Gavin Kostick, Paul Krugman, and Jean Claude Trichet

We have the horrid prospect of European authorties who are either economically retarded or economic hitman – in the grand scheme of things it does not matter really.
I remember reading the FT some months ago when they gave a clear graph of broad money creation withen the Euro.
Goverment debt did not increase much in the last decade until recently when goverments acted to save the shadow banking sectors arse.
Credit money exploded during EMU however.

If this blog could produce another plain as muck graph like this it would be greatly appreciated,as wading through the ECBs site and its autistic nonsense is too much for this Dork.

@Jean-CT

“Some, moreover, said that the Stability and Growth Pact itself was “stupid””

What we actually did was refer to it as the “Stupidity Pact”.

It was based on the idea that no recession in any EZ state would ever or could ever be significant enough to warrant a deficit beyond an arbitrary figure. This was and is stupid – but not as stupid as the willingness of countries likely to have high volatility or “beta” in their gdp, to sign up to the idea.

Well done Gavin.
Krugman’s second link refers to Lords of Finance (subtitled The Bankers who broke the World) and the possibility of a sequel -Lords of Finance: The Next Generation. The observation may be prescient. The Dow closed with it’s longest losing streak since 2002 and a trillion dollars has been wiped out since April. The housing market is dead with values continuing to fall and unemployment rising again. I am wondering if this stage of the Great Recession (year 3) parallels The same period of the Great Depression when serious mistakes were made by Central Bankers.

Off track on current topic. In a commodities cycle now, what are the views of bloggers on gold and especially silver. Would love to hear some views.

Well done indeed Gavin.

Mr. Trichet, all that and not one mention of bank supervision or regulation – what a banker.

@ David Burke

The big margin in gold/silver has already been made between 06- 10/11. If you had been in early you would be almost 100% return.

If you can, punt now looking for 5-10% per annum, more or less depends on how bad you think things are going to be over the next 5 years – as I say it is a punt.

Been selling down to original capital since start of this year (profit taking) and happy to leave the rest in for a year or two – but not buying.

By the way David I am anything but an expert on this – just an ordinary man doing the opposite.

If you are looking for a short term punt – wheat, barley and potatoes for 2.5% which is massive margin in the commodities market. England and half of Europe not going to make target this year for sure.

There are a lot smarter than me out there that’s for sure.

Don’t go with the flow & good luck. 😉

Mr. Trichet all that and not a mention of bank regulation/control – what a banker.

My apologies John.

🙂

PS – do not take that as investment advice as I am but a Dork.

The discussion here on his Iceland-Ireland post prompted Krugman to provide additional evidence of Trichet’s views, a William Black post quoting a 2004 speech given by Trichet in Dublin:

http://neweconomicperspectives.blogspot.com/2011/06/ecb-president-trichet-praised-ireland.html

Thanks for the kind comments. To be fair, I think it was JtO a good while back who alterted me to the value of going directly to the sources of information where such was possible.

As well as the links, Prof Krugman also sent a one-line message, which I posted and was followed up by Keven Donoghue, and, I hope he doesn’t mind, I repost below.

‘Krugman: “There was also an interview with La Stampa, I think, on the ECB site.”

‘It’s still there of course; 14th October 2010. The interviewer’s question (which is of the familiar type, I have something to tell you, he asked) is in boldface:’

“A balanced budget is the objective of the Stability Pact, but some euro area countries have never even come close. And the IMF, while recommending debt consolidation, admits it will be very painful in the early years.

‘”We must take fully into account the confidence channel. When a country moves in the direction of fiscal soundness, this is not only good for growth from a medium and long-term perspective, but it might also be beneficial for growth in the short term. Because it enhances confidence in segments of the economy that had lost some of their confidence, and that is good for consumption, investment and job creation. People would not engage in more consumption, entrepreneurs would not invest actively, and savers would not be forthcoming if fiscal stability was impaired or threatened.”

‘I’m not sure whether Krugman is quite right in saying that nobody bought into the doctrine of expansionary austerity more thoroughly than Trichet. But I’d be surprised if any prominent official in Europe, Japan or America plugged the idea as much as he did.’

