Fit For Purpose Bailouts

One of the disappointing things about the bailout and associated adjustment programme is that it has done little to lower the perceived probability of an eventual Irish default. I know that many readers believe Ireland is fundamentally insolvent, and so are not overly surprised. At this stage, however, there is growing recognition that the structure of the European bailouts also makes it difficult for countries to regain market access. Key European policy makers have indicated a willingness to revisit the arrangements, though this will have to go beyond the relatively straightforward option of increasing the size of the support funds.

I grapple with the reasons why the current structure of the bailouts is itself an impediment to regaining creditworthiness in a piece for the business section of todays Irish Times (article here).

34 replies on “Fit For Purpose Bailouts”

I think the flaw in the argument stems from the opening sentence,

“IT CAN seem churlish to be too critical of Ireland’s economic rescue.”

There is no rescue of the Irish economy.

It is a rescue of Irish banks’ creditors – European banks – which is taking place. The mechanism is to seize current state assets and to saddle Irish taxpayers, that is its viable businesses and its citizens, with ever-greater debts in order to fund this international bank rescue. And throttling the Irish economy in the process.

@Michael Burke

Isn’t there a rescue of the current public payroll, or have I misunderstood the funding position?


I think most of us agree that losses should have been imposed on unguaranteed senior bondholders. The respective roles of the Government and European policymakers (notably the ECB) in preventing this loss sharing is unknown, at least for now. It is possible that such loss imposition could might have been enough to preserve market access if it had been pursued before the international markets became highly unstable — we probably will never know that for sure.

So was Ireland “rescued”? I believe a scrambled attempt to restructure debts late last year in the absence of the bailout would have had catastrophic effects, including much deeper austerity and a probable complete collapse of the banking system as all deposits fled. So we should be careful in taking what we have now for granted.

Having said that, the point of the piece is that the design of the “rescue” is seriously flawed. In saying this I start from the premise that the shared goal of the rescuers and rescued is to get Ireland back to normal market access, though I am aware that there are other agendas at work as well.

Surely the EFSF has explicitly renounced the priority usually given to official financing? And in the light of this, private creditors would have a very strong case in English law, (which is the designated jurisdiction for all EFSF activity) against any measures designed to give EFSF priority.


The IMF’s priority is de facto rather than de jure, but very few countries have chosen to default on the IMF (see the discussion in the recent Buiter report on this). I would expect the EFSF to have the same de facto priority. I think the problem is endemic to having official creditors. Now clearly many countries have successfully come out of IMF programmes, so I am not saying it is insurmountable. But it is a barrier to market access, especially where the sums involved are large and there are already doubts about solvency.

@ John

The austerity and collapse of the banking system is what should have happened in September 2008.

If it did we would already be starting our recovery.
Admittedly from a lower point but we would have removed so many shackles from our backs.
A bit like Iceland.
And If we go we will not be the only ones.

Even now I would say lets just get on with it.

I know any academic in the handsome employ of of the state has an fiducial interest in maintaining the status quo for as long as possible.
No matter how noble their intentions that fact and desire for self preservation will always be in the back of their minds.

But for the Outsiders as David McWilliams calls them I believe lancing the boil will have a far better middle to long term result.

Its like doing the Ironing.
Its the thought of having to do it that are worst part.

“I know any academic in the handsome employ of of the state has an fiducial interest in maintaining the status quo for as long as possible.
No matter how noble their intentions that fact and desire for self preservation will always be in the back of their minds.”
I think Kelly and Lucey and Kinsella and Whelan and…well, lots of others, have been calling for some change for some time now. Do they have private wealth? Or are they gen-u-winely trying to suggest a way forward? As JmH says “it seems a bit churlish”….


“I would expect the EFSF to have the same de facto priority”

Fairly sure thats not the case, it is junior to IMF loans.

@Dr Bob

I think I pointed out that I had noticed about three economists who had stuck their head above the parapet on this one. They seem very isolated, in terms of sharing this sort of view with the public, to me. They must be almost invisible to the average Joe. Irish leadership has simply failed o this issue. Nobody wants to fart in the lift.

@ Dr. Bob
The economists you mention have in various ways put forward strategies that are not in their own short term interests.
They are to be commended for this.
The fact that they have done so adds weight to their arguments.

That does not mean that they have never at least bore their financial interests in mind or that other economists don’t put a higher weighting on their own self preservation.

