New Central Bank Quarterly Bulletin Post author By Philip Lane Post date October 4, 2011 The new bulletin is available here. Categories In Uncategorized 33 Comments on New Central Bank Quarterly Bulletin ← Transparency in public energy policy → Iceland´s Recovery—Lessons and Challenges 33 replies on “New Central Bank Quarterly Bulletin” Has the CB ever produced a projection that hasn’t required revision by the next quarter? Is there any point at all to such predictions/guesses? Marshall Auerback and Warren Mosler from New Economic Perspectives on PIIGS and the ECB. http://neweconomicperspectives.blogspot.com/2011/10/core-europe-sitting-pretty-in-their.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomicPerspectivesFromKansasCity+%28Economic+Perspectives+from+Kansas+City%29 Jim Stanford from Globe and Mail. Jim is a very bright boy. Try to overlook the fact he is a union economist. http://www.theglobeandmail.com/news/opinions/opinion/europeans-arent-bailing-out-greece-theyre-bailing-out-banks/article2189592/ One or two of the differences between the 2011 and 2012 figures on page 6 look ‘interesting’ to say the least e.g. the recovery in personal consumer spending, GNP, assumptions on exchange rates. Looking at Table 1 on page 11 there are few points I would made. 1. Capital Formation (Building abd Construction) is forecast to decline by almost 5% from 2011 to 2012. Given that the ‘construction’ industry is on the floor already, this seems pessimistic. This area is also one that responds to government initiatives. I have suggested in the past that all semi-finished estates and commercial semi-finished buildings be given away for free subject to the provision that they be completed to plaan within two years. An initiative of this kind is badly needed. NAMA should be forced to responsibility for its full patch (weeds and all) not just the glossy finished hotels and finished commercial buildings that it preens itself for disposing of. 2. Given the very high imports figure there must be scope for the policy of import substitution. This policy may be old fashioned but it is highly relevant in the context the very high figure for ‘imports’. Imports cannot all be made up 100% of royalties or intercompany charges. 3. Given that consumption is forecast to fall from 2011 to 2012 for both personal (fall 0.8%) and public (fall 3.6%), with building and construction falling by 4.7%, how can any sensible person forecast an increase of employment of 0.1%? It stretches credibility that the exporting sector that is not employment intensive can compensate for such falls. Where do these guys get their numbers and their well paid jobs. Growth of 1% when the euro is imploding, the US is looking at a double dip and even cracks are appearing in China. Meanwhile domestic demand and jobs are being slash hooked by the trokia and we are just about to see the Irish version of junk mortgage mass default. Is that a flying PIIGS I see. where’s John the Optimist? Let the games commence… @Joseph I would disagree somewhat with saving the more isolated estates – first we must save our market towns – then we can think of saving these estates – however I think they are doomed anyway as depreciation has already done much damage. The physical capital formation figures have went from obscenely large to obscenely low. But many lessons can be learned from Scotland. The Sterling-Alloa-Kincard railway was opened to relieve congestion on the Firth of Forth Bridge from Coal carrying trains to the nearby power station. http://www.railway-technology.com/projects/stirlingalloakincard/ The Alloa commuter train station was opened as a secondary consideration as it was a poor neighbourhood in a depressed former industrial town. The station expected forecast was 155,000 passengers ,it now gets 400,000 passengers a year who travel to Sterling and beyond , I suspect Scotrail makes a surprisingly tidy profit from this station. en.wikipedia.org/wiki/Alloa_railway_station But why are such utilities with similar populations and standards of living so much more successful in Scotland ? The people are for the most part not radically more productive…….. its the settlement pattern. This is the real intrinsic fiscal drag over and above the Banks in this country although the banks created this mess also. I would like to see a extra 85 million spent on saving 2 village / housing estate hybrids and a historic market town in a very deep depression then on “saving” 20 + half finished bog estates in the middle of nowhere that if occupied in the future will become catostrophic consumption sinks. Tralee