More on sectoral financial balances

David McWilliams discusses the Irish version of the ‘Gavyn Davies’ sector financial balances graph in the Irish Independent today. He makes two points. The first is to highlight the restoration of the foreign sector balance in recent years, which he interprets as meaning that, absent the banking crisis, the government would not have needed to seek EU/IMF funding given the availability of sufficient domestic savings to fund the government deficit.

His second point is that the chart shows that austerity will not work because, if the private sector keeps saving, then either the government deficit remains high (as a result of a further contraction of the economy) or there is a build up in the current account surplus on the balance of payments, which he also sees as undesirable because it means that “we will export capital to the rest of the world for them to use, while projects in Ireland are starved of capital”.

While the first point may be true in the sense that the state would not have faced the downgrade on its sovereign debt in the absence of the banking crisis, I think the second conclusion is wrong.

To help the discussion, I reproduce the chart here which I had earlier created in a comment on Brendan Walsh’s post below. Two caveats are in order. First, although in principle the financial balances are equal to the net borrowing or lending of each sector as shown in the institutional non-financial accounts, there is a sizeable discrepancy due to errors and omissions. More important, these figures only show the flow of funds for any year, and need to be complemented by the balance sheet figures showing the stock of financial assets and liabilities held by each sector if we are to assess these flows correctly.

Irish sector financial balances

The stock figures (not shown here) show how private sector debt increased in an unsustainable fashion and that the private sector now needs to deleverage, i.e. to reduce its liabilities relative to its income. The government is currently unable to borrow because of the size of the bank liablities, but even if this constraint were not there there are dangers in allowing the public debt to build up with the consequent knock-on debt service costs. So if the government deficit is to be reduced given high private savings without causing a further serious contraction in the economy, we need the foreign sector balance to take up the slack. In other words, given the various objectives which macro policy must keep in mind, exporting more to pay off our foreign creditors is the least painful way of resolving the various dilemmas that now face the Irish economy.

114 replies on “More on sectoral financial balances”

David McWilliams’ second point is, of course, daft and you are right to correct him.
As far as I can see from the online version of the Indo there is no acknowledgement of the source of his erudite analysis.

@Alan Matthews,

Your effort to counter the fantasy of the ‘crock of gold at the end of the rainbow that will solve all our problems’ is indeed welcome. But I fear you may be preaching to the converted on this board. And, as I am sure you are well aware, adversarial rebuttal of patent nonsense is not generally given sufficient houseroom or currency on this island of saints and scholars.

I don’t think his second point is completely daft, though I don’t see how it follows from the graph.

There are some infrastructural investments the government could do that would improve our ability to export, like fixing the water pipes. This would help sustain industry (which needs water) boosting exports and reduce imports of San Pellegrino. Also, as a percentage of GDP these imbalances would be smaller due to a growing economy. Of course, this line of reasoning has little to do with the graph.

@Rory O’Farrell,

To finance this infrastructure investment which mix of the following would you advocate:

1. Curtail wasteful, inefficient public sector investment to free up resources for the opposite type of investment;
2. Increase public sector borrowing,
3. Incentivise/divert/commandeer? private sector savings,
4. Privatise some state-owned assets to finance new assets with the proceeds from existing assets?

An indicative percentage weighting would be a help.

Having to run current account surpluses in order to pay back a large stock of debt is not a good thing, especially if the debt was originally other peoples’. You consume (import/invest) less for a given amount of output (exports/savings). I imagine that is what David was getting at.

On the other hand, exogenous increases in export demand are a good thing as Alan points out.

Thanks to Alan for producing the graph. As I said in my original post, these charts are a good way of framing macroeconomic debates.

I think a small note of caution is necessary about this ‘conventional wisdom’ that seems to be emerging that Ireland must, and will, ‘export its way to recovery’. The big, bad world out there has changed.

But I still agree that investment in efficient infrastructure and utlily services is required to provide the necessary platform for the tradable sectors. And, for goodness sake, let them do what they will without excessive government ‘strategic’ direction, subsidy-spraying and picking of winners. The property bubble should have taught us more than enough about the ability of governments to pick winners.

David McWilliams has had a deposit selling moment. David is fond of sensationalist little tricks like turning received economic wisdoms on their head. Here he argues the contrarian view that a current account surplus is an evil of famine like proportions. But the article starts by highlighting the good news that we are movng into BoP surplus. Contrarian views are certainly sensation grabbers but to argue both the conventional wisdom and the contrarian view in the same article is taking the mick.

Thankfully most contributors so far see David McWilliams deposit selling moment for what its worth. But for those journos who idolise him, let me spell it out.

If one has a current account surplus it is an acccounting truism that one is accumulating foreign financial/capital assets. There is only one way to correct this and that is to ensure that imports are made to exceed exports. Now surely even David will concede that a policy to reduce exports and increase imports is totally inimicable to the domestic economy.

@ Kevin O’Rourke

I think there is a bit of a fixation on deleveraging. Some creative destruction and writing off debt is a far quicker way to address the imbalance.

@Paul Hunt

In the past I would have put the emphasis on 2) but I don’t think this is possible. Regarding 1) wasteful projects shouldn’t go ahead anyway. I think investments should be targeted at pro-export/import substitution (especially substituting proper schools buildings for oil). I don’t know how much can really be saved. Also I don’t really like the idea of privatising things now, but it has to be kept on the table.

So very rough percentages.

3) 80% (for incomes over €100,000 I’d say 2-5% must go into a special bond paying whatever the German rate is. Sort of like an income tax hike, but they’d get the money back after say 5-10 years).

That leaves 20% for 1) and 4). I include in 4) liquidating whatever is left in the pension fund, probably not much now :(.

In addition any extra money that could be borrowed at a reasonable rate I would borrow. I don’t really expect I could raise that much.

And of course I would cut the banks loose. This would save money, but I’d do that regardless of our fiscal position.

@ Paul Hunt

I forgot to say some tax can still be raised by altering the tax base for corporation tax, and I’d seriously increase effective inheritance tax.

This is the guy who argues for an exit from the euro and a devaluation. And yet here he lectures us on the evils of a current account surplus. He really should get off the stage.

In any case, his one correct observation, that the BOP position means we are not an entirely hopeless case, is about a year late, ESRI, JtO, me and others have been pointing this out for some time.

@Alan Mathews/Brendan Walsh.
re David McWilliams’ second point is, of course, daft and you are right to correct him.

I am not an economist but the question I would like to ask re private sector savings is are they “savings” in the real sense of that word or are they deleveraging. If it is the former, then the hoarding will eventually cease sooner and people will start spending. If however they are an attempt to reduce massive private sector borrowing then positive results will be very much delayed.
Given the enormous bubble debt accumulated, there is an argument that the usual results of increased ‘economic savings’ no longer immediately apply and that ‘private sector balances’, which I concede that I do not understand fully, are now a deceptive indicator of future trends.

I am loathe to dismiss McWilliam’s arguments.

The state of the Irish economy & the state of the Irish state finances are linked but they are not the same. BOP surplus is good for the Irish economy & hopefully it will also lead to an improvement in the Irish state finances. However, it seems it is only likely to happen in the long-term (‘spillovers’ are not large enough for a significant impact in the short- or medium-term).

Irish state finances seem to depend a lot on VAT revenues and they have fallen. The reason why they have fallen is that people are spending less on VAT items. The reason why the spending is lower is two-fold:
1. Unemployed people have less to spend
2. It is no longer possible to fund discretionary spending by releasing equity in homes, in fact people are now paying back loans that were backed by this kind of equity.

The ‘optimists’ see that in the long-term things look likely to improve for the state. The others see that there might be a problem to survive the short-term & if that is done then the problem is to survive in the medium-term.

In the short-term the state needs to raise revenues (taxes) & decrease spending. However, both comes into conflict with the medium-term objective of maintaining asset values (where some (a lot?) might have been put up as security for loans). Deleveraging seem likely to continue.

The best chance for the Irish state to survive the medium-term is if more people gain employment (quickly).

What growth industries (domestic and/or foreign) can be tempted to invest in Ireland?

@ JR: “If however they (savings) are an attempt to reduce massive private sector borrowing then positive results will be very much delayed.”

Yep. Need to show detail on this: genuine savings v paying-down debt.

How about, “Grandma Got Run-over by a Reindeer” over on Nasty little table there. Irl is not on the list, but someone could update the entries.

Exporting our way off the bottom. No can do. Math is against us. We would need a truely massive increase to achieve that. Our best hope is that Spain + Portugal go down. Now the ECB will have to ‘fix’ the debt predicament; aka: defaults on all non-sovereign debts.


@Rory O’Farrell,

Thank you for your forthright response. I expect you would not be averse to considering it as broadly representative of the ‘left-progressive’ stance on one of the few remaining significant economic policy areas where the state exercises some sovereignty – even if the terms of the Troika deal do impose some requirements and restrictions.