It’s not true that the priority of most official assistance (including IMF) is de facto rather than de jure. A key part of any IMF agreement is acceptance that it has priority.
The EFSF specifically said that it did not want that priority because it realised that having it would close off private finance.

The reasons that the markets have reacted lukewarmly is because they are highly sceptical of Ireland’s growth outlook. This, in turn, is largely due to their having swallowed hook, line and sinker the politically-motivated and totally crackpot McWilliams/Kelly theory that all economic growth in Ireland post-1997 was a fraud, an illusion, some sort of Ponzi scheme.

This is Morgan Kelly writing in 2007:

“economic growth in the past decade has been an illusion”

“economic growth since 1997 has been based on building houses for all the people that have got jobs building houses”

Is it any wonder that markets are sceptical about Ireland’s growth outlook when they read this sort of bilge? If there was no real growth between 1997 and now (as McWilliams and Kelly claim), why should they believe that there will be any real growth between now and 2020? That is the nub of the matter.

Ironically, it has taken the recession to show the McWilliams/Kelly claims for the fraudulent nonsense that they are. New house building has totally collapsed since 1997. Hardly any houses are now being built or sold. So, if all the growth post-1997 was an ‘illusion’ and simply the result of ‘building houses for all the people that have got jobs building houses’, as Laurel and Hardy claim, would we not now expect to see GDP/GNI back at its 1997 level? Am I being too northern-logical for the Dublin 4 mindset in asking this question?

But, it is far from that. These are the figures for GDP at constant 2008 prices in various quarters since 1997:

1997 Q1 23,477bn
2007 Q4 47,478bn (pre-recession peak)
2009 Q4 40,705bn (recession bottom)
2010 Q3 41,378bn (latest)

From these I calculate the following changes:

change in real GDP between 1997 Q1 and 2007 Q4: +102.2%
change in real GDP between 2007 Q4 and 2009 Q4: -14.3%
change in real GDP between 2009 Q4 and 2010 Q3: +1.7%
change in real GDP between 1997 Q1 and 2010 Q3: +76.2%

So, real GDP rose by 102.2% between 1997 Q1 and 2007 Q4, the pre-recession peak. Morgan Kelly says this growth was an ‘illusion’ and ‘ based on building houses for all the people that have got jobs building houses’. So, in that case, why did real GDP only fall by 14.3% during the recession between 2007 Q4 and 2009 Q4, during which period new house building and selling totally collapsed, before rising again by 1.7%. What happened to the other 87.9% of the growth between 1997 Q1 and 2007 Q4? Why did it not disappear too?

I have asked this question on numerous occasions on this site and never got an answer, either from David McWilliams, Morgan Kelly, or any of their cult disciples on the site? I will ask it again, although I know I am being utterly ridiculous in hoping for an answer, at least one this side of the election (and then only if the electorate vote in a politically-correct media/academia-approved manner). My question is this:

If, as you repeatedly claim, all economic growth in Ireland post-1997 was an
‘illusion’ and ‘based on building houses for all the people that have got jobs building houses’, then why was real GDP in 2010 Q3 some 76.2% higher than in 1997 Q1 (compared with an EU average of 20%), even though, by 2010 Q3, new house building and selling had totally collapsed? How do you explain the 76.2% rise in real GDP between those two dates?

I can’t make the question any simpler.

If they still don’t answer, people can draw their own conclusions.

John McHale is a brilliant economist and doing brilliant work. I rank him in the top two economists in Ireland (the other one being Ronnie O’Toole). Although not conclusive (too early yet), the December tax returns lean towards supporting the view that he was correct in his relatively optimistic pre- and post-budget analyses of how realistic were the government’s fiscal targets for 2011 and beyond. But, in order to get at the reason why the markets have reacted so lukewarmly to recent developments, I would like to see him pursue head-on the matter of whether or not the economic growth in Ireland post-1997 was largely (not completely, but say about 85-90%) real or an ‘illusion’ and ‘based on building houses for all the people that have got jobs building houses’, as David McWilliams and Morgan Kelly claim. If he can convince the markets that it was largely (say about 85-90%) real, that should go a long way towards persuading them to take a less sceptical view of Ireland’s future growth outlook.

See the discussion on IMF status on the top of page 33 in Buiter et al.

Can you really see a country defaulting on the EFSF?


Might one of the major answers to your question be the massive increase in Private/corporate debt in the same period and associated multiplier effects?