has won some much needed jobs recently – I imagine without a rail connection it would be goosed. And believe me when I tell you Youghal has no more feathers – its been plucked. This is a triage operation – we must first save our towns. @Dork You make a very good point re towns and settlement pattern. I am sure that they are several partly finished estates in the towns to begin with. Towns that will be further destroyed by NAMA refusing to take charge of and take responsibility for its non-performing ‘assets’. Now more than ever we need incentives for town/ inner city development. @Ninap Same could be said about the ECB. Here’s a sample of what J-C Trichet had to say in Luxembourg this afternoon: “Trichet put the onus on governments to act, without dragging the ECB further into the policy response. “Eurobonds and the EFSF and more generally all that is in the hands of governments to handle the situation — I would say it is their responsibility to face up to the worst crisis since World War Two,” he said. “We are the epicenter of this global crisis,” he added. This is a bit rich from the guy who raised interest rates twice this year! Ceterisparibus Says: October 4th, 2011 at 6:36 pm @Grumpy,PR Guy. Shure all is well. A little problem with a few small banks in Europe according to Mickey Noonan the banking guru on RTE news…and on IT site… “Minister for Finance Michael Noonan said: “I think it’s apparent that some European banks will have to be recapitalised but the initiative has to come from their own governments and their own finance ministers,” “I think there are some small banks in Europe certainly that need to be recapitalised. That was clear from the latest round of stress tests, but that’s a matter for the individual governments and for the monetary authorities,” he told reporters as he left the two-day meeting in Luxembourg.” DEXIA and SOC GEN and Maybe BNP….Mickey mouse banks. And we only borrowed 20.66 billion so far this year. That’s after decimating your pension by half a billion or thereabouts. And we are now only borrowing a billion a month. Talk about progress..growth of 1% and now your barrister won’t have to wear a wig so you should get more competitive refresher rates if you end up in the four goldmines. Michael Noonan seems to think his role in the Ez crisis is to be the Comical Ali of the status quo…and that stirring talk will calm those pesky markets. RTE’s lead economic story is ‘Minister welcomes upbeat Central Bank forecast’ … 1% is upbeat ? And a _forecast_ is lead story, when carnage is actually happening ? It would appear that we learnt nothing from our last financial crisis. And as a ‘small open economy’ …the Ez crisis is very much our crisis. In fairness to the Minister he doesn’t appear to believe the CB…But speaking in Luxemburg, Minister Noonan said that Department of Finance would have to make its own projections and this would be crucial to the budget preparations. Mr Noonan said: “I was expecting, with the decline in the economies of our customer countries to which we export, that there would be a more significant mark down. “The Deprtment of Finance will have to form their own independent opinion, through their own forecasting unit, as to where we pitch the estimate for next year. That will be a crucial factor in the preparation of the Budget.”. Per the Examiner @ Ceteris They are bankers after all. Their bulletin just amounts to – take more money off the citizens and don’t worry about it – sure it’ll all be grand. A definite Goldmannesque agenda here. Peter Sutherland probably wrote it for them @Ceterisparibus Mr. Noonan appears to heave learnt that talking down your chances and then handsomely beating (even if you only beat them by being less in the red) them is what markets expect. It is, I think, a good move. Looking at the exchequer returns, they don’t seem too bad? Anyone know what this bit is: “Sale of NPRFC Shareholding in Bank of Ireland” (Other capital receipts) Anyone Who are these guys. the world is on the abyss right now, the euro is finished. Eammon Devalera comes to mind, “our selfs alone” @Joseph Never a fan of NAMA and its mission – “should you choose to accept it…. this apartment complex will self destruct in about 5 years” But they are operating under a quite insane monetory envoirment. The CB wants to raise taxes & cut capital expenditure AGAIN in a falling money supply !!!! You raise taxes & raise the money supply in this envoirment not the above as it wipes out all previous investments. Also are they (Irish CB) really scratching their head about rising imports ?? – I suspect