Unfortunately it seems to rely more on dogma/ideology than on economic theory and evidence and doesn’t augur well for coherent economic governance from the combination of political factions likely to triumph at the next election.

The CSO institutional accounts show the gross accumulation of financial assets as well as the gross assumption of liabilities by each sector, so you can check how the change in the private sector net financial balance is derived (the CSO Excel spreadsheet is here

However, while these trends may be interesting in themselves, they are not relevant to interpreting the financial balances graph, which is based on the identify that the sum of the three balances (private, government and foreign) must equal zero. It is this zero constraint which, together with some assumption about causality, makes the graph a potentially useful way to interpret and project the economy. If there is a private sector surplus (however derived), then this must be reflected in either a government deficit or a current account + capital transfers surplus. Of course, the graph tells us nothing about the level of GDP at which this identity is reached. Its really a consistency check in thinking about how the economy might evolve in future.

I would like to make three points.

One, the Irish taxpayer and economy are NOT paying back a loan. Legally, there never was a binding agreement established. The banks owe the money, period.

Two, the money did not benefit the people or the economy. This is not a loan repayment but more like a tithe.

Three, the export argument only works if Ireland maintains an unsustainable and rigged corporate tax structure that others in Europe rightly feel is unfair advantage. Additionally, the export market, as has been shown in recent numbers, does not add jobs in proportion to growth.

@ Kevin O’Rourke

“Having to run current account surpluses in order to pay back a large stock of debt is not a good thing, especially if the debt was originally other peoples’. You consume (import/invest) less for a given amount of output (exports/savings). I imagine that is what David was getting at.”

You are being far too kind. That is clearly not what DMcW meant. He said that a current account surplus meant we were exporting capital and starving the domestic economy of that capital. I am not an economist but thankfully others in this thread who clearly do know their economic onions have called this “daft”.

A current account surplus is good, end of. That we need it to pay back debts is not good, but that is a different point.

Current account surplus will be with us for years to come. I don’t think McWilliams is daft to mention that this means we are financing investments overseas while we starve ourselves of capital. It’s true, but that doesn’t really change anything. We are currently bloated with debt and reduced borrowings/debt repayments will definitely be the new order for the next few years.

A big Current Account Surplus is needlessly technical language for paying off more debts than we accumulate through new borrowings. Given where we are right now, I should think we’ll be glad to reach that situation.

Is this it. Let’s say I earn 5,000 a year and now spend 3,000 a year. I have 2k left. I can (i) save it in a bank or (ii) spend it or (iii) borrow against it.
Option (i) means that my money is used to pay off bank debts (not a bad thing), option (ii) means I spend and if I spend wisely I can bring up somebody else and option (iii)means I need growth out of my investment to beat the interest rates.
If this is right option (iii) is too risky. Option (i) seems good but there is an opportunity cost to the wider economy which leads to reduced growth and a possibility of the banks going under anyway. Option (ii) is not without it’s merits. I dunno.
I think that DMcW has set himself up a bit as a solutions man. Sometimes there are none. Or at least none visible at a particular point in time. It’s a tough gig. But history forgives the people who get it wrong – it doesn’t have much time for those throwing the tomatoes.

David McWilliams

Do you want a financial equivalent of the Famine, where a country with plenty of money collapses for want of credit? Do you want a situation where we export our young, educated people rather than spend money we have here on investing in them?

David McWilliams appears to appeal to both the desperate unemployed and the privileged who have been guaranteed security of employment by the State despite the benefits they have compared with most private sector workers. With the limitations of space, ‘cost’-free choices are presented and the solutions are usually set out without any downsides.

Journalists are usually ill-equipped to challenge the claims.

In Oct, Japan was the second biggest holder of US Treasuries at $877.4bn compared with China’s $906.8bn and Ireland’s $41.4bn.

Japan has a gross public debt of over 200% of GDP and as with Ireland, it just can’t conveniently seize private cash holdings. US companies have $1.8trn in cash or cash equivalents on their balance sheets which could help Uncle Sam.

Overseas residents hold more deposits in Irish banks than domestic residents and the crock of gold which McWilliams sees is in the control of the likes of Pfizer, Microsoft and Google and is used for lending to other foreign affiliates.

As for the household savings rate, it dipped to 3.9% of disposable income in 2007, the year of the SSIA maturities and recovered to 12.3% in 2009, according to the CSO. McWilliams says the savings rate is more than 16%.

In Jan 2007, The New York Times reported that Irish consumer spending in Ireland was less than 50% of gross domestic product, low by European standards, according to Dan McLaughlin, chief economist at Bank of Ireland. According to the Central Statistics Office, the country had a household savings rate of 11.9% of income in 2003, compared with 2.1% in the United States and 11.1% in France.

Part of the increase in the rate in 2009 reflects the dip in disposable income but it did remain above the 2007 level of €87bn.

McWilliams refers to “a wild swing of 21% of GDP in less than two years” using his savings rate figures; “such a swing is unprecedented in the western world and mirrors exactly what happened in Japan in the 1990s.”

However, the facts show that the current savings rate is back to an Irish and European norm.

The chart also tells us that austerity will not work, because if the private sector keeps saving, austerity will only lead to less and less spending in total, which will cause the budget targets to be missed — as happened in Japan — and public debt will rise unnecessarily.

So there is no need for ECB or the IMF support; all we need do is seize funds held at the IFSC!

The devil can cite Scripture for his purpose and Irish data in particular needs interpretation.

Irish households remain among the wealthiest in the European Union; Ireland’s stock of direct investment overseas is valued at €190bn. The stock of FDI assets here in Ireland is at €170bn.

The Irish side of the equation is impressive on paper, like much else when it comes to international-related data.

@ Ger

“I don’t think McWilliams is daft to mention that this means we are financing investments overseas while we starve ourselves of capital.”

Sorry, but it is totally daft. Let us consider what happens when Seamus sells a cow to Wolfgang. Wolfgang arranges for his bank in Bader-Bader to transfer money to Seamus’ bank in Tullamore. Ultimately this reflects itself in an increase in our Central Bank’s reserves at the expense of Germany’s reserves. It does not in any way translate to Ireland investing in Germany, in the economic sense of the word “investment”.

Of course, Irish people may be investing overseas but that has nothing to do with running a current account surplus.


I wonder if David is really pushing something else, though can’t quite bring himself to say it explicitly — capital controls.

Having lost market access for the State and the banks, there are really just three sources of financing: official financing (EU/IMF & ECB); forced foreign creditor financing (default); and forced self-financing (capital controls on domestic residents).

This would be hugely problematic for a eurozone country with a completely liberalised capital account and heavily integrated into the global economy. But it is better to debate these things explicitly. Paul Krugman has already compared Ireland’s crisis management strategy unfavourably with Iceland’s, which has used capital controls as a central plank of its financing.

@Rory O’Farrell

“I forgot to say some tax can still be raised by altering the tax base for corporation tax, and I’d seriously increase effective inheritance tax.”

If you want to increase “effective” inheritance tax (that’s CAT) you have to look at the whopper of a two tier system. Basically there is open ended tax relief in respect of the assets of businessmen/women and farmers. Roughly speaking the thresholds for these privileged groups are ten times higher than for the plebs, and the tax rate applied is about one tenth.

If you just do the dumb thing, which is to put up the headline rate and alter the headline thresholds, you just make things more inequitable – and the tax gains are peanuts in the current context.

@ JMcH

“I wonder if David is really pushing something else, though can’t quite bring himself to say it explicitly — capital controls.”

For the guy who recommends leaving the euro, sequestering 75Bn from US MNCs, forgiving mortgage repayments for two years etc. etc. I doubt whether he would be coy about being explicit on capital controls. Spare yourself looking for some clever nuanced insights here. It is simply classic David courting sensationalism by uttering outrageous contrarianisms. Do you agree with his assessment of the evils of running a current account surplus?

In addition to the points raised above, I’m struck by some other statements
“a recovery is not only possible, but actually likely — as long as we do the right thing.” i.e. there is an easy way to avoid a drop in living standards. That’ll curry popularity with most readers, desperate for an easy fix. But it doesn’t prepare them for the very tough choices that still lie in the future.
“local gombeen men profiting from doing the foreigners’ bidding.” A hint of populist xenophobia? There is still some opportunity for a government to have some choice in policy making.
“If we separated the banking system’s debt from the rest of the State, we could borrow easily on international markets”. Any sovereign running a budget deficit in the double digits relative to national income several years on the trot is going to run into severe problems sooner or later, even with the healthiest banks in the world. If by “State”, is meant the private and public sectors combined, sure, Ireland has sufficient wealth to pay off its increasing burden of debt. But not without extraordinarily difficult choices ahead.

@ John, “it is better to debate these things explicitly.”
I don’t know. If I was planning a change in policies, there are some things I’d keep to myself. Hopefully there is some serious thought being given to policies that will cut future public liability substantially. We’ll see.