Well done Gavin.
This communication from the ECB is much better than anything Mr. B.S. has come up with.
Problem is that it almost looks like an apology for the mess that’s about to come

@ Gavin

‘Deploying sensible enconomic policy is an end in itself, rather than policy that is designed to ’send a message’

Unless economic sovereignty has been ‘ sort of accidentally’ ceded, and all ‘acceptable’ solutions are essentially adminstered ones. We have a partitioned dual economy, with high tech capital intensive enclave. Chemical exports are roaring ahead while chemistry grads are emigrating en masse. That’s the ‘bright spot’ in the economy.

No wonder the government is behaving ‘oddly’. The fog is thickening, the lack of strategic thinking is painful, and the muddling can only get muddlier.

There is only so much room for jaw-jaw, and there is work to be done. DoC has a nose for ‘market realities’. :

‘The ECB will monetize after their clients take the remaining state assets in the weaker members of the euro zone and generally assert the remaining bits of control over their vassal jurisdictions’

The later Pierre Bourdieu was a student of power, in all its respectable and respected guises:

‘All that is said here applies first and foremost to the State, which, like all historical gains linked to the relatively autonomous history of the scholastic fields, is marked by a profound ambiguity. It can be described and treated simultaneously as a relay, no doubt a relatively autonomous one, of economic and political powers which have little interest in universal interests, and as a neutral body which, because it conserves, within its very structure, the trace of previous struggles, the gains of which it records and guarantees, is capable of acting as a kind of umpire, no doubt always somewhat biased, but ultimately less unfavourable to the interests of the dominated, and to what can be called justice, than what is exalted, under the false colours of liberty and liberalism, by the advocates of ‘laissez-faire’, in other words the brutal and tyrannical exercise of economic force’

Pascalian Meditations: Polity press 2000 p127

That was written well before the financialisation of the real economy. Our state, and the EZ project, is going to be tested sorely before this is done. All credit for your efforts nonetheless.

@ paul quigley

Thanks for the reply. I’m painfully aware of the limitations of my grasp on the situation, and comments such as yours and others on the blog, I find very helpful.

You say:

‘That was written well before the financialisation of the real economy.’

When I ended with the get-out-of-jail, ‘All the above assumes a centrist sort of position which really only makes sense to me within a further context’, the international reform of Western economies away from the dominance of finance is part of the context I had in mind. But I wouldn’t want to be posting ever-lengthening posts.

Gavin Kostik is emerging as Ireland’s greatest all-round genius since George Bernard Shaw. Not only a giant in the field of the Arts, but now establishing himself in the field of Economics, which is a rare cross-over. I expect he’ll be managing the Irish rugby squad in his spare time by this time next year.

The poor ECB are being unjustly slated, not just on this site, but in the Irish media generally. They are simply doing what they were set up to do. Which, moreover, is precisely why Ireland broke the link with sterling in 1979, the start of the process which led to Ireland joining the euro a couple of decades later.

One of the primary objectives, possible THE primary objective, of a well-run central bank is to maintain the value of the people’s savings, and to prevent them being eroded away to nothing by high inflation and depreciation of the currency against other currencies. That is based on the observed experience of decades, possibly centuries, where peoples’ confidence in the value of their savings was found to be one of the necessary, although not on its own sufficient, requirements for general economic confidence and resultant economic growth. Unlike the crooked and lying Bank of England, whose jurisdiction my company pension fund (although not my personal savings) has the misfortune to come under, and which is currently being eroded away by high inflation, the ECB sets a high priority on this and has been quite successful in achieving it. Things like balanced budgets should be seen, not just as desirable in themselves, but as means to this end (i.e. maintaining the value of the people’s savings).

If we look at the history of the whole thing, Ireland broke the link with sterling in 1979, the start of the process which led to Ireland joining the Euro a couple of decades later, precisely for this reason.