much of this stuff is oil. You don’t destroy productivity to reduce imports!!!!!! – they have got it back to front – although you can do so easily if you wish – but thats caveman economics. France burns more oil then Italy but it is still far more efficient for example – (input – output ratio) The losses in Irish depreciation and lack of capacity usage must be absolutely huge now. If we forget about house depreciation for a second & look at the newly built Midleton to Cork line as a example It has been a great success but is not running to capacity – why ? Because people simply have less money to spend – now if they raised the money supply – spending the new money on extending the line to its terminus a few things would happen. Lets suppose the CB is worried about import inflation as that is the only inflation in the Irish economy now. So it decides to raise taxes on oil & cars – this curbs import consumption – but people may still have money to spend if they don’t consume these items as the money supply is rising due to new capital creation. So they get on the Train………… Also the line is not working to capacity because it has no natural terminus – therefore although the Midleton to Youghal section is not viable on its own – the existing section is not working to its previous old potential capacity as no one gets on in Kent station to reach the old terminus now as it does not exist. I feel as if I am in a Ian Banks novel now – not quite WASP FACTORY like yet I hope – the best we can hope for is THE BRIDGE – a bit of civilisation to keep the always nearby chaos in check. But everybody in power seems to be so self destructive now – things are just not working out rationally. @Hoganmahew re Other capital receipts. This could be the sale by the NPRF of its shares in BOI as part of the sale agreement. “Investors are to initially purchase on an unconditional basis €241 million of the State’s shareholding and have to purchase the remainder of up to €882 million after regulatory approval has been obtained. In all, investors will purchase 4.2 billion ordinary shares.” http://www.irishtimes.com/newspaper/breaking/2011/0725/breaking4.html @Tier One Ratio Experts: I know very little about Tier one ratio but I would have thought that the ratio was got by as follows: Total capital/Total assets. However following a quick look at a Dexia bank presentation I note that the Tier one ratio (approx 12%) is calculated as: Total capital/Weighted Risk assets. However the weighted risk assets seems to be a fraction of total assets! Who does the weighing in these cases? What Avery weighting scale is used? http://www.dexia.com/EN/journalist/financial_results/Documents/20110408_slides_press_2Q_UK.pdf PS – If the CBs assumptions for the EUR/USD in 2012 of 1.43 is incorrect and we go to parity next year we will not need a petrol /car tax hike. We will get a second bigger European oil shock – this is possible as the ECB refuses to confront the core issue of a defective reserve currency. This means that Europe must do all the adjustment as both America blows it on personel over consumption & the pegged Chinese currency blows it on over investment in fixed capital. This is the core reason why Europe is imploding first. Jean Claude it seems is best buddies with Uncle Ben. @David Burke Back from the abyss …Dow ends up 154 points on story in the FT that Euro ministers are doing something (according to CNBC). moved 300 points in last hour. Wow. That was scary. @ Joseph It’s Risk Weighted Assets divided by Capital. Different assets requires different capital requirements (from 0-100%), so total “RWA” is a fraction of total assets. If you had an asset base of Bunds, you’d actually require little or no capital, if all residential mortgages then maybe a small bit, if all commercial lending then quite a bit. Bame the BIS and the national regulators. @ Joseph I suggest you read Chap 2 of this excellent on line volume. Very enlightening about what sort of risks bankers actually take, as opposed to what risks they say they take. And. believe it or not, written by a banker. ‘This rapid expansion of the balance sheet of the banking system was not accompanied by a commensurate increase in its equity base. Over the same 130 year period, the capital ratios of banks in the US and UK fell from around 15-25% at the start of the 20th century to around 5% at its end (Chart 23). In other words, on this metric measures of balance sheet leverage rose from around 4-times equity capital in the early part of the previous century to around 20 times capital at the end. If anything, the pressure