RE. ” Irish households remain among the wealthiest in the European Union; Ireland’s stock of direct investment overseas is valued at €190bn. The stock of FDI assets here in Ireland is at €170bn. ”

Somehow I cannot believe the numbers. But is the assertion that “Irish households remain among the wealthiest in the European Union” proved by the fact that “Ireland’s stock of direct investment overseas is valued at €190bn”?
What is a household? Is it the summation of ordinary Pats and Patricia investing their savings overseas, is it Irish registered companies or corporations investing overseas or indeed a small numbers of very wealthy Irish individuals investing their wealth overseas. In the latter catagory, I have a number of tax exiles in mind and a number of tax inziles, if I can coin that word and define it to mean tax fugitives from other countries using Ireland as a base to invest wealth worldwide.
In fact the statement “Irish households remain among the wealthiest in the European Union” is a little like John Bruton’s statement that “We are still a wealthy country”. Perhaps “we” are.
However it does not feel that way for the vast majority of people. And I believe with good reason.

@John McHale

We have been wondering about this for some time and are not prepared to dismiss it as a slight possibility, but do have real difficulties coming up with a plausible strategy that an Irish government might pursue to enforce it – or indeed how that might impact foreign branches in the state, EU treaties and the constitution.

In a rather nebulous way this sort of argument was responsible for some of the deposit flight earlier this year. Trust has long gone and the recent history of small groups quietly coming up with some surprise gambit to deal with the country’s credit crunch suggests that you are right suggesting a proper debate.

Believe me, you can forget about the idea that nobody else has thought about this and that keeping quiet means that it won’t occur to anyone. An open discussion and general conclusion it is not a runner would probably result in a flow of funds back to the state. Keeping quiet fuels suspicion.

Real dumb question probably but how do they know what assets are really owned by whom. I owe BOI for my house (so do they own it) but they owe somebody else for the money they lent me (so do they own it?)
So is my house an Irish-owned asset or a foreign owned one?

As usual, Brian Woods II is spot-on in all his comments about the significance of the balance-of-payments surplus, and in his statement that all these points were being made by himself, myself, and economists like John Fitzgerald, many months ago. It is high time that he was promoted to Brian Woods I. I won’t make the points that I was going to make when I logged on, as I’d just be repeating what Brian Woods II has said. So, I’ll make another point.

Contrary to most media commentary, the move into balance-of-payments surplus is occurring primarily because of a large increase in exports, rather than a fall in imports. Imports are running about 5 per cent higher in volume in 2010 than in 2009. However, exports are running about 10 per cent higher in volume in 2010 than in 2009. This is on top of exports having held up remarkably well in 2008 and 2009, falling by only 2 to 3 per cent, compared with 20 to 25 per cent in most EU countries. In addiition, the trend is accelerating. It looks as though exports will be about 15 per higher in volume in the second half of 2010 than in the second half of 2009. In other words, we are now in a full-scale export boom.

The question needs to be asked. Why did our official economic forecasters fail to predict this and does it matter that they failed to predict it? In September 2009, the Department of Finance and the Central Bank were both forecasting that Ireland’s exports would fall by around 2 per cent in 2010. Even by budget day in December 2009, the Stability Programme (link below), published by the Department of Finance, contained the following statement:

“There is likely to be a lag between global recovery and an improved export performance in Ireland, given the deterioration in competitiveness. This suggests that export growth will be a modest 0.4 per cent next year.”

So, even as late as December 2009, the Department of Finance was predicting that exports would only rise by 0.4 per cent in volume in 2010, a year in which global trade was forecast to rise by about 20 times that amount, implying a large fall in market share. Even this was an upward revision from its forecast a few months earlier of a 2 per cent fall. There is a saying in the IT world: ‘garbage-in, garbage-out’. Clearly, their forecast of a miserly 0.4 per cent growth in exports in 2010 was ‘garbage-out’. I’d suggest that greatly exaggerated claims of loss of competitiveness’ was the ‘garbage-in’.

I am not being wise after the event. I posted repeatedly on this site at the time (so much so that a prominent academic economist called me a pollyanna) that these pessimistic forecasts for export growth in 2010 were nonsense. I argued that the supposed loss of competitiveness was greatly exaggerated. I predicted on this site in December 2009 that exports would rise by approximately 8 to 10 per cent in volume in 2010. Even my ‘pollyanna’ forecast now looks like it was too pessimistic. The only prominent media economist that I am aware of, who also argued that the ‘loss of competitiveness’ was being exaggerated by other economists, and who forecast a large increase in exports in 2010, was Ronnie O’Toole. He did so several times on this very site. He has now been triumphantly vindicated. In contrast, in early 2010, McWilliams was repeatedly writing in his media columns that exports were collapsing and that only a withdrawal from the Euro and a massive devaluation of around 30 per cent could save them.

Does any of this matter? Yes, of course it does. Investors read these forecasts and conclude that a Euro exit and massive devaluation are more than probable. The Department of Finance forecast implied a very large fall in Ireland’s market share of exports. McWilliams’ forecast implied a total collapse in Ireland’s market share of exports. In these circumstances, why shouldn’t investors conclude that a Euro exit and massive devaluation are more than probable, and demand an interest rate premium as insurance? Which is exactly what happened.

The Department of Finance and the Central Bank should both apologise for their poor and damaging forecasts, while McWilliams should be held up to ridicule for being the publicity-seeking clown that he is, which I am glad to see appears to be starting to occur on this thread.

This is not a black and white issue. What should a highly indebted country do? It should export capital/save. What should a high unemployment country do? It should consume/not export capital. Unfortunately Ireland is both. In the medium term we will need a huge debt write-off/low interest loan whatever we do. Is there an optimal point in the trade-off between consumption and debt repayments? Also, some commenters might remind themselves that the government have repeatedly accused the population of oversaving and encouraged them to increase spending. Finally, given all the intervention in/spending on our banking sector, it is truly appalling to see that our banks still aren’t fit to lend. Lack of credit will kill business.

“This is on top of exports having held up remarkably well in 2008 and 2009, falling by only 2 to 3 per cent, compared with 20 to 25 per cent in most EU countries.” You’ve answered your own question. For exports/tax avoidance to not only not fall substantially but then rise rapidly is very surprising and would have been unreasonable to predict. Like with the housing bubble, it would be very unwise to assume exports will rise rapidly for ever.

As for your point about McWilliams, the EU Commission,the IMF,the ECB, EU members, the financial markets and a huge number of commentators lost confidence in us due to our government’s gigantic social welfare payments to bank bondholders.

@ grumpy

I agree with you about CAT. I’m more concerned with the exemptions than the actual headline rate.

@Brian Woods II

“A current account surplus is good, end of.”
That’s mecantilism.

@ A few different posters

The balance of payments must balance at zero (apart from statistical discrepancy). Could you please refer to a current account surplus.

Alan and David:

Be careful with the idea that the private sector net saving was sufficient to fund the fiscal deficit. If you follow the maths of sector financial balances, you will realize the private sector cannot net save (spend less than it earns, or save out of income flows less than it spends on tangible investment goods) unless some other sector is willing to deficit spend (spend more than it earns, invest more than it saves). There is an interdependency here. If households and businesses try to save more than they invest, income will decline and their attempts are likely to be thwarted, unless the fiscal balance declines or the trade balance increases.

You are correct to point out if the private sector continues to try to maintain a historically high net saving position (as is often the case after a financial crisis or during a recession, when paying down private debt can be a priority), and fiscal deficits are to be reduced at the same time, the only way that combination can proceed is if the trade balance improves further. Otherwise, income levels will fall and the fiscal deficit reduction will come up short as tax revenues do not meet expectations.

The problem then lies in the transition. Barring an acceleration in global demand, a deep enough depreciatiton of the euro, or a large increase in tradable goods product innovation and labor productivity, Irish export increases will depend on lower Irish costs.

That means lower wages and salaries, which makes servicing the existing private debt load harder, and increases the likely losses banks will face.

These dilemmas still remain poorly recognized in part because the financial balance approach is not widely understood. If they were understood, it might change the trajectory and the orientation of fiscal policy that countries are pursuing.

It is also true if you run a large trade (or current account) surplus, you will have an offsetting capital account deficit. But remember if a country is exporting more than it is importing, it is either increasing its financial claims on foreign countries or reducing its liabilities to them by definition. There is no way around this, unless double entry book keeping is a flawed notion.

The bigger issue is trying to identify what can be done to get domestic companies to reinvest more of their profits in cost reducing or product innovating capital equipment at home. Fiscal consolidation may not get you that result.

I’m afraid the debate was never about Ireland being a great dynamic and viable economy. The issue has always been about how that economy has been chained to defunkt banks.
I am not an economist but it’s the banks, the banks and the banks that will bring us down.
IMF here and German inflation up. It’s bad now and with rising interest rates it will get worse.
Solutions on a postcard please

So basically exports are up on even the bubble years, employment in the export industry is more or less the same as in the bubble years & government revenues are not even close to meet government spending?

