Paul Krugman points to the gap between Icelandic and Irish CDS spreads here.

33 replies on “Credibility”

Why it’s almost as if we had a time-machine and could prevent the rise of the Morlocks…

Krugman can’t be right as I’ve just been reading the IMF Ireland country report which states clearly and in terms that the recovery is beginning and that the fiscal consolidation measures are having a positive effect on confidence.

Dated July 14, 2010.

Ireland and Iceland are like orphans that have been taken in by 2 different foster families. Iceland ended up with a circus crowd. Not very intellectual but people with a lot of cop on.

The Trichets are a very respectable couple who took in Ireland but Mr Trichet has a ferocious temper and he never admits to his wife that she is right when she suggests he should look at the map.

I think some people loose the plot a bit by focusing too much on “credibility” via the pursuit of policies – lack of insolvent bank windups, no losses for seniors, no haircuts to Croke Park, shifting the weight of all sorts of stupidity and excesses onto sovereign bond holders, etc – that people in the markets find “incredible”.

You can currently measure the extent of “incredibleness” quite easily.

In politics it is a truism that if you repeat something often enough it becomes “true”. Politics is not finance.

Krugman is right as usual, but I have a couple of quibbles with this:

Why, it’s almost as if defaulting on debts run up by runaway bankers and letting your currency depreciate works better — even from the point of view of investors — than socializing private-sector losses and grimly sticking with a fixed exchange rate.

Minor quibble: it’s only better for investors because their losses are history. More substantial quibble: Ireland isn’t sticking with a fixed exchange rate. Ireland is stuck in a monetary union. There’s a very big difference, as Krugman well knows. How can we extricate ourselves? The only scenario he has discussed is the Argentina route: to have such a severe run on the banks that they have to close. Then, with their doors closed, the CBI can instruct the printers in Sandyford to churn out some new punts.

I’m sure there is a better way. I can’t see any obstacle to the introduction of a parallel currency, which is used to pay day-to-day costs such as wages. Creditors need not be affected; the introduction of such a currency is not a default. In effect we can switch from being a Eurozone member to being on a Euro standard.

Evidently we are not yet desperate enough to discuss such measures, but we may be in a year or two.

On the general subject of Krugman, I see that he is moving a step closer to Galbraith’s view of the world. Bad policies are not just the consequence of foolish pre-Keynesian ideas; they reflect the excessive influence of a rentier class. If I was younger I think I’d get to work on a biography of Krugman. His gradual radicalisation is interesting to watch. Some of his begrudgers pin the blame on his wife, but George W. Bush and Tim Geithner have probably had more to do with it.

@Kevin D

Story today in the papers that the state broadcaster might reduce pay to some of what are regarded in a country of 4.5m or so as “star broadcasters” (stars almost all of whom would struggle to get much of a gig outside the state). 30% is being talked about. Why not 70%? Some of these are costing the state a million a year. That’s austerity? That’s showing a lead to the lower paid? That’s cutting your cloth according to your means?

Why is the state borrowing the Euros to pay these guys that kind of money?

Not only should the state be paying them in IOUs, they, and people with that kind of excess earnings over what is needed to live in a near bankrupt state should be volunteering to be paid mainly in IOUs.

There is little national solidarit,y and a take what you can get mentality. Krugman may or may not be right but so many of the influential people in Ireland have a direct financial interest in the state obtaining and drawing on a credit line from official funders, that it almost doesn’t matter. The vested interests know which side their bread is buttered.

@ grumpy

I thought RTE paid its galacticos and galacticas out of ad revenue and the TV licence . Where does the state get involved ?

“A warm reception in a cold climate for sovereign debt: Iceland’s first international bond offering since its spectacular economic and banking collapse late in 2008 has been snapped up by investors. The five-year $1 billion deal, yielding just under 5%, is a milestone in rebuilding confidence internationally and follows a turnaround in the economy, forecast to grow 2.25% this year.”

Damn those viking capitalists!

The license fee is a state tax, it is not an RTE tax. RTE receives about 200mn from the state each year. It is projected to have a deficit of 30mn this year.


You can put RTE into receivership with my blessing and spend the license fee on something more worthwhile. Like most people, I’m all in favour off austerity measures which get rid of services I don’t want and cut the pay of people I don’t like. Sadly that won’t be enough to stabilise the debt-income ratio.

@Kevin D

Almost any individual initiative can be dismissed because it will not in itself stabilise debt/gdp.

That is the argument that is used to exclude just about every comparatively small group and Jeep the focus on the lower paid and all those carers. There aren’t enough TDs to mean halving their salaries and turning up bonuses would make the difference. The most senior civil servants are fairly small in number – lets excuse them, and so on.


That is the argument for doing little or nothing about the semi-states in general. How can that be acceptable. How will costs in Ireland come down?

You have to get on with it. You add them up, send messages throughout society and change the mindset.

Currently people are holding out for a default which they imagine will remove the requirement for them to be involved. The ones who can hold out until after the default, cementing their comparative gains in society over those that were first in the queue.

This shows that there is a sucker born every minute.

In the past few months, Iceland’s inflation has started to increase again. The harmonised index has risen by 3.5% in the past 3 months alone (v 0.8% in Ireland). A 5% annual return on the bonds certainly seems a good deal for Iceland, but hardly for those buying the bonds. As I won’t be buying them, it worries me not. Those buying the bonds will very likely get their money, it will just be worth a lot less in real terms than when they bought them (i.e. just like UK bonds). However, I doubt that they are bright enough to notice, so smiles all round.


Note the basic information

“June 10 (Bloomberg) — Iceland returned to international debt markets for the first time since its banking meltdown more than two years ago as investors offered to buy twice the amount the government offered in dollar-denominated bonds.”