You are right; my statement is too strong here. What I really meant is that both the IMF and EFSF are de facto senior to non-official creditors — or at least that is the way it is perceeived by the markets.

@ John McHale

Whether David can or not, doesn’t matter. The cds market can.

There is talf of making the replacement for ESFS more senior, but it, ESM would still be junior to IMF.

This is from Buiter for example:
“The EFSF is a private entity (a limited liability company incorporated in Luxembourg). It could be turned into a bank, making it an eligible counterparty to the ECB’s operations. Any debt sold by the EFSF to the ECB, or any loans provided by the ECB to the EFSF, could then be guaranteed by the euro area member states. Granting the EFSF (or its successor, the ESM) seniority over all other sovereign creditors other than the IMF would further limit the exposure of the contributing sovereigns to possible ex-post burden sharing should a sovereign default occur after a member state has borrowed from the facility. “


Your point about not getting an answer before a general election leads one to think that you believe the economists you mention are anti FF and will not admit they are wrong until the present government is booted from office.

Are you pro FF?


You are taking comments made too literally.

Generic conversation from 2006:

Enthralled, mesmerised Investor: What do you make of the Irish economy Grumpy?

Grumpy: What economy?

Investor: The Irish one.

Grumpy: There isn’t one.

Investor: I beg your pardon!

Grumpy: There isn’t an Irish economy, just a pyramid scheme.

Irritated Investor: You what?

Exasperated Grumpy: All they are doing is borrowing money to build apartments for the Polish builders to rent while they are in the country to build apartments – to accommodate Polish builders. Its a pyramid scheme.

Median investor response: Very funny, but my property investments are doing me just fine and I’m sticking with them.

None of that was meant to be taken literally. It was exaggeration to attempt the near impossible of getting through to people to consider the risks in the economy. The exact wording you pick from MK’s stuff was almost certainly chosen for the same reason.

Just what favour would even more property investment had done the country at that time?

@Eamonn Moran

Your point about not getting an answer before a general election leads one to think that you believe the economists you mention are anti FF and will not admit they are wrong until the present government is booted from office.

Are you pro FF?

JTO again:

I applaud the fact that you attempted to answer my original question, the first time that anyone has attempted to answer that particular question in my two years on here, although I have asked it many many times.

However, your explanation doesn’t hold up. There may have been some excess borrowing at the peak of the boom, leading to a modest (5% of GDP or so) balance-of-payments deficit. However, that has been eliminated and the balance-of-payments was in surplus by 2010 Q3. In contrast, the US and UK, about which the same could be said of their economies at the height of the boom, still have balance-of-payments deficits, so they still have some more correction of imbalances to achieve.

The bottom line is that real GDP was 76.2% higher in 2010 Q3 than in 1997 Q1, but with all the imbalances that had been apparent at the peak of the boom (high house prices, over-building, balance-of-payments deficit) more or less eliminated. So, with those eliminated, 76.2% is an accurate measure of the real growth in GDP between 1997 Q1 and 2010 Q3, even if the 102.2% growth recorded between 1997 Q1 and 2007 Q4 was marginally unreal.

The key point is that the McWilliams/Kelly line that ALL the growth post-1997 was an ‘illusion’ and simply the result of ‘building houses for all the people that have got jobs building houses’ has now been demonstrated to be false, by virtue of the fact that 85-90% of the growth post-1997 is still there and the economy is growing again, even though new house building and selling has collapsed and the balance-of-payments is in surplus.

Regarding your other two later points, I’ll take then one-by-one.

(a) YES! The vast majority of Dublin 4 media and academia, from which fetid pool the majority of economists in Ireland are drawn, are and always have been ferociously anti-FF. This goes back a long way and this isn’t the correct forum to discuss it. Indeed, Frank Ward put up a thread here back in November that was a brief summary of economic history in Ireland in the 1930s and he made exactly the same point about academic economists in Ireland back then. Plus ca change, plus c’est la meme chose.