Up until the late 1970s, the UK pursued a high inflation/devalue-the-currency-at-regular-intervals-to-compensate policy. At the other extreme was Germany, and some of the countries around it, which pursued a low inflation/stable currency policy. France came somewhere in between. The result was recurrent sterling devaluation crises throughout the 1960s and 1970s. Because Ireland’s currency was tied to sterling, Ireland was invariably and inevitably dragged in to these sterling devaluation crises. In 1979, Ireland decided that its economy was strong enough to break free of this vicious circle and so broke the link with sterling. One of the key points to note is that, when Ireland broke the link with sterling in 1979, it wasn’t in order to achieve a devaluationst against sterling. Quite the reverse. It was to stop Ireland’s currency continually being dragged down by the recurrent sterling devaluation crises of the previous two decades.

Unfortunately, it was bad timing. North Sea oil was discovered about this time and came on stream in a big way in the early 1980s. As a result, for the next couple of decades, the UK economy was relatively and artificially strong relative to the other economies of northern Europe. The era of recurrent sterling devaluation crises came temporarily to an end. There was one in 1992, but that was the exception. Overall, from around 1979 until 2007, and in total contrast to the period up to 1979 when it was in continuous and massive decline against the currencies of other northern European currencies, periods of sterling weakness were matched by periods of sterling strength. So, during this period, the reasons for Ireland having broken the link with sterling in 1979 no longer applied as much as they did in 1979 and became somewhat irrelevant.

Roll forward to 2007, and the picture changes again. By this stage, North Sea oil is running out, and the pre-1979 situation of the UK economy performing less well than the other economies of northern Europe is starting to re-emerge. Not only that, but so too is the pre-1979 UK policy of printing money in bucket-loads, allowing inflation to rip and allowing the currency to sink (while all the time lying about it, so as to fool people into lending the UK money at low interest rates). That is precisely why Ireland broke the link with sterling in 1979. It is only now (for the reasons given above) starting to pay off.

Look at the figures since June 2007:

In June 2007, 1 euro = 0.67562 pounds (£) sterling
in May 2011, 1 euro = 0.87788 pounds (£) sterling

change in harmonised price index between June 2007 and May 2011:

Ireland: -1.5% , UK: +15.0%

That is precisely why Ireland broke the link with sterling in 1979 and eventually joined the euro. Since 2007, Ireland has decisively broken free of the traditional and now-returning UK high inflation/devalue-the-currency-at-regular-intervals-to-compensate policy. Regarding the UK, as the figures show, the bulk of its gain in competitiveness, resulting from the sterling devaluation, has been eroded by its much higher inflation. This process is ongoing and even accelerating. Inflation in the UK is forecast to go above 5 per cent in coming months. Before long, the entire UK gain in competitiveness, resulting from the sterling devaluation, will have been eroded. When that occurs, nothing is more certain than that the UK, aided and abetted by the Bank of England, will engineer another large devaluation of sterling (while all the time lying about it, so as to fool people into lending the UK money at low interest rates). This, in turn, will stoke further UK inflation. The pre-1979 vicious circle of high UK inflation/devalue-sterling-at-regular-intervals-to-compensate has well and truly returned, but this time with Ireland no longer being dragged in. All the more so, since the UK sterling devaluation hasn’t worked. It has triggered soaring UK inflation, but no UK export boom. Manufacturing production figures were published yesterday for April: in Ireland, supposedly crippled by the high euro, it was up 4% y-o-y; in the UK, supposedly benefitting from weak sterling, it was down 1.2% y-o-y.

By all known laws of economics, the ECB-driven low inflation/stable currency outlook should lead to an improvement in confidence and growth as compared with the BofE-driven high inflation/depreciating currency outlook.

If we look at the Eurozone as a whole, and compare it with the UK, this is precisely what is happening. Forget what you read in the Daily Torygraph about how wonderfully the UK is performing, as a result of being outside the Eurozone, as compared with the Eurozone itself. For the first time in a generation, Eurozone economic growth is outperforming the UK. Consumer and business confidence in most Eurozone countries is very strong, but very low in the UK. Inflation in the Eurozone is much lower than in the UK. So is the budget deficit. Exports and manufacturing production are growing much faster in the Eurozone than in the UK. Many Eurozone countries are in balance-of-payments surplus, while the UK remains in heavy deficit. For this situation, the ECB deserves lots of credit, while the Bank of England deserves only flak for going along with a policy of printing money in bucket-loads, letting inflation soar and letting the currency sink (while all the time lying about it, so as to fool people into lending the UK money at low interest rates).