Can you explain to the rest of us why the rate of inflation in Iceland should stop international investors buying these – given that you reckon they will not be defaulted on?

@ Grumpy/JtO

the key issue there is that its a USD denominated bond. So US inflation is the key. Now, if they were issuing a GBP-denominated bond at 5yr UK Gilt +320bps, ie 5.6%, you could certainly argue that its a poor return.

Btw, if we issued in EUR on the same terms as Iceland, we’d be issuing 5yr at almost 6%. While its better than what we can do right now, i doubt we’d have been dancing in the streets at the prospect last September.


Very well. I assumed that, like the UK, the bonds would be in their own currency. In that case, the balance of risk is changed and it is not such a good deal for Iceland, but a better deal for the bond-purchasers, than I thought. If the Icelandic currency falls sharply against the dollar, it will cost the Icelanders a lot more than 5% to repay it. And, given their high inflation, that is quite likely.


US inflation of 2.2% in the past 3 months alone. Given how much money they are printing, it is very likely that US inflation will be relatively high for the next few years, and very likely that the dollar will fall v the euro. So, it looks like the REAL return to investors on this bond will be extremely low. I certainly won’t be investing in it. However, as I was mistaken in assuming that it was denominated in Icelandic currency, the return will probably be better than the negative REAL return currently being ‘enjoyed’ by investors in UK bonds.

Talking of the UK, April industrial production figures for Ireland and UK out today:

in Ireland, industrial production UP 4.0% y-o-y in April

in UK, industrial production DOWN 1.2% y-o-y in April

Add in that inflation in the UK is 4.5% v 1.2% in Ireland, do all those who moved their savings to the UK think they are on a winner?

@ Grumpy

I am with you on the need to get the finger out. I just thought the licence and the ads covered RTE’s budget.


“Given how much money they are printing, it is very likely that US inflation will be relatively high for the next few years, and very likely that the dollar will fall v the euro. ”

Paul Krugman will be delighted to hear this.

Personally I have always found predictions about politics a doddle, economics fairly do-able, equities and bonds a bit tricky, but generally currencies – almost impossible.

“Given how much money they are printing, it is very likely that US inflation will be relatively high for the next few years, and very likely that the dollar will fall v the euro. ”
Or you might alternatively say:
“Given that the US is engaged in a soft restructuring of debts through monetary inflation, it is likely that overall US indebtedness will fall in the next few years and that the dollar will rise v the euro as the eurozone continues to squabble about indebtedness resulting in messy unstructured defaults”.

As grumpy says, you just never know. No-one has printed like the japanese and despite Hokusai and Hideyori running the presses, deflation persists.

Mind you, I agree with you on one bit (even if you haven’t actually said it). It is a canard to say that a currency is only as strong as its weakest link. It isn’t. It is as strong as its strongest link – no-one looks at the economy of Alabama when measuring the dollar; they look at California if they look inside at all. Ireland, with 2% of eurozone GDP is a pimple on the arsch of Germany. Even adding Greece and Portugal, the effect is very small. With Spain, it becomes small…

Krugman quoting Talking Heads – it might be a once in a lifetime event, but I like it. If you want to stretch things, Dinosaur Jr’s Freak Scene also has some apt lyrics.

John, please go check the charts which Krugman has been posting. For the past few years, voices have been crying ‘Fire!’ in Noah’s Flood. And they don’t seem to change, no matter what happens.


‘However, dig deeper and it becomes clear the EU figures exclude home loan rates from its inflation calculations—the very item that is a big driver of consumer price pressures in Ireland.

Ireland’s Central Statistics Office figures show that home loan interest costs have climbed by an astonishing 20% in the year to May and by 9% over the last three months alone.

That’s because Irish mortgage banks, recipients of billions of euros of rescue aid from the Irish government, have attempted to stem losses by increasing variable interest rates. Unfortunately, there is worse to come as banks will again also increase their tracker home loan rates as the European Central Bank increases key rates laster this year.

The specter of rising inflation will hover in the coming months, says KBC Bank Ireland Chief Economist Austin Hughes, as home loan rates and energy prices rise further later this year. That will mean even less spending in a depressed domestic economy.’

Maybe you should have gone to ‘Specsavers’ 😉

High inflation in a period of low GDP growth. Many economists thought that this was impossible, but the oil embargo of the 1970s contributed to a staggering increase in oil and food prices, which fueled inflation and hindered economic growth. Stagflation is difficult to control, as focusing on controlling inflation could hurt growth even further, while trying to ease credit to encourage growth could intensify inflation. The term is a portmanteau of stagnation and inflation.
Farlex Financial Dictionary. © 2009 Farlex, Inc. All Rights Reserved

Sound familiar?

On the thread that followed the last Krugman post, “Paul Krugman: When Austerity Fails”, a debate ensued during which I emailed Prof Krugman and got a reply, and then emailed J-C Trichet (as the debate concerned Krugman’s characterisation of Trichet’s views) at the ECB. This week I received a set of links and quotes from the ECB, which are at comment 106 on the link below.

I’ve mentioned this before, and will stop doing it after this, but for completeness fans, it is at least possible to compare and contrast the evidence supplied by the two camps.


“Some of [Krugman’s] begrudgers pin the blame [for his radicalization] on his wife ….”

Take a wild guess at why some of Krugman’s “begrudgers” might blame his wife.

Hint: It has nothing to do with Krugman being henpecked.

@Ordinary Man

Inflation that consists almost entirely of rising interest rates isn’t what most people understand by the word. The high unemployment rate means there’s not going to be a wage-price spiral. It’s certainly not an argument for more increases in interest rates.

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