Can someone clarify how the increased exports are going to translate into more jobs & more government revenues?

Especially since the employment and government revenues does not seem to depend that much on the value of total exports…..

On a lighter note, Ireland is only mentioned in the comments here not in the strip itself 🙂

KOR’s chum, and my favorite economist PK, compares Ireland with Nevada on his blog today:

“Ireland = Nevada”

PK: “……..Fiscally, Nevada’s retirees can count on Washington to keep paying their Social Security and Medicare, which amounts to a big transfer into the state now that it’s paying much less in federal taxes.”

I’d note that Ireland’s electoral retiree bloc etc can count on Irish politicians tapping an international credit line that everyone says is too expensive, which doesn’t amount to a transfer unless it isn’t paid back.

PK: “Oh, and Nevada is in effect getting a federal bank bailout — not so much directly via the FDIC, although there’s some of that, as via Fannie and Freddie: with less than 1 percent of the US population, Nevada is generating more than 5 percent of the F&F losses — losses that are a problem for taxpayers in general, not specifically in Nevada.”

Again, the only way Ireland is getting such a bailout is if it stops acting pussy with its own gold-plated sectors and then negotiates some write-downs on the equivalent of its F&F losses.

Nevada is also dry and hot.

Where does the BOP surplus reside? If in the “Irish” banks why do the banks have liquidity problems? At what point will the BOP surplus lead to a stabilization in bank liquidity? If not in the “Irish” banks where in the real world is it manifesting itself? Or is the BOP surplus gone from the Irish financial system before it sets foot there?


Please forgive me but I do not know what else to say. It is ridiculous to think that Ireland is exporting more because of its “competitive” advantage when it is solidly based on an unfair corporate tax advantage over the rest of the EU. Why will no one own up to this fact? Ireland is doing the same thing as the Chinese with their undervalued currency. Why not look at the real problem, crony corruption that permeates every living cell of Ireland’s oligarchy? Nothing is going to change until there is a change at the top with people that have at least a minimal respect and sense of equity for all the citizens of Ireland, not just their insider friends who are awash in perks.

I used to think it was an ironic joke when it was said that an Irishman is not content with success unless all his friends are failures. But, after this latest fiasco, I think it may well be a truism.

@ Jesper

Can someone clarify how the increased exports are going to translate into more jobs & more government revenues?

They will not!

Minister Batt O’Keeffe said this week that IDA Ireland aims to create 9,800 direct jobs in 2011.

In the period 2004-09, its supported firms lost an average of 9,000 jobs annually.

Exports increased by 50% in current money terms in 2000/09 with no jobs added.

@ All

I recently came across a stinging rebuke to a more exalted celebrity economist, Joseph Stiglitz from Kenneth Rogoff in a ‘Dear Joe’ open letter when the co-author of ‘This Time is Different’ was chief economist at the IMF:


I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem.

The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, as an academic, you are a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a “beautiful mind.” As a policymaker, however, you were just a bit less impressive.

Hurlers on the ditch beware!

But who would want to be a policymaker when Dr. ‘Doom’ Roubini can pay $5.5m for a 3,700-square-foot loft in New York?

As a counterpoint to the populist effusions of DmcW I would advance this sober and realistic assessment by Donal Donovan (formerly of the IMF) in today’s IT:

I accept Donal may be accused by some of being excessively tender of the reputation of the IMF, but I think the case he makes stands on its own merits.

I also accept that anyone can seize on a piece of text in an op-ed piece of this nature to support their own preferences and hobby-horses, but I believe the key assertions have an objective credibility.

And so to my own hobby-horses: for example, when looking at future growth prospects, Donal, quite rightly in my view, focuses on the ability of ordinary citizens to acquire goods and services – and a corresponding share of growth coming from increases in real private consumption. This, imo, strengthens the argument for removing the deadweight costs being imposed on all citizens, but, more importantly, on the tradable sectors (on whom we are relying for export-driven growth).

Donal is also, imo, realistic about the prospect of bank bond haircuts. The major core EZ politicians will not be disposed to advance radical changes to existing property rights in response to squeals from the smaller peripheral economies comprising such a small proportion of EZ GDP when the mechanisms in place seem to be containing the situation, when their own economic and financial policies rendered them so vulnerable – and, more importantly, when they must be seen to suffer for the errors of their ways and to make their own efforts to resolve the problems by voters in the core EZ economies before any respite will be considered.

But some respite will materialise – the core EZ problems are too serious. We must demonstrate the resolve to tackle the problems that are within our control to address. There are no painless solutions or untapped crocks of gold. And blaming external others – core EZ politicians, bank bond investors who didn’t price risk properly, the ECB, etc – will simply alienate those on whose support we rely – and will rely on even more in the future.

Brian Woods 2
“A current account surplus is good, end of.”
actually Brian current-account surplus is merely a economic metric, neither good nor bad in and of itself. we could in principle run a current-account surplus by exporting everything that wasn’t nailed down, and if we banned imports at same time were then we would have a very large current-account surplus. This would not be good, end of.

@ Paul Hunt

when you said
“There are no painless solutions or untapped crocks of gold. And blaming external others – core EZ politicians, bank bond investors who didn’t price risk properly, the ECB, etc – will simply alienate those on whose support we rely – and will rely on even more in the future.”

I heard

“Don’t blame those who are partially/substantially to blame because we might need to tap them for more debt later”

“Don’t blame those who are partially/substantially to blame because we might need to tap them for more debt later”

Try to square that statement with the thoughts of James Chanos of Kynikos Associates, at a gathering earlier this year attended by the likes of George Soros, Joseph Stiglitz, Elizabeth Warren, Robert Johnson, and more to discuss the ramifications of financial reform – from the Make Markets Be Markets, sponsored by the Roosevelt Institute..

@ BL

Thankfully, I currently earn more than I spend. That’s good. Please do not bully me, Prof, by turning this into a debate about angels dancing on pins. Lenny when questioned a couple of weeks ago about why a certain economist didn’t agree with him retorted that economists are like the theologians of old capable of arguning almost any divine insight.


Fair point, but my focus is on those who would seek to secure popular support to protect the undeservingly privileged and to deflect attention from economic problems that need to be addressed – and are in our power to address – by blaming perfidious foreigners and claiming there are painless solutions, ‘crocks of gold’, etc.

But, I suppose, what I really want to see is a government with a clear popular mandate that is able to speak clearly and honestly to our EU partners, to demonstrate what Ireland is doing to resolve its problems, to spell out the limits to its capability in this regard and to highlight the additional EU-wide measures that are needed it to provide it and other vulnerable EZ economies with some necessary relief.

@ Jopseph Ryan and all

Just to be clear, I am not claiming that a BOP surplus means that all our problems are solved. But it is one we have up on Greece, for example. And I agree with McWilliams’ opening observation that it does mean that our problems are more within our control.

But how he managed to do a complete volte face on this proposition and finish up arguing that a current account surplus is yet another problem of Famine like proportions, is really quite unbelievable even for McWilliams.

I find it difficult to read McWilliams anymore and I used to be a fan. The comparison between the famine and our current minor economic problems are almost offensive. In the famine – our schoolbooks tell us – 1 million died and 1 million emigrated. McWilliams’s national self pity is nauseating.

Even if the comparison with the famine had some proportion it is still invalid. Britain had a colonial relationship with this island. The export of food during the famine did not reduce our capital borrowings since the Ascendancy (largely based in England) still owned the land. The “export of capital” which our current balance of payments surplus makes possible will reduce our borrowings and interest rate costs and improve our credit ratings. We will have entered a virtuous circle.

I find it very ironic that he doesn’t appear to think that the balance of payments surplus on the current account is good news. It was McWilliams himself – to his great credit – that warned of the fragility of the boom a few years ago because of our balance of payments deficit!

Does anyone here want to swap our economic situation with Greece, Portugal or Spain. When I last looked their balance of payments deficit on the current account was greater than 6 per cent?

I just had to laugh at McWilliams observation that the “country is far from bust”. Where does this leave his recommendation that we should renege on our debt?

And apparently we didn’t need EU/IMF funding. If we had reneged on the bank debt – which is, in effect, sovereign debt thanks to the Guarantee which McWilliams supported – we could have happily obtained funding on the international markets!?

@ Brian Woods II

Lenny when questioned a couple of weeks ago about why a certain economist didn’t agree with him retorted that economists are like the theologians of old capable of arguning almost any divine insight.

Lenny probably doesn’t understand why mercantilism is a bad policy either.

@ Rory O’Farrell

We don’t want to stray too far off topic but wasn’t the criticism of mercantilism that if everybody tried to get too much of a good thing (i.e. foreign surpluses) it would lead to trade wars and instability. Lil’ ol’ Ireland at this particular time can’t get too much of a good thing.