Turning to Ireland, we can see that it is mirroring the Eurozone performance in one respect, but not in another. Ireland’s export sector is matching, or even exceeding Eurozone performance. The low inflation is leading to an improvement in competitiveness, which is leading to an export boom, which is pushing the balance-of-payments into surplus. There are new investment, expansion and job announcements in this sector almost daily now (I counted close to 1,000 this week alone). I myself am fortunate to work in this sector (although only partially south of the border), and I am currently run off my feet with work. I simply can’t keep up. However, in total contrast, there has been, co-inciding with this export boom, a massive panic-hysteria-driven flight of capital from Ireland, as people move their savings abroad. This has crippled consumer spending and prolonged the slump in construction.

As to what should be done, the Irish Government and the ECB should stick to their guns. They should adhere to agreed budgetary targets, which, from the exchequer figures up to May, is what indeed is happening. They should be confident that, while the export boom is for real, the capital flight is nothing more than a panic-hysteria-driven bubble. They should make it their absolute priority to burst it, inflicting as heavy losses as possible on those who are behind it.

As I have posted many times, the current large outflow of savings from Ireland to the UK is perverse. It is occurring when, as the figures I gave above show, inflation in Ireland is now averaging 3% to 4% less each year than in the UK. Add in that nominal interest rates are much higher in Ireland than in the UK, and we can see that the REAL return on investing one’s savings in Ireland is currently far higher than investing one’s savings in the UK. In fact, investing one’s savings in the UK is currently bring a very high NEGATIVE REAL return. The fact that the UK government and the Bank of England have been successful in persuading so many mugs and suckers from Ireland to move their savings to the UK, at a time when soaring inflation there means that they are offering a very high NEGATIVE REAL return on those savings, is testimony to their skills, developed over several centuries of empire, in the arts of black propaganda. In many ways, one admires it. I am quite certain that many of the articles in the UK financial press in recent years, focusing on what a safe haven the UK is for people from Ireland to move their savings to, even if high UK inflation and low interest rates there result in those savings being eroded away in real terms to the tune of 4% to 5% annually, are inspired by some black propaganda department in Whitehall. Unfortunately, many people in Ireland have been suckered in this way and are now seeing their savings disappear, but JTO is certainly not one of them. The Irish government and the ECB should move decisely to break the psychology of these unfortunates. They should be aggressive in promulgating the view that those who are moving their savings from Ireland to the UK, while entirely to free to do so if they wish, are doomed to take a massive hit on the transaction. They should adhere to agreed budgetary targets and declare emphatically that Ireland will not default/devalue. But, they should also be far more aggressive in highlighting the fact that Ireland’s inflation rate is now consistently 3% to 4% lower than in the UK, that, along with this, its higher interest rates offer a far higher REAL return than in the UK, that Ireland is moving into balance-of-payments surplus, while the UK remains in deficit. In fact, I would go so far as to suggest the following: the government should erect a large screen on top of the GPO, with graphs in green and red, showing inflation in Ireland and the UK since June 2007, currency movements for Ireland and the UK since June 2007, real interest rates in Ireland and the UK since June 2007, the REAL return on Irish and UK government bonds since June 2007, and the current values of each 1,000 euros deposited in an Irish bank in June 2007 and each 1,000 moved from Ireland to a UK bank in June 2007.

Fortunately, help is at hand, and not before time. The ratings agencies in the West are crooked. They ignore countries avoiding their debts by allowing soaring inflation and devaluing their currencies. There is a new Chinese ratings agency (link below) which takes these factors into account, as they should be. This ratings agency has declared the US in default because it has allowed the dollar to sink. How much more true is that of the UK, which has had since 2007 much higher inflation still, and has allowed its currency to depreciate by 23 per cent versus Ireland’s currency since June 2007. The truth of the matter is that, to date, the only people in Ireland who have been defaulted on are those who have bought UK government bonds since June 2007 or moved their savings from Ireland to UK banks since 2007. Their plight has gone largely unrecognised, either on this site or in the Irish media generally, possibly because they are too stupid themselves to realise that they have been defaulted on. As they say, one should never give a sucker an even break.

http://blogs.wsj.com/marketbeat/2011/06/10/us-has-already-defaulted-says-chinese-rating-agency/?mod=google_news_blog

@Grumpy
A good article in the NYT to day on one of “the people”.
http://www.nytimes.com/2011/06/12/business/12bank.html?pagewanted=1&hpw

@Grumpy

I was watching that last night. Very interesting.
Where did the real squeeze come from in terms of political room? ANd how big a squeeze was it?