to raise leverage increased further moving into this century. Measures of gearing rose sharply between 2000 and 2008 among the major global banks, other than US commercial banks which were subject to a leverage ratio constraint (Chart 24). Once adjustments are made to on- and off-balance sheet assets and capital to give a more comprehensive cross-country picture, levels of gearing are even more striking. Among the major global banks in the world, levels of leverage were on average more than 50 times equity at the peak of the boom (Chart 25). For a given return on assets (RoA), higher leverage mechanically boosts a banks‘ ROE. The decision by many banks to increase leverage appears to have been driven, at least in part, by a desire to maintain Retrun on Equity (ROE) relative to competitors, even as RoA fell. For example, as Chart 26 illustrates, virtually all of the increase in the ROE of the major UK banks during this century appears to have been the result of higher leverage. Banks‘ return on assets – a more precise measure of their productivity – was flat or even falling over this period. http://harr123et.wordpress.com/download-version/ @David Burke Scrap that. Back to the abyss. Moody’s downgrade Italy after the close in NY. All bets off. @Paul Thanks for that – just reading chapter 1 I remember the Modern Mystic (now no longer on Utube) talking about what exactly British banks did in the mid 1960s – to a large extent funding goverment debt with customer deposits , but people laughed on this site when I posted his views because he looked a bit odd despite the fact what he was saying was shockingly convential. Now we get convential Adair Turner essentially starting his piece with that convential fact – that it was real quantifiable leverage back then – the ratio of private loans to a base directly tied to the real organic economy. So you had a proper signal between both credit & money. But Basel formalised the destruction of that system – treating credit deposits as money……… or at least balancing “assets” against credit fluff – the real leverage is now catastrophic. Sorry CONVENTIONAL….. its late and I am a Dyslexic Dork. Besides its far too late to be reading horror stories………. aaaaahhhhhhhhhh Ah Lorenzo listens to Dorks …….!!!!!!!!!!!!!!!!!! http://www.ecb.int/press/key/date/2011/html/sp111003.en ECB: The Triffin dilemma revisited Cometh the hour cometh the hit man. “The quandary under the BW system – THE LACK OF A CREDIABLE ANCHOR for international monetary and financial stability – continues to exist. Key issuers and holders of reserve currencies pursue domestic objectives independently of what would best serve the global system and even their longer-run interest.” But he does not like Bancors …….. hmmm what does he like ? ■”Finally, would not a bancor-based IMS, as Keynes was hoping for in the 1940s and Triffin in the 1960s, be the best response? This type of solution had very few advocates in the 1960s – an attitude that has hardly changed 50 years later. I remain very sceptical about the bancor proposal, and not only because of its doubtful feasibility. Indeed, some have said that a supranational currency would need to be kept strong in order not to depreciate against the other major existing currencies. Any weakening would undermine its attractiveness, and hence its function as a reserve asset. However, if the supply of a supranational currency were to be restricted, it might fail to meet demand and so fall short of its function”. What he is talking about in this humble Dorks opinion is nothing less then a free floating world Gold reserve. Just saying like. If not the euro is toast – the Dollar reserve will eat everything and I mean everything. But he is but a hit man – this could be a rouse …… but how else will they save their creation ? Whats the value of Greece’s 112 tons of Gold at Euro M1 these days ? The New York Times namechecks Ireland as being at the epicentre of the global crisis…with Trichet saying to the EP similar: http://www.nytimes.com/2011/10/05/business/global/europe-finds-slope-ahead-is-growing-ever-steeper.html Yet the government spinghouls and the jingoistic ‘green jersey’ media are claiming ‘upbeat forecasts’ , ‘improved deposits’ are the main story ? The real problem here is the same complacent, ‘ah sure don’t be questioning things’ attitude that got us into the last crisis. Ministers, their advisers and civil servants lacking the competence (and thus confidence) to tackle the status quo. And a media led by the likes of Stephen Collins, who think their job is to act as apologists for what they perceive