The Challenge of Debt Reduction during Fiscal Consolidation

The IMF has a useful new paper on the possibility of self-defeating austerity.    Paul Krugman responds here.   The paper shows that fiscal adjustments will bring the debt to GDP ratio down over time relative to a no-adjustment baseline, although the ratio will rise in the short run when the multiplier is greater than one.   For the Irish case, this phenomenon was pointed out in the April 2012 Fiscal Assessment Report from the Irish Fiscal Advisory Council (see Box C, p. 45).   See also posts here and here.    The IMF paper also has an interesting suggestion for setting and monitoring debt targets in cyclically adjusted terms. 

66 thoughts on “The Challenge of Debt Reduction during Fiscal Consolidation”

  1. Krugman has picked an easier target this time. Osborne should clearly have paid more attention to the actions of Bernanke.

    http://www.ft.com/intl/cms/s/0/b586044e-874c-11e2-bde6-00144feabdc0.html#axzz2NAZ5p9rW

    The question raised is whether the ECB under Draghi is playing, and will continue to play, a role equivalent to that of the Fed. Another “IMF document”, as LBS delicately described that on multipliers, is not going to make much difference.

    P.S. Did anyone have the indelicacy to mention “multipliers” during the recent ad limina visit of the head of the IMF?

  2. Krugman resisted the temptation to have an aside about how Olli Rehn will now criticise the IMF for conducting this kind of research.

  3. DOcM,
    The US authorities have operated a policy of loose monetary and loose(ish) fiscal policy. That is why the US economy is on the early stage of an upswing. The Uk is operating with QE ergo loose money and tight fiscal, so the economy is bumping along the bottom.
    Our EZ friends are tightneing fiscal policy and running with tight monetary conditions perhaps to suit a Germany economy that is overheating. That contributes to a depression elsewhere in the EZ. That will not end until the Euro breaks apart.

  4. @ TMD

    Agreed except for your conclusion and the fact that the question of whether the EZ will continue with a policy suited to Germany rather than the rest (i.e. France) is open.

    There is no sign whatsoever of “overheating” as far as I know either in Germany or elsewhere in the EA. (Some of the better-informed experts on this blog can, no doubt, supply the latest inflation figures).

    The euro, like rock and roll, is here to stay.

  5. @ TMc: “That is why the US economy is on the early stage of an upswing. ”

    I don’t think so Tull, the US Labour Participation Rate is allegedly decreasing? If this is correct (needs a few more quarters to confirm/deny) then that means less in taxes and …. Lets just wait until end Q3.

    Now if someone could please show me that multiplier (or any multiplier) which allows me to pay down more debt with less income …. I think some tuition in basic math might be in order here.

  6. @DOCM

    “Another “IMF document”, as LBS delicately described that on multipliers, is not going to make much difference.”

    I find it difficult to believe that you stoop to this level. So EVIDENCE does not matter?; blind pseudo-elitist triumphalist allegiance to a failed ordoliberal and little deutschelander ideology is all?

    IMHO your credibility, if you ever had any, as an impartial commenter is shot. To dismiss science is the road to ………..!

  7. Luc Eyraud and Anke Weber (IMF)

    Abstract: Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output. Although this effect is not longlasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of
    tightening in an effort to get the debt ratio to converge to the official target. We discuss whether these problems could be addressed by setting and monitoring debt targets in cyclically-adjusted terms.

    [Conclusion] .. With multipliers close to 1 in the current environment, fiscal
    consolidation is likely to raise the debt ratio in the short-run in most advanced countries. We provide empirical evidence supporting this hypothesis. The slow response of the debt ratio to fiscal adjustment could be an issue if financial markets focus on its short-term behavior.
    […] Our analysis suggests three main operational conclusions, which are particularly relevant for Europe today. First, underestimating fiscal multipliers may cause unpleasant surprises. […] Second, using the debt ratio as an operational fiscal target presents risks. […] Third, an appropriate design of consolidation packages can minimize adverse loops involving fiscal tightening and short-term debt dynamics.

    @John McHale

    A serious paper. Ta for link. Evidene on early state multipliers in this particular financial crisis is pretty overwhelming (at least for those of us who retain some faith in social scientific research) at this point in time.