Message – per se, a current account surplus is a GOOD thing, but obviously not everybody can be in that happy state.

@ Brian Woods 2
“Thankfully, I currently earn more than I spend. That’s good. Please do not bully me, Prof, by turning this into a debate about angels dancing on pins. ”
I’m glad you’re in surplus, as I. And that is good, when we consider stocks and flows. What would not be good would be if you are I had decided to simply cease spending on anything, including food, as maintenance, or any other form of economic activity. I’m not quite sure how pointing out that a current-account surplus, per se, is neither necessarily good bad or indifferent is dancing on the head of a pin. however, as you have said a number of times, you aren’t an economist… This does make it somewhat unusual that you would spend significant amounts of time and energy hanging out in an economics blog.
As a number of people on this thread have pointed out fetishising a balance of payments surplus is mercantilism. perhaps to be charitable we should recognise that you’re not particularly attached to gold and public don’t believe that the volume of international trade is immutable, and are therefore more akin to a neo-mercantilist approach, similar to that of China. There is a really interesting website at the new economic school- – which I personally find fascinating.

I have to say I also find it refreshing that your monomania has now moved on from my discussions about what is and is not of value in the bank towards some concern about David McWilliams. Williams is an economic commentator, he’s a small business in and of himself, making his living primarily through writing commentating and speaking engagements. He does a pretty good job of this. He would be the first to suggest that should not be confused with detailed economic commentary. As Eureka has pointed out he has set himself up to some extent as a big picture kind of guy. In generally does a pretty good job of this. Does he make some glaring errors? Of course he does. do we need in this country somebody well-trained in technical areas economics able to comment and commentate in a manner which the average man in the street can understand? Absolutely!
Brian seems to want to things which he yet claims to be impossible to achieve; first the Economist be absolutely precise 100% of the time off in their robust occasions and in their analysis as any form of error revealed actual or theoretical immediately obviates all previous present and future analysis, and secondly that there be 100% agreement across the board of thousands of social scientists worldwide as to what should be done with complex social theories. I recall from previous blog comments of his he was an actuary. That must have given you pleasing degree of exactitude, but should never be confused with economics, which is a social inexact imprecise activity. If you’re so concerned with David McWilliams, contact him. I’m sure he would be delighted to have a pint and a chat about your views. of course you could have turned up as Kilkenny and addressed these issues…

A Balance of Payments Surplus is GOOD, especially if you have an accumulated State and private debt from previous years which most economists think is BAD.

@ john Martin

“I just had to laugh at McWilliams observation that the “country is far from bust”. Where does this leave his recommendation that we should renege on our debt?”

Well he is only recommending that we renege on the bank debt but you are right, even that is a bit rich, when he advocated the government guarantee that debt.

He thinks its ok to just throw the guarantee in the bin because we cant afford it.

I agree with him, but its a little cheeky, to say the least, when you cheerled the guarantee!

“Message – per se, a current account surplus is a GOOD thing, but obviously not everybody can be in that happy state.”
Do you think then that international trade is a zero sum game? that the volume of international trade is in fact immutable? would you be in favour of reducing imports through tariffs? Do you believe that we should have national champions which should be subsidised in order to achieve export led growth?

@ Prof Lucey

Ahhh! 4 questions, and what makes me think that these are trying to lull me into a deposit selling moment. I will answer but only if you answer this more on topic question first. Do you agree with opener and with Brendan Walsh that David McWilliams second point is “daft”?

I wonder about peoples (sic) sometimes. Do they really ‘get it’ as far as a modern developed state needs to ‘grow’, else it Regresses. Would the exponential growth of debt have anything to do with this? Would a debt free state be a ‘happy place’? How about if state debt were not permitted? – you lived on your actual income? WHY do we borrow our future income?

Any ideas about the nature of aggregate economic growth and the constraints that are imposed upon it? Few commentators bother to include them in their epistles. Take Donal Donovan (to-day’s IT). In four cols he manages not to mention the mandatory energy needs of a modern economy. Curious. He actually ‘suggests’ that by 2015 we will have regressed (economically, I presume) to 2006! That’s a -9!

With crude energy costs where they are (winter spike and all), aggregate economic activity will at best, flatline. If these energy costs persist into the summer and autumn… its bye-bye! How dependent is our Ag sector on diesel? – (the sort that attracts neither VAT nor exise duty).


@ John Martin

‘Does anyone here want to swap our economic situation with Greece, Portugal or Spain. When I last looked their balance of payments deficit on the current account was greater than 6 per cent?’

No but I will bet that their exports are

a) more reflective of activity in their real economies, and less inflated by covert financial engineering and
b) more reflective of enterprises which have deep linkages to the rest of their domestic economies

Given the state of the banks, the public sector and the unemployment register, I can’t agree that we have entered a virtuous circle. We are not in Dante’s seventh circle, but I suspect 2011 is going to be fairly hellish.

@ Brian Woods II

No, that wasn’t the criticism of mercantilism.

Just think of the Current Account as like the current account in the bank. Its not fundamentally good or bad how big your overdraft is, its what you do with it that counts.

@ Prof Lucey

B_E_B reminds me that I have put you in an awkward position. Anyway it has bought me time to answer your questions:

“Do you think then that international trade is a zero sum game?”

Well yeah. If we are using the same definitions then one man’s current account debit is another woman’s current account credit.

“… that the volume of international trade is in fact immutable?”

Nope. It is a mathematical tautology that X – X = 0, but this tells us nothing about the size of X.

“Would you be in favour of reducing imports through tariffs?”

Nope, because of retaliation.

“Do you believe that we should have national champions which should be subsidised in order to achieve export led growth?”

Ahhh, easy so far but here I spot the trap. I’ll risk a no answer here. There is no point in kidding oneself. Normally it is a good thing to have a job but if one is doing it for no pay obviously that doesn’t hold.

I look forward to receiving my grade in this challenging exam.

Has this become a Brian-only thread? All we need is a guest appearance by BLTD – though he seems to be here in spirit!

@Brian Lucey

“do we need in this country somebody well-trained in technical areas economics able to comment and commentate in a manner which the average man in the street can understand? Absolutely!”

To understand the dangers of this approach without attaching a strong ‘health warning’ go to:

and check out the dangers for yourself by doing the experiment which shows how easy it is to find ‘sense’ in ‘nonsense’.

I’m so confused. None of this makes sense. What’s the big deal (really) about this Balance of payments thing anyway? We don’t even have running water.
This statistic doesn’t change the fact that we have debts we cannot afford to pay and doesn’t change the fact that we can’t invest in our economy.
Take the water problem now. Imagine if we could invest a few billion there instead of into Anglo. With increased efficiencies it would pay for itself in no time.
A country with crumbling infrastructure is a poor country. Doesn’t matter what some statistic says.
And the way DMcW is being vilified is disgusting. Look how Seanie Fitz, and Fingers and Lenny are drifting in the national consciousness and we turn our ire on commentators.
It’s the most lamentable stage in the demise of the country – the descent into a noisy mob.
What hope is there for this country when we enjoy tearing each other to shreds so much?


Re BOP surplus.

I need a little help here. Where does the BOP surplus actually reside?
If it is so large and significant why is it not substantially improving bank liquidity? Is it possible that the BOP surplus is nothing more increasing debtors in multinational company balance sheets?

@ Eureka

I’m so confused. None of this makes sense

It sure doesn’t.

You decry the state of chassis the country is in but you want a big faux happy family à la the Bertie Ahern era where dissent was viewed as anti-patriotic.

Most people indeed kept heads down, traps shut and took the shilling while the going was good.

So it’s a crime almost to question public positions of an individual whose job spec in part is to create public controversy.

McWilliams’ public views on various topics may differ from his private views.

Check out some of W.C. Fields’ quips and you may cheer yourself up!

He was one of the few who called this right though. I don’t agree with everything but whereas Roubini can live off past prescience you have to peddle something extra in a small country. Don’t know the man personally but imagine he has to make a living too!!.
But how come, at this end of year, we’ve all forgotten the letter written to Brian Lenihan re Nama! How come no vitriol is going his way?? What he has done to this country is worth spewing bile for. Not DMcW.
Re this BOF thing – is this real money – as in stuff we can actually spend?

@ Joseph Ryan

The BoP surplus is not a huge deal but better than a deficit IMHO. To answer your questions, last one first, John Fitzgerald replied to a query from me on this blog that MNC surpluses are actually regarded as debit items on current account i.e. MNCs are foreigners in this context.

Now to answer your first question we have to follow the trail and it can go in several directions.

Remember the tale of Seamus, Wolfgang and the Cow. Wolfgang has instructed his German bank to transfer cash to Seamus’ Irish bank. Seamus’ Irish bank will now have a liability to Seamus most likely backed by a deposit in a German bank. It might use that deposit to reduce its German funding. Or (I think) it might cash it in with the Irish Central Bank thus increasing its CB deposits (or reducing its CB support) and increasing CB foreign reserves.