(b) Regarding my own views, I would not describe myself as particularily pro-FF. Most northern nationalists do have an instinctive preference for FF over FG, as FF was the only party south of the border that came to the aid of the northern nationalists and, if it wasn’t for FF, Lord Brookeborough or some descendant of his would still be in power north of the border and B-Specials would still be patrolling the streets. We have largely FF to thank for getting rid of all that and for the Good Friday Agreement which has brought a United Ireand within sight, as none of the other parties south of the border showed any interest (although Garret Fitzgerald as Taoiseach did). However, time moves on. And, pending re-unification, I could now equally well live with an FG-led government. In fact, given that FF have little chance of being in the next government, I would like to see an FG overall majority as the best outcome of the next election. However, regarding other parties like the Conor Cruise O’Brien Labour-Stickies Party, I really couldn’t comment on them on a family site like this, as there might well be ladies reading it.


None of that was meant to be taken literally. It was exaggeration to attempt the near impossible of getting through to people to consider the risks in the economy. The exact wording you pick from MK’s stuff was almost certainly chosen for the same reason.

JTO again:

I welcome your admission that most of what Morgan Kelly says is to be taken with a pinch of salt and that it is largely exaggeration. I have been saying the same for two years on here.

@ John McH

“In saying this I start from the premise that the shared goal of the rescuers and rescued is to get Ireland back to normal market access, though I am aware that there are other agendas at work as well”

But the actual flow funds is from Irish taxpayers to Europe’s banks, with debt incurred by the former to finance that. Therefore, the ‘rescuers’ are Irish taxpayers, the ‘rescued’ Europe’s banks.

@Michael Burke

Isn’t there a rescue of the current public payroll, or have I misunderstood the funding position?


You yourself have just transparently exaggerated my comment on your out of context quote from MK above.

Does that mean everything you say is …………?


I’m not gonna get into the historical argument you are pushing but I would like to raise a point I mentioned on another thread (Krugman) that you may not have seen. It regards not just the possibility that we will have growth, which you claim is being ignored, but a calculation of the level of growth that would be required to overcome the current situation.
Reproducing the comment in full below, would love to hear a response:

Krugman’s four scenarios idea is really a bit of a non-sequitur, because he goes on to say that he can’t see how Ireland and Greece can avoid restructuring, which means Toughing it out is out of the question. Win Thin at Creditwritedowns (echoing Satjayit Das at Eurointelligence last week) builds on previous IMF work in making the same case:

“the larger the differential for any country between real interest rates (borrowing costs) and real growth (with the differential defined as r – g), the larger the increase in the primary budget balance (budget ex-interest payments) that is needed just to stabilize the debt/GDP ratio

Markets have fixated on 7% borrowing as some sort of threshold for a country having to go to the EFSF. We would posit that under the IMF concept of r – g, borrowing costs don’t even have to rise that high to help unravel a country’s debt dynamics. Let’s look at IMF growth forecasts for 2011 for the major euro zone countries and compare them to real 10-year borrowing costs to obtain r – g. The differential is largest for Greece at 11.6%. Next is Ireland at 6.6%, then Portugal at 5.5%. Spain comes next at 3.4%, Italy at 2.0%, the Netherlands at 0.5%, and Belgium at 0.4%.

There has been talk that the stronger euro zone countries (read Germany) somehow subsidize the high borrowing costs experienced by the weaker countries. Looking at the (r – g) gap for the periphery, however, it would seem that the subsidies needed to drop r down to g for these countries may simply too great to bear, especially if Spain and Italy are thrown into the mix. And just breaking even here does nothing to reduce the mountain of debt that already exists for these countries. Here, r – g must be negative, and we reiterate our view that without EM-type rates of growth, euro zone countries simply cannot grow their way fast enough out of this debt trap. Other measures that are reportedly being discussed by European policy-makers include expanding the EFSF, allowing it to directly purchase member bonds, and lowering the cost of EFSF aid. None of these are enough to close the r – g gap substantially, in our view. We continue to believe that large-scale debt restructuring with significant haircuts is the only sustainable solution to the euro zone’s current debt woes.”

I’d be interested to hear John McHale and JtO’s explain to me why Thin is wrong and we are actually able to tough it out.

It’s beginning to seem like it’s the Europeans, and not the Americans who, to paraphrase Churchill, will do the right thing only after they have exhausted the alternatives. But then maybe I’m being too optimistic in assuming that sanity will eventually prevail…


Just one small point about the debt sustainability calculations. In the National Recovery Plan, The DoF projects (Annex 3) the average nominal interest rate on outstanding bonds for the next four years as: 4.1% (2011), 4.9% (2012), 5.4% (2013), and 5.7% (2014). They project the GDP deflator-based inflation rate (Annex 5) as over the same period as: 0.75%, 1.0%, 1.25%, and 1.75%.