  8. Krugman notes that this paper “ends up making a simple but important point.

    Suppose that a government imposes fiscal austerity in a realistic fashion, with spending cuts getting steadily deeper relative to baseline over a period of several years. If the negative impact of these cuts is fairly large — which all the evidence coming in suggests is the case under current liquidity-trap conditions — and if the country starts from a fairly high level of debt — as the austerity countries do — something alarming is likely to happen. Instead of falling, the ratio of debt to GDP is likely to rise for years.

    In part this is because a weaker economy shrinks revenues, offsetting a large part of the direct austerity. What pushes it over the top is the weakening of GDP, which increases the ratio.”

    What is happening to Irish GNP?_ the realistic measure in terms of servicing both genuine and odious financial system debts.

  9. @ All

    FT Markets this morning;

    http://www.ft.com/intl/cms/s/0/99f4def4-880e-11e2-8e3c-00144feabdc0.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct#axzz2NAiZPNcp

    It seems likely that the adaptation that will take place in response to the political pressures that are rising, especially in the UK, will be a shift to placing emphasis on the structural deficit. As it seems that this is exceptionally difficult to measure (based on the debate at the time of the adoption of the fiscal compact), it should allow more flexibility of interpretation i.e. a shift in policy without actually appearing to make it.

  10. I think you have to look at things from the point of view of the system. What is good for the system? What is the point of the system? Who decides?

    One thing that is clear from the crisis is that plutocracy is doing rather well while the people in the middle are being squeezed.

    http://www.ft.com/cms/s/0/db7182de-869b-11e2-ad73-00144feabdc0.html

    “What looks like a recovery, a rally or an increase in consumer confidence may just be the effect of elites passing money among themselves.”

    So perhaps debt reduction isn’t the goal. Maybe diamond sales would be a better metric.

  11. Let me get this straight (please correct any mistakes or misunderstandings). Thanks.

    Po* GDP is a valid metric for Ireland. I know, I know, but it is economics afterall!

    Y + B = C + G + (I – D) + Nx

    [B is borrowing: D is all debt repayments – money being destroyed]

    For 2007: Y = 100. Can someone fill in the other variables to sum to 100.

    For 2012: Y = ?? and so on for the rest of the variables?

    C is down: -15% by all accounts; so if it started at 60 (2007), its now 51 (2012). Which direction has G gone? Up? Same? Down?. I is surely down. Nx, is allegedly up – magically!

    Each of the variables have different values but they contribute in differential proportions to the summed value of Y. Could someone please explain what exactly is meant by these meaningless ‘multipliers’ and how they are allegedly contributing to any increase/decrease in the value of Y. And, they must be clearly identifiable since our economy is, in aggregate, a physical process. Just muttering about ‘multipliers’ is akin to the incantations of the JuJu man.

    For what its worth: Emitted credit is a positive multiplier? Yes? No? Debt repayments are a negative multiplier? Yes? No? Any advances?

    That’s a very straightforward expression for Y. Its simple addition and subtraction. 1st Grade stuff.

    * ‘Po: Beyond Yes and No’: [Edward de Bono]

  12. Getting the multipliers so wrong wouldn’t be accepted in most other disciplines. Imagine Rona O’Gara after the Scotland match saying “The model said a kick at that angle would work”.

  13. There’s a more fundamental challenge to debt reduction – The fact that when a loan is repaid to a bank the money used to do so is canceled out of existence.

    It’s a shame that a lack of money in the economy is so often blamed on collective saving or a reduction in government spending.

  14. The most interesting question, on further perusal of the document, is whether what it recommends could plausibly be fitted within the agreed new rules (bearing in mind that Germany has yet to ratify the fiscal pact).

    Also worthy of note.

    Footnote 26;

    “Targeting the nominal debt ratio is only one of the many reasons for which fiscal policy can be procyclical. For instance, some governments are forced to follow such course of action, because they have lost market access.”

    Also (page 22).

    “Finally, structural reforms can also contribute to breaking adverse loops.
    While their benefits usually take time to materialize, there is evidence that some structural reforms deliver gains already in the short run, and can boost growth relatively quickly (OECD, 2012).”