One way or the other Seamus has an increase in domestic funds and the banking system (including the CB) has an increase in foreign assets (or a decrease in foreign liabilities).

What DMcW seems to be suggesting is that Seamus, flush with these foreign earned funds channels them into a foreign investment which would of course reverse the banking entries and mean that the influx of current foreign funds has been matched by an outflow of foreign capital investment. But even if that were the case, it is at worst neutral to the domestic economy.

@Brian Woods 11.

Thank you for your reply. Therefore one could conclude that If the BOP surplus is substantial and continues, it will resolve the liquidity problems of the Irish banks. Any sign of this happening ? Or will Seamus have to tea ohne milch for some time yet?

On the question of balance of payments… A country’s balance of payments (just like a company’s balance sheet) is always zero or “balanced” (debits equal credits). When people say balance of payments surplus or deficit they mean the balance of payments on the current account. If you have a balance of payments surplus on the current account you are in effect exporting capital (or reducing your accumulated borrowings). On the other hand, if you have a balance of payments deficit you are importing capital (or increasing your accumulated borrowings from abroad).

Is it better to have a balance of payments surplus or deficit? A surplus means that you are foregoing consumption, but you are securing future consumption in the form of future interest receipts/dividends or reduced interest payments abroad. A deficit means that you are having your consumption now at the expense of future consumption. This may or may not be sustainable. In the case of the USA the world economy is dependent on US consumption. Therefore she does not find it difficult to obtain credit from the rest of the world. So, very arguably, balance of payments deficits are not a big problem for the US.

But in Ireland we have experienced enormous problems in obtaining credit. Therefore persistent balance of payment deficits on the current account is NOT sustainable. So, the news that we are entering a period of balance of payment surpluses is unambiguously GOOD news.

@ Joseph Ryan

No way is the BoP going to be big enuff to resolve the banks liquidity problems. Actually I omitted to point out another option for Seamus. He could transfer his deposits and not just his foreign earned deposits to a foreign bank. And that is the main problem with Irish banking liquidity today.

There is another point re balance-of-payments surplus and exports growth that has been overlooked, including by myself in my post last night. That is, if exports are growing by 10 per cent year-on-year in 2010, and by up to 15 per cent year-on-year in the second half of 2010, well above the EU15 average, and if the balance-of-payments is in surplus as a result, then clearly the economy is reasonably competitive, and there is no need for further internal devaluation yo the extent previously assumed. That means no necessity for ongoing deflation.

Most of the pessimistic forecasts for nominal GDP growth in the next few years are based on the assumption that Ireland must continue to experience an internal devaluation and deflation for many more years to restore competitiveness. Clearly, the exports growth and balance-of-payments figures indicate that the economy is nowhere near as uncompetitive as has been claimed.

Euro HICP inflation is currently just under 2 per cent and is forecast to be 2 per cent annually for the next few years. It will probably be more as a result of the global food and energy situations. UK HICP inflation is stuck in the range 3 to 4 per cent and shows no sign of falling. Ireland’s HICP inflation is currently close to -1 per cent, almost 3 per cent less than in the Eurozone and 4 to 5 per cent lower than in the UK. Ireland’s HICP inflation rate has been maintaining these gaps with the Eurozone and the UK for over 3 years now. There is no necessity for it to continue forever. Once competitivenees is restored, which it is clearly now very close to being, it is sufficient simply to maintain the same HICP inflation rates as the Eurozone and the UK.

Accordingly, I suggest that appropriate targets for Ireland’s HICP inflation be 0 per cent in 2011, 1 per cent in 2012 and 2 per cent annually from 2013 on, the same as in the Eurozone. This will leave Ireland highly competitive, about 3 per cent more competitive than in 2010 and, allied to even modest real GDP growth rates (much lower than I myself believe will occur), will result in healthy growth in nominal GDP.

@ John Martin

Why do you always explain these things much more eruditely than I?

@ JtO

I have been struggling with the concept that just because you have a BoP surplus does not necessarily mean that you are competitive. We have 13% unemployed. It is possible that with a 10% further internal devaluation we would expand both exports and imprts to a point where we would have both full employment and a BoP balance. In other words, just because you have a BoP surplus/balance does not mean that your exchange rate/price level is correct. I realise I am way above my pay grade here and expect Prof Lucey to pounce on my deposit selling moment.

If the BOP surplus resided in healthy banks would that make any difference in terms of its impact?


Year on year, our export performance is in the bottom third of the EU. You have to go back and compare current exports with 2007 exports to give Ireland the top spot.

Also the Balance of Payments balance is zero. The current account surplus is positive. I don’t see the point in using terms incorrectly, it just causes confusion.


Two observations:

First the Irish economy is one of the most polarised in that it has a largely export oriented portion – some of which is quite literally world class. It is so efficient that it can churn out delta in GDP without adding to employment. In this part of the economy the usual rules of thumb about output gaps, trends and employment which get applied to more mature economies don’t really work. The point about reforming the expensive tendencies of the professions and civil service is to assist the formation of or prevent the demise of more labour intensive activities than the likes of Google, EBay etc. The unemployment rate – including the emigration is therefore unlikely to be brought down in a way that compensates for all those jobs in construction, retail etc quickly.

Second, both the above portion, and more ordinary elements of the exporting industries are going to be influenced by international trade in general.Much of the demand of the last year has been an inventory bounce effect following the seizing up of early 2009, plus some overheating in the BRIC countries resulting from the US exporting its liquidity trap via QE and the dollar becoming a funding currency for carry trades. The outlook is not clear with the Chinese tightening up, republicans in Congress leaning on the Fed and stock markets that look rather like they do when they have gone up as far as they are going to for a while.

@ Prof Lucey

“Not so much daft as wildly overstretched.”

As euphimisms go, that is calling a mate daft.

Wouldn’t say daft – would say desperate.
Still don’t understand this despite the really good explanations (more due to my remedial abilities) but it seems like the only ray of light in a really dismal picture.
Can’t blame the man for latching onto it and making the most of it.

With regard Dmw article I would be grateful if someone could help me understand what exactly he is proposing. I am amaze this has not come up yet on this thread.
Far from being capable of explaining economics to the common man this article and many of his recently seem to be a collection of acertions that do not obviously follow. For example how does having a current account surplus mean we do not need IMF/EU bailout? who is overing to fund us at a reasonable rate other than IMF/EU.
The fact that middle class families are paying back money they borrowed is IMO ‘a good thing’. What is he proposing?….how would he prevent middle class people from paying back what they owe. Some kind of tax on debt repayments that would incourage people and businesses to reduce their repayments to a minimum. Also increased DIRT CGT perhaps??
Given the fact that our total debt is extremely high (north of 700bn, I believe) is it not a fact that overall the entire country is highly leveraged overall. If we discourage deleveraging (through unspecified measures), at what point does David believe the overall debt would become unsustainable?…he as previously indicated our overall debt level was already unsustainable.

I doubt any serious policy maker or analyst would take Dmw seriously anymore, but it is dangerous for such a popular celebrity to imply in the most read newspaper that there is some easy solution to our problems that prevents the need for gov. spending cuts/taxes etc. If he actually spelt our the policy measures he would propose to curtail our surplus, for what purpose, and for what period this could be sustained for then it might spark some useful debate. The article certainly raises many questions but tells us and proposes nothing.

With regard JtO views on export led growth I have to agree entirely with Grumpy, Brian II, and John Martin. Although Pfizer doing well in Ireland is very good news for their existing employees and contributes to our tax revenues, the impact on employment and gov. income is limited. If we see no impact on gov. defecit, or jobs when these companies increase value of exports by circa 20% what level of growth do we need for them to actually make any significant difference to our economic fortunes (40%….80%). It might make our GDP number look at bit better, but that is of little relevance to real people.
Another worry I would have re. export growth is that it may be very volatile. If these companies can increase production so dramatically to meet external demand, what is to stop them decreasing production in a demand slump.