It is important not to exaggerate the real interest rate that is likely to be faced. I am certainly not saying that Ireland does not face a significant debt sustainability challenge. But I do feel it has been exaggerated, especially by international commentators.

@Mick Costigan

John McHale is an infinitely greater expert than me on the rates of real/nominal GDP growth needed to avoid the debt trap that you speak of. When it comes to that subject, I wouldn’t even mention myself and him in the same breath. If I recall correctly, he posted quite a lot on the matter back in November. His view back then was that quite modest rates of growth were sufficient to stabilise the debt/GDP ratio, certainly much less than the long-term average growth rate in Ireland. I wouldn’t dream of re-doing the calculations that he has done, and I have total confidence in them. I did a quick search and found one relevant comment he posted back then, although I recall that there were many others.

“However, even with nominal growth averaging just 2 percent – less than half of what is assumed in the plan, the debt ratio would stabilise peak at 113 percent of GDP in 2013 with an additional one percent of GDP improvement in primary surplus in 2014 (2.9 percent instead of 1.9 percent). Moreover, if we raise the starting ratio by 10 percent of GDP to allow for larger State-financed bank losses, the debt ratio peaks at 124 percent of GDP in 2013. While one came imagine worse outcomes easily enough, my takeaway is that that strategy is robust to some quite bad news.”

Just for the record, since John McHale posted that relatively optimistic comment back in mid-November, there have been a few developments, which seem to back him up, among them:

(a) Tax Revenue for November came in at 227m higher than predicted by the DoF, and Tax Revenue for December came in at 230m higher than predicted by the DoF, resulting in the budget deficit for 2010 being 11.5-11.6% of GDP rather than the 11.9% being predicted by the DoF when JohnMcHale was posting the above paragraph back in mid-November.

(b) The GDP figures for Q3 were published in mid-December. While these showed just modest real GDP growth (up 0.5% q-o-q), the figures for nominal GDP growth, which JohnMcHale was mainly focusing on in his calculations, were quite good. The Q2 figures were revised up and the Q3 nominal GDP growth rate was 0.8%. The nominal GDP figures since the bottom of the recession in 2009 Q4 are:

2009 Q4: 38,033
2010 Q1: 39,233
2010 Q2: 39,293
2010 Q3: 39,588

change between 2009 Q4 and 2010 Q3: +4.1%

In the paragraph I quoted above, John McHale calculated that annual nominal GDP growth of 2% was sufficient to stabilise the debt/GDP ratio. Yet, in the three quarters between 2010 Q4 and 2011 Q3, nominal GDP rose by 4.1%, which annualises to 5.5%. I realise that you can’t jump to a definite conclusion on the basis of three quarters, but, for what they are worth, they lend support to his relatively optimistic outlook.

Of all the parties involved in the bailout I view the IMF as the most disinterested when making forecasts. Ireland is just one of dozens of countries that they are dealing with and they have no particular reason to change their forecasting methodology for Ireland from that which is used for other countries. They published detailed projections in December, from which I extracted some figures which I posted previously.

Their numbers for interest repayments are lower in the first two years and higher in the last two years compared to those outlined above, and likely reflect the actual post-bailout schedule of repayments rather than the figures in the National Recovery Plan which were pre-bailout.

When converted to Euro amounts, rather than percentages, you can see that this results in an estimate of €11.2bn in 2014 on interest payments. If you add on some more for expenditure on principal repayments to start getting the overall debt level down from 120+% GDP to the EU target of 60% GDP, the amounts per annum for debt servicing roughly correspond to the entire income tax take for the country. It is figures like these that lead many to conclude that this is right on the edge of sustainability, and that while default is not inevitable, it is definitely a significant risk and thus will be taken into serious consideration by potential bond-purchasers when they are deciding whether to take the plunge or not.

Also there seems to be an odd pre-occupation with “international commentators” as if somehow they operate in unison and that this collective view should be treated in a different manner to that of “domestic commentators”. A year ago the government was going on about how ‘international commentators” were applauding all the measures taken. Now it is mostly about how they are uninformed and getting it wrong. There is a wide range of domestic opinion and a wide range of international opinion. The FT and WSJ have had some of the most informative and impartial articles on the subject while the Irish Times/Irish Independent have carried articles that were delusional and/or highly partisan as well as good and insightful ones. Also I’ve seen some pretty good research reports from banks such as Morgan Stanley/Citi etc and some pretty lame ones from Irish banks/brokerages (though I do not in general have access to this work, just some that was intended for or made its way into the public domain). As with many aspects of globalization borders don’t matter that much any more.