  15. fyi
    Jean-Claude Juncker Interview: ‘The Demons Haven’t Been Banished’

    In an interview, Luxembourg prime minister and former Euro Group chief Jean-Claude Juncker, 58, urges other EU countries to push ahead with structural reforms, explains why he sees parallels between 2013 and the year preceeding World War I and throws his election support behind Angela Merkel’s re-election campaign.

    http://www.spiegel.de/international/europe/spiegel-interview-with-luxembourg-prime-minister-juncker-a-888021.html

  16. Off topic but I can not wait to see how Stephen Collins spins the new “We have always been at war with West Asia” aspect of Enda’s London speeches.

    RTE: http://www.rte.ie/news/2013/0311/376015-kenny-meeting-with-british-pm-in-london/

    The money paragraph from the speech (link here) is:

    This policy of socializing the costs of private failure was in the first instance the responsibility of the previous Irish Government but the error was compounded when the continuation of this policy became, in effect, a condition of the 2010 bail-out programme required by Brussels and Frankfurt, where there was fear that a bank failure in Ireland would unleash panic in the financial markets across the eurozone.

    Obviously this is a speech to a sympathetic London audience and not in the belly of the Eurobeast but it does seem that the difference between the government’s sane new position on the financial crisis and that of left comes down to thirty six months of hesitation and one fiscal compact.

  17. @DOD

    “‘The Demons Haven’t Been Banished’”

    No, they have not been vanished. Anything to do with Frau Merkel managing ‘Europe’ by reference to the latest Bild opinion poll.

    Good post from El Pais. The ‘dressing room has been lost’. The prawn sandwich brigade are still doing well though.

  18. @ All

    FYI

    http://www.handelsblatt.com/politik/international/portugal-und-irland-koalition-will-bei-hilfsprogramm-tricksen/7907398.html

    Luckily, we have Portugal in our corner. Or, rather, we are in Portugal’s corner.

    As for the rest, the real argument is well summed up in this contribution by the chief economist of HSBC. In three words; productivity, productivity, productivity!

    http://blogs.ft.com/the-a-list/2013/03/11/monetary-stimulus-is-not-enough-to-contain-uks-economic-woes/#axzz2NFfzVr3N

  19. @DOCM

    The Chief Economist of HSBC might try to explain how Western economies are going to beat the Chinese export machine, other than inviting the workers in all Western economies to live on a bowl and half of rice per day, six days per week, Sky sports not included in the benefits package.
    Some of these people should go out into the real world some day.

    Full containers to the West, all going home empty.

    http://online.wsj.com/article/SB10001424127887323628804578347253961214688.html

    @DOD
    Looking at the graph of German polls, it like watching a graph of Kilkenny winning All Ireland’s. Steady as she goes. Same result in September!

  20. While there is little chance that the Europhobe party will win a majority position in the Bundestag. One should never underestimate the lack of good judgement displayed by voters. There is a small probability that Germany will commit economic suicide. This would be all our prayers coming through. A 33% decline in the Euro which would then be composed of France the PIIGS and a few other small countries. Arrivederci, auf wiedersehen, au revoir to austerity.

    I noted the loaded cleavage line reference between Germanic tribes and Latin origin. The Brits know how to shove the shiv in.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9920666/Germanys-anti-euro-party-is-a-nasty-shock-for-Angela-Merkel.html

  21. @Mickey Hickey
    “There is a small probability that Germany will commit economic suicide. This would be all our prayers coming through.”

    Not necessarily, though I take it your remark was somewhat ‘tongue in cheek’.

    But it is a pity that Germany and the EZ institutions have stuck with the same course throughout, all five years now, despite all the evidence of the destruction that it is causing.
    Some questions need to be asked.
    What in fact is the objective of ‘austerity’?
    Ultimately in whose benefit is it?
    How much human destruction is that objective worth?
    Who benefits from that worth and why should those people who are subjected to the deliberate harassment of the policy of ‘austerity’ support it?
    Surely, to use that duplicitous expression we hear from bankers, these victims have ‘no skin in the game’.

    It is crystal clear that employment is not a priority objective of the EZ, despite recent meaningless rhetoric to the contrary, especially in Ireland.

    Juncker wants to compare 2013 to 1913 and well he might, but he fails to identify the