Again, I suspect the ECB. And the fact of course that by that stage the only thing many ministers were interested in was getting their the lump-sum cheques. Substantial considerations in every sense of the word.

The national interest was way down the list of priorities for most ministers, with the exception of Lenihan to be fair to him.

@JTO

In fact, I would go so far as to suggest the following: the government should erect a large screen on top of the GPO, with graphs in green and red, showing inflation in Ireland and the UK since June 2007……

Could I suggest a different location for the screens:

A few hundred yards away from the GPO, opposite the Social Welfare Office in Kings Inn Street. To provide something of interest for people queuing outside. You could sell advertising on screen. Christian D’Or, Gucci and a few others may be interested.
You could be on to a real winner with those screens.

They are all lying…from FT Deutchland
“When it comes to the construction of the next bailout for Greece, all the stakeholders are lying through their teeth to such a degree that one hardly knows who one should point the finger at first. The thing that unites them is that none of them want a solution that will really involve private creditors, irrespective of whether you want to call that a default, rollover or debt restructuring.”

“The decision in favor of another rescue package is based more on political will than on a sober analysis of the data. To their shame, the troika did not even try to find out whether the conditions that they had previously set for help have been fulfilled. In theory, an analysis should provide information about whether Greece has any chance of getting back on its feet in the medium term with the help of loans. The fact that the troika has so far avoided carrying out that analysis can only mean one thing: The rescuers do not want to know the answer, because they fear the consequences of an inconvenient outcome.”

I couldn’t help noticing the header where Gavin is assigned the title of “commenter” . The irisheconomy.ie caste system is very endearing. Isn’t Gavin more of a “regular contributor”? Where would the blog be without the little people ?

Good Man Gavin.

It is posts like this which encourage me to read and contribute to this site even though I specialise in European Politics and not Economics.

This also proves something many of us have realised for a long time which is that the site is closely followed in many parts of Europe and world.

Unfortunately this also has a downside as some of us must remain relatively anonymous. What we Irish consider to be”healthy respectful debate” is not always appreciated in other parts of Europe where democracy is still a relatively new and curious concept which is not yet fully ingrained among leaders who are recent converts.

Well done!

@ seafoid

Would ‘frequent flier’ be the right expression?

One of Mr. Stiglitz interesting ideas, a representitive from Workers Unions/groups on the executive board of the ECB.

If you’re wondering how I got the adresses here is 1 source
http://www.europesworld.org/NewEnglish/Home_old/PublicProfile/tabid/690/userid/4091/language/en-US/Default.aspx
However Trichets and contanciaos are just a guess

office.president@ecb.europa.eu, office.vice-president@ecb.europa.eu, office.binismaghi@ecb.europa.eu, office.gonzalez-paramo@ecb.europa.eu, office.stark@ecb.europa.eu, office.praet@ecb.europa.eu

This addresses are for the executive boards offices.

@ JTO

Inflation rates in the UK are irrelevant when considering irish people who have shifted their savings to the UK as they are not spending them in the UK just storing them for safe keeping. At some point they will transfer their funds back (presumably when they need them). The only risk they are taking is on whether the exchange rate on the EUR-GBP will increase further. You suggest the value of the £ will fall further. This is possible, but given that it is currently at historically low levels against the EURO, and given the insecurity surrounding the future of the EURO, it is a risk many feel is worth taking. If the issues surrounding Greece, Spain, and Portugal increase then the value of the EURO will fall and irish people will have made an FX gain. The real concern people have is that the EURO will collapse and the value of their savings will disappear on the new Irish currency, which will sink like a stone.

Here: http://www.ecb.int/press/key/date/2010/html/sp100827.en.html