You are right that it will be difficult, with a primary surplus of 3 percent of GDP required under a reasonably favourable scenario.

You are also right to call me on the lazy “international commentators” comment. It sometimes seems that some commentators that I respect force Ireland into a neat storyline about the European crisis. But I don’t help things with inappropriate generalisations of my own.


Now that Belgium has appeared as a blip at the edge of the radar screen it might help to diminish the neat storyline of undifferentiated peripheral sinners and virtuous core member states.

I don’t know what happened over Christmas, but now the EU Commission seem to be putting the 3% profit margin on EFSM/EFSF loans back on the table for negotiation. My guess is that eventually this money will be used as a carrot and given back as a rebate to the debtor countries after all the targets for revenue and expenditure adjustments are met. At a minimum it could be used to ease the debt servicing pressure for a while if a country looks about to fall off the edge. There is no reason, other than a desire for retribution, for all the non-bailout EU countries to make a 3% profit on the amount of their guarantees, particularly as a key objective of the exercise in Ireland’s case was to ensure that there would be no default on private debt owed to their banks and given the fact that the EU make a 0% profit on loans given to help non-Eurozone EU states.

The IMF rates won’t be changed, since they will not treat Ireland any differently to any other country, but they are lending in the 3%-4% range anyway, not at 5.7+%. The fiction that IMF loans were lent at 5.7% was only an artificial comparison introduced by the EU Commission to try and make their interest rates look less punitive.

On your GDP to GDP comparisons, while your argument that not “all” growth from 1997 was housing is unarguable in itself, if we take the Kelly/McW argument with a more realistic statement like “far more of the growth than anyone imagines”, where do we come out?

In 1997 there was no state borrowing. In 2009 there was 22 billion, so we could take that off the top, couldn’t we? The activity in the economy that isn’t “real”. If you count GDP then the gap between GDP and GNP is relevant. It’s increased from 8 billion in 97 to 28 billion in 2009, and potentially more in 2010. Microsoft, Google, ebay, all run operations from here whose revenue counts as GDP, but which has smaller GNP impact (far from negligible, but much smaller). Should that all be taken off the top? If you do this, then while there has certainly been real growth from 97 to 2009, it’s a lot less than often felt. Plus, the country is now loaded with debt that it did not have in 1997. The activity represented by the GDP growth was borrowed and now future activity will not add to the wealth of the nation – merely pay back the debt.

On the bailout itself, as a non public sector person, I don’t consider that the bailout helps me at all. It allows the govt to continue to protect its friends and to load debt onto those it doesn’t care about.

@ Hugh Sheehy

+ 1

A large part of the growth is:
* based on excess domestic public and private sector borrowing, and will be hacked away by the deleveraging or default processes in store
* based in the MNC enclave, where disentangling financial from real economic activity is almost impossible

As for the bailout, it kicks the can of state current expenditure down the road, fends off a significant threat to the solvency of big EZ banks, takes pressure off the ECB, and preserves Ireland as a zone for MNC tax arbitrage.
All at a cost, as John rightly infers, of putting Ireland into the category of ‘administered economic zone’. You are right to suspect that it won’t be administered in the most economically efficient, or transparent manner.

The two parts of Ireland may be converging in a way which JtO won’t like. But what the hell. As Joe Lee has been trying to tell us, we can’t start from anywhere except the place we are actually at.

“However it doesnt hold up, there may have been some increased borrowing at the peak of the boom”

John The level of private debt in the country increased dramatically in the period from 1997 to 2008.
For every extra euro of debt that was subsequently spent, it would have shown as growth.
Now unless I am much mistaken the level of Private and corporate debt has not got back to 1997 levels. It has stopped growing but only at the expense of moving some of it to public debt.

You make another large assumption that house prices have collapsed but yet we have still not gone back to 1997 levels of growth.

The prices may have collapsed but the money owed on these houses has not.
What I am basically saying is that it is very hard to make GDP comparisons from one decade to another unless you are willing to allow for lots of other things such as the level of debt and increase in the gap between GDP and GNP (as Hugh Sheehy pointed out) etc. etc. Saying that there is a similar balance of payments in the 2 years doesn’t cover it.

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