the establishment to be. Very easy to draw down the six figure salaries….so long as no one upsets the apple cart. Groupthink (Nyquist), how are ya ? @hoganmahew I thought the exchequer numbers for very disappointing. We went from tax revenue being €200m above target to revenue being €160m above target. However, the €450m collected from the pension fund levy wasn’t included within the profile. That is effectively a €0.5bn shortfall in a single month across all tax heads. €70m VAT, €100m Corporation Tax, €140m Excise and €200m Stamps. There are some pluses and minuses within those numbers, some €100m in excise number were delayed but €230m in income taxes through DIRT were brought forward. Overall there are warning signs that there may have been a very significant slow down in the economy over the last few months. is it not worrying that there was falls in the VAT, and excise receipts as these give a better idea of how the normal, ‘real’ economy is getting on. The rise in income tax only means the government is taxing more heavily not that there is growth in wages. @Dreaded_Estate Yeah, you’re right. Seamus Coffey punches the point home: http://economic-incentives.blogspot.com/2011/10/tax-returns-flatter-to-deceive.html So once changes to calculations are included, the tax take is down… so much for unthinking optimism. There is a story on the RTE website which outlines the reaction of finance minister Michael Noonan to the Central Bank’s updated economic forecasts under the headline “Noonan happy with upbeat Central Bank forecast”. http://www.rte.ie/news/2011/1004/economy.html Minister Noonan’s reaction is breathtaking for a number of reasons: 1. the proper measure of Irish economic output from a sovereign perspective, GNP, was revised downwards for both 2011 (from -0.3% to -0.4%) and 2012 (from +1.0% to +0.7%). 2. even if one were to erroneously base one’s outlook on GDP – as the minister seems to do – one should accept that the Central Bank has revised its forecast downwards from 2.9% for 2011/12 (0.8% 2011 + 2.1% 2012) to 2.8% (1.0% 2011 + 1.8% 2012). 3. these revisions represent the culmination of several downward changes to official forecasts. Consider the following official forecasts for GNP growth in the current year. December 2008 DoF +3.5%, December 2009 DoF, +3.0%, December 2010 DoF +1.0%, October 2011 CB -0.4%. The steady downward trajectory of official growth forecasts for 2010 and 2012 are following the same pattern: initial optimism tempered by creeping realism. 4. these revisions represent further evidence that the Irish economy is merely treading water in economic output terms at a time when our fiscal agreement with the Troika relies on substantial growth-driven tax revenue increases (€6 billion) between now and 2014. 5. these revisions do not make any allowance for the impact on global economic conditions of a Greek default or a bursting of the Chinese property bubble. With copper prices down nearly 30% in just two months, the latter seems highly possible while the former looks quite probable. Ireland is in deep trouble. Michael Noonan would be better recognising that fact than seeking refuge from it in ill-founded optimism and blather. Otherwise he risks losing his credibility in a manner similar to the late Brian Lenihan. “3. Given that consumption is forecast to fall from 2011 to 2012 for both personal (fall 0.8%) and public (fall 3.6%), with building and construction falling by 4.7%, how can any sensible person forecast an increase of employment of 0.1%? It stretches credibility that the exporting sector that is not employment intensive can compensate for such falls.” I would have had similar thoughts myself, but we have just seen what I think is the first YoY fall in the Live Register since before the recession began and consumer and public spending figures have been negative this year. If consumer spending falls in 2012 at a less rapid pace than this year while the overall economy growing, then I would not be surprised to see the number of people employed in Ireland stabilise or marginally increase. There is a significant export sector that is benefiting from the flight to safety to anything but the Euro. In fact the flight is largely to US$ denominated assets, the US will soon be in the same predicament as Switzerland. The Finance Ministers and Central Bank Governors of economically stable countries are all busily talking down their currencies. I expect that wage pressures in the private sector are nonexistent and with 14% ? unemployment and 25% youth unemployment new hires are a bargain. Comments are closed.