@Prof Lucey,
”however, as you have said a number of times, you aren’t an economist… This does make it somewhat unusual that you would spend significant amounts of time and energy hanging out in an economics blog”

By that logic you should not comment on the decisions of elected representatives such as cowen et al , as you yourself are not an elected representative. As a legal document perhaps you believe only lawyers should be allowed comment on the bank guarantee legislation.
some of use take more than a passing interest in subjects other than our own profession. Sometimes I look at Bendtner miss a sitter and know i could have scored that….
Smells like Ad Hominem elitism to me

@michael hennigan
I agree with almost all your posts on economic issues that I come across.
However, I think you are too pessimistic on the impact on the Irish economy of both exports generally and of FDI generated exports.
Our export sector has had a large, albeit necessary, positive competitiveness shock, ball park 20% for new activity, which is what matters when competing for new business.
We have a large export sector, c 100% of the economy, so that any given % growth in the export sector has a material impact on overall economic growth.
While the extent remains debatable, my view is that our economy has become highly internationalised over the last 20 years and that export activity is more embedded in our economy than is commonly understood.
Of course, a significant proportion of FDI generated export growth leaks out of the domestic economy, in the form of indirect payments to parent companies, but the residual is material and is reflected in growth in GNP, as distinct from GDP.
As JtO points, out export growth is currently running at 10%+ which even allowing for indirect outflows represents a large positive demand impact. This demand impact comes not only from employment but from other impacts, such as rent, purchases of goods and services and tax payments (eg corporation tax).
Current export growth doesn’t have precisely the same form as the growth in the 1990’s as much more comes from services, which are, in my opinion, somewhat more domestic demand
intensive than the 1990’s growth was.
There are 2 reasons why this growth is not immediately noticeable.
The first is that the domestic sectors are still declining vis construction investment and government expenditure especially.
While these sectors may continue to decline they will eventually bottom out.
The second important factor which is sometimes missed is time.
It takes time for growth in a given sector to impact on the overall economy to an extent that is noticeable.
We are not very long out of what appears to be the largest global recession since the 2nd world war, accompanied by the greatest
global financial crisis (ex-Asia) since the 1st World War. This means that exports have only recently started to grow in response to the resumption in the growth of the global economy.
The monetary impact of this growth cumulates over time and this means that the positive impact on demand, on the size of the balance of payments surplus and on the positive impact of the latter on the liquidity position of the banks will only gradually, but cumulatively accrue over time.
The best example of this effect is that it is in only in Q3 10 has our BOP moved into surplus.
It is axiomatic that only a large and extended BOP surplus will have a material impact on the banking systems’ net liquidity position. This is certainly in prospect but it will take a number of years for this effect to begin to materially reverse the liquidity imbalances built up during the bubble years.

Don’t know why David McWilliams takes such a battering. Compared to many experts he is breath of iconoclasm. While many others gallop for the shilling from the public purse (consultancy, public boards, etc.) McWilliams has stood his ground. The country is awash with experts that have never risked a penny. The same cannot be said about McWilliams.

Growth without jobs is BS; even Thatcher grasped that at the end of the 80s. So why are otherwise intelligent people trotting out this tripe?

@The Alchemist
hear hear
It’s not so much that he takes a battering on his views but that he takes a battering on views attributed to him which I have searched his article for until my head hurt without success.
His simple analogy that the country exported food during the famine – while of course millions starved, with the export of money towards paying back debts to foreign banks seems so simple it hardly needs stating – yet we get a mish mash of BOPs and CASs which seem designed to distract from the main issue – we are paying money we didn’t borrow while as a result w are unable to fund ourselves.

The thing that gets me most with the article is that he seems to get the sequence or description of events backways, more than once.

McW says “After all, had the Government not spent in response to the private sector rush to save, GDP would have fallen by close to 20pc!” I’m not sure I’d characterise the end of borrowing-driven construction as a “private sector rush to save”.

Also, while there may – in theory – be enough saving going on in the country to finance the borrowing requirement, I do suspect that people think there are better things to invest in than a govt that’s continuing to spend on the things ours is spending on. Only huge yield or coersion (a la Rory O’s suggestion) could change that.

@willie slattery

“It is axiomatic that only a large and extended BOP surplus will have a material impact on the banking systems’ net liquidity position. This is certainly in prospect but it will take a number of years for this effect to begin to materially reverse the liquidity imbalances built up during the bubble years.”

Er, not unlesss I don’t understand banking. You can get liquidity pronto if you have a bank that depositors and other creditors think will have no problems paying them back. Rabo doesn’t have a liquidity problem, just the ones with “Ire” in the name. A CA surplus does not automatically go to your zombie banks.

@willie slattery


The US recovery appears to be finally gaining traction, which will help and it will take time for the impact of increasing competitiveness to show in the data.

Eurostat reported this month that hourly labour costs in the Eurozone rose by 0.8% in the year up to the third quarter of 2010 – – the lowest increase registered since the start of the series in 2000. Finland’s rate fell 0.7%; the Dutch rate dipped 1.3%; Germany’s rate rose 0.5% and Spain’s rate dropped 0.8%. There was no Irish data.

While Irish unit labour costs have fallen partly because of a jump in pharmaceutical output while job numbers in the sector fell, the cost of doing business is also falling in other countries.

Looking to the medium term, while export growth will result in some jobs growth, it’s hard to see the sector becoming an engine of growth again given the less favourable international backdrop; we have units of all the big US firms in high tech and pharmaceuticals while attracting firms from emerging markets will be a hard sell.

Jobs in the tradeabale sector (Irish +FDI) are at the 1998 level and the number of jobs per new project is low and beyond your own sector, it may well be foreign workers who have the language skills to fill a lot of these roles.

Batt O’Keeffe said this week that nearly half of the new IDA projects this year have been research and development-based. That could be very little or a lot and the kitchen sink is likely to have been thrown in as well. So with the R&D tax credit, the effective rate of tax is below 12.5%.

R&D is broadly defined, includes dubusiously dubbed ‘centres of excellence’ and very little original research is done; last year Applied Materials moved its main R&D functions from Silicon Valley to China where it has manufacturing facilities.

Last month, the Government established the fourth advisory panel since Dec 2008 on its floundering ‘smart economy’ strategy. This month it gave $50m to a US venture capital company, which is opening an office in Dublin and it was termed a ‘coup.’

The pharmaceutical industry is facing many challenges and the FDA approved as many new drugs in 1950 as it did in 2008; pharmaceuticals account for more than 50% of Irish merchandise exports.

The short-term challenge is to create about 200,000 net jobs and it won’t be delivered by university research.

Link to a related article, published on Thursday:

In the absence of new topical posts by the main contributors – not surprising during the holiday season – we seem to be veering off the original track. Probably just as well as we were moving from the initial ‘acknowledge the good sense, while highlighting any nonsense’ approach to largely irrelevant ad hom attacks and pro hom defences.

DmcW is like a hamster on a treadmill; he feels he has to keep generating material to sell newspapers, books or performances. It is inevitable that not all he asserts will stand up to scrutiny; no one has a monopoly on wisdom. Even Homer nodded. But he has performed a public service; and will continue to do so. And to infer from one suspect assertion that all he asserts is invalid is unhelpful and destructive – even if this seems to be quite a common reaction here and elsewhere. It forecloses the space for discourse and limits participation. If everyone who made a public utterance that was found not to hold water and was subsequently subject to such pillory that they were discouraged from engaging in public discourse, it simply creates more space for the shills, trolls, ranters and know-nothings.

But it would be good if he were prepared to make a comment here.


Sorry to be like a broken record, but export performance yoy is not third bottom. You are quoting data selectively, particularly by excluding services. Please go into Eurostat, look for national acounts, get seasonally adjusted volume of exports (goods AND services) and you will see:

Q3 2010 40424.1 versus Q3 2009 35743.6 (+13%) versus euroarea (+11%). Q3 2010 40424.2 versus Q3 2008 37403.3 (+8%) versus euroarea (-3%). This is an outperformance of 11%, or 6% per annum. This is a very strong performance in any ones book.

@ Prof Lucey, Paul Hunt et all

Economics has become a national sport as witness the popularity of this blog, repeated articles in the newspapers and the reputed wild success of Kilkenomics. DMcW played his part in making this transformation and more power to him for being a substantial benefactor. David has gone beyond being dangerous, I doubt whether many CEOs of US MNCs lost much sleep when he suggested grabbing 75Bn from them.

I am not a professional footballer but you should hear me wax about what is the best position for Wayne Rooney to play. I guess I should lighten up. If David comits a gross howler I should equate it to Wayne missing a penalty. Wayne missing a penalty means we feel less inhibited in playing a bit of football ourselves and in the same way if David can get it oh so wrong it encourages amateurs like me into the fray.

Still sticks in the craw how the media and indeed the populace hang on his every word.


Lightening up is probably a good idea. It probably wouldn’t sell many papers, books or performances or add to the glee at Kilkenny if people were told that we need to:
1. revise and adapt the ‘export platform’ model;
2. elect TDs who will reform Dail procedures to exercise restraint over government and hold it properly to account;
3. strip out deadweight costs in public, semi-state and private sheltered sectors that are burdening the domestic economy and the tradable sectors; and
4. wait until German politicians discern that a plurality of their voters reckon that Ireland has suffered enough economic pain and some relief on bank debt might be extended.

Happy New Year

Doing a little Wiki-surfing. It is interesting that Bernanke makes a similar but opposite argument about the US deficit. Popular wisdom has it that the US deficit is a result of rapacious Americans living beyond their means. Bernanke argues that the causation originates on the capital account. It is the Chinese appetite for US dollars that forces there to be an unbalance in the current and capital accounts in equilibrium.

