasuries whose banks lent this money by increasing the price of their Gold holdings to compensate for the loss of their interest bearing vehicles.
The fact that this has not happened indicates that the ECB wants to destroy the productive capacties of their host to make their client banks solvent again.

Perhaps I shouldn’t ask, but how do you plan to increase the price of gold holdings?

Jean Claude would just have to wake up in the morning , have a good breakfast , contemplate the nature of existence and then instruct the ECB to bid up the price of Gold.
This would dramatically increase the price of reserves held in Germany , France and Italy and therefore would buffer the external losses of German and French banks interest bearing vehicles that are now probably toast.
Italys fiscal postion would also be solidified.
Hell the ECB would also be able to take any losses on Irish debt it holds.

The overall wealth withen the euro zone would remain the same although the Euros buying power outside the Eurozone may be impaired.

@ Keith
Some people don’t get it. The default state of humanity is not general prosperity but oppression of the impoverished many by the wealthy few.
We’re heading there again. Bye bye the Golden Age of consumer driven prosperity. Welcome back crap times.
It’s the natural order

However do not hold your breath – the ECB seems willing to destroy the periphery so that their precious debt money can retain value against Gold.
The dynamics are not unlike Volcker’s 1980s strong interest rate policey to protect the dollar and destroy US industry
This succeeded and broke the value of Gold even though the monetary base continued to increase – how was this achieved – money no longer went into capital creation in America – now the Dollar is toast because of Volcker’s actions as there is no more capital to extract.
However the core Euro area still has a huge capital base and therefore the Euro may beat Gold for the next 10 years or so – but first for that to succeed it must destroy the productive capacities of the Euro periphery.

@ Padraic Reidy

Yes, cutting the deficit and keeping the State open for business is the number one priority but we also have to think about what we want the place to be like when we come out the other side of this mess.


As when a company is restructured, there must be hope that the challenges beyond the immediate financial emergency are being addressed and it shouldn’t be just the usual: “the Government must…”

We have seen the cost of silence, where individuals in organisations remained silent about what was going under their noses during the boom.

Dan O’Brien in the Irish Times made a pertinent point on Friday on the absence of the issue of the jobs crisis on the agenda at the Kenmare economics workshop last weekend, while many chairborne policymakers seem to believe the tired mantras about exports are all that is required.

The invisible Irish unemployed and the challenge of creating 180,000 net new jobs

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