To be charitable to McWilliams his argument is the mirror image of Bernanke’s. It is the Irish peoples’ thirst for foreign investment which is causing the imbalance. Whilst the argument is not quite a deposit selling moment my instinct tells me that it is not valid.

Actually Paul items1-3 were fairly earnestly and extensivly discussed at kilkenny, and item four was alluded to. Bw2 suggests that it want a success, but if course he wasn’t there and the ticket sales of thousands give the lie to that. I’m sir organizing a conference on how the govt have done the right thing on the banks would also draw thousands….it would be a laugh anyhow.

@Brian L,

Thank you. I’m much encouraged. We need to start focusing on the things that need to be done – and can be done however difficult they might seem. An informed electorate is the best starting point and any hint of painless solutions, hidden crocks of gold or blaming foreigners for this mess is simply wrong-headed and self-defeating.

And as to the govt.’s handling of the banks, I’m happy to let the people pass judgement in the near future.

It’s an interisting issue to consider if the three best known economists – Krugman, Stiglitz and Roubini – had ended up on Wall Street rather than academe, would they have behaved any differently to the typical Wall Streeters.

Krugman joined any advisory board to give respectability to the biccaneerong

The iPad is more user friendly than the iPhone!

Anyway, I was referring to Krugman’s role at the Texan energy trader Enron; Stiglitz spends most of his time travelling according to his wife and Roubini has become rich as Americans do when they become celebrities.

@ BL

You said: “Bw2 suggests that it wasnt’ a success, but of course he wasn’t there and the ticket sales of thousands give the lie to that.”

I said: “…and the reputed wild success of Kilkenomics.”

I was not being sarcastic. I used “reputed” since you are correct that I missed the experience.

@Michael Hennigan

There is a tendency to go native. I think PK was rather more outspoken after leaving the Enron gig. There is a saying about having people pissing out rather than pissing in.

Watch out for pissing out type appointments for the odd contributor to this blog after the election.

There is also the problem on Wall St – as in most places – that things spend more time going up than down. That puts credibility pressure on bears who often get kicked out by impatient management.

“Jobs in the tradeabale sector (Irish +FDI) are at the 1998 level and the number of jobs per new project is low and beyond your own sector, it may well be foreign workers who have the language skills to fill a lot of these roles. ”

Certainly feels like that and pretty depressing.

@ Grumpy

if you make 0% in a general -20% bear market, you’ve done brilliantly, but are unlikely to earn the plaudits you should have. If you earn 30% in a general 25% bull market you’ll probably be decently feted all round. In the financial markets, good news is far easier to sell than bad news.

To All.

Personally I am still not convinced about the veracity of the CA BOP surplus figures as quoted or the immediate benefit of a BOP current account surplus, except to say that it is better that a BOP CA deficit.
Having learned that the MNC sector is excluded, the surplus must be generated by the “indigeneous” corporate sector. [Individuals rarely trade as individuals].
That being the case what indigeneous sectors are giving rise to the surplus and where are they placing the surplus.
It seems to me that the Agri sector., eg Kerry group, Glanbia, etc must account for a significant portion of the CA surplus. Do these funds remain in the Irish economy or are they invested worldwide?
If there is logic in excluding the MNC sector, should Irish MNCs also be excluded?
In addition, if MNCs are excluded and we know that they are not labour intensive, why has the CA surplus not generated jobs in the more labour intensive sectors that by definition the surplus comes from?
I would need convincing that the figures are correct and evidence of a more direct link between the sectors generating the surplus and the resultant jobs created.

@ Joseph Ryan

I may be misinterpreting John Fitzgerald on the MNC thing. As I understood him it was not that their activity was excluded it was that any surpluses accruing to an MNC was regarded as a current account deficit i.e. it was regarded as a repatriation even if it was not actually repatriated. MNCs are obviously a big part of export/import activity. I guess that the MNC macro account is as follows:

Exports –
Imports –

= BOP CA surplus
= payments by MNCs to domestic agents and the Irish taxman.

Like you I remain a bit skeptical and have heard it said that our export performance is all a transfer pricing scam, but not if my interpretation of JF’s comments are correct.


That makes more sense. Still a sectoral breakdown of the BOP CA surplus between the ‘two economies’ would help clarify matters for everybody. If one could be certain that the improving BOP CA surplus extended to the non MNC sector it would be cause for much optimism.

@ Ronnie O’Toole

I used national accounts, (P6, so including services) Q3 ’09 to Q3 ’10 y-o-y percentage changes. Data is unavailable for 4 EU countries. I’m basing our position on EU27 rather than EA16. I accept that on a previous thread I only used merchandise rather than services (though merchandise has the advantage of more timely data than the national accounts).

I used current prices (I don’t like using volumes for trade because terms of trade effects aren’t captured). I didn’t use seasonally adjusted data because it is y-o-y. I used millions of Euro rather than national currency.

So compared to Q3 10 to q3 09 we are 7th from bottom 🙁
q3 2010 to q3 08 we are top 🙂 (though Switzerland and Japan did better)
q3 2010 to q3 07 we are 10th place from top.

So our top position when comparing q3 2010 and q3 2008 is due to our not having a major export decline in the first year of the crisis, and then fairly mediocre (but not bad either) export growth in the 2nd year. I think this is fairly respectable. We have grown our exports while other countries merely regained the ground they lost. And we need some good news. However, I think the government is over spinning the improvement, and neglecting some important infrastructural investment we need to sustain export growth. Regarding exports we are doing alright, but some commentators would have us believe we are experiencing an export boom, which I don’t really believe.

21/12/2010 11:51:06

Anglo Irish Bank

Following the statement of the Irish Minister for Finance on 30 September 2010, Anglo Irish Bank will receive a recapitalisation of € 4.946 billion which will cover the capital needs of the bank until 31 December 2010. This is the fourth capital injection for Anglo Irish Bank since the beginning of the financial crisis. It has become necessary because impairments and losses on Anglo Irish Bank’s entire commercial loan book have continued to increase due to the poor quality of the book caused by the risky lending practices in the past and the drop in prices on the commercial property market combined with the ongoing crisis on financial markets.

Anglo Irish Bank will furthermore receive a guarantee covering certain off-balance sheet liabilities (derivatives, clearing transactions and transactional arrangements) that will ensure that Anglo Irish Bank can continue its daily activities as a going concern.

@con o leary
I saw that mentioned in the Keiser Report also – wtf is that all about – seems to be little comment elsewhere.

Also he had Ellen brown on and she referred to the possibility of an alternative to QE which is linked here on her site with an example from North Dakota the only state in the union with its own bank apparently. Sounds a bit like a silver bullet but it would be interesting to hear experts views?

“Restoring Credit with a Publicly-owned Bank: The Model of the Bank of North Dakota

There is another possible solution to this dilemma. Neither states in the U.S. nor those in the eurozone can print their own money, but they CAN own banks, which can create bank credit on their books just as all banks do. Most of our money is now created by banks in the form of bank credit, lent at interest. Governments could advance their own credit and keep the interest. This would represent a huge savings to the people. Interest has been shown to make up about half the cost of everything we buy.”

Happy New Year to all!

@AMcGrath ..Ellen s idea
is certainly worth thinking about.
First things first . The Eu in their press release are
stating that there are ..” off balance sheet liabilities”
in Anglo that is an admission that yet more
of our money money (again an unknown amount ) is need in Anglo.
More importantly, it is an admission of fraud . No passwords
needed to investigate. Send the Gardai fraud squad/CAB around to the
EUs Irish offices to seize the evidence and while their at
it pull in Alan Dukes for questioning to see what he knows
about Anglo,s hidden “off balance sheet liabilities.”

Ireland’s economy is in some strange way similar to the US.
In the US the benefits of its reserve currency recycle multinational and petrodollars back into the economy – Ireland benefits from multinational wage and European transfer payments so therefore both have a excess of paper wealth.
However strange ideological concepts as well as the divorce of currency from money has separated capital growth from wealth accumulation.
Spending money in the domestic economy is only half a solution – the money spent needs to increase capital.
The strange rush to privatise utilities and therefore reduce capital spend to create internal dividends for the wealth holders actually destroys wealth collectively.
The French until recently had a internal sink for their wealth in areas of high capital intensity operations such as their nuclear and rail industries – the push to privatise these industries will however remove this vector for capital and capital growth over time destroying core French wealth.
I think it helps to have capital intensive industries as it removes the option to consume wastefully.
We should embrace capital intensive utility industries and reject the Brussels mantra of corporate vulture accomedation in our state industries
The sad state of our water utilities due to lack of investment is a case in point as conservative Irish fiscal spending has transfered spending elsewhere.(in a fiat system all money must be spent – if not on utilities then on BMWs)
And as for British privatisation of water…………
I am sure people may think this is socialist dogma but it is nothing of the sort – it is plain simple statist republicanism.
The servants of the square mile and other areas have twisted simple capitalism into a strange beast that eats its own tail to fill its belly – how sad for their souls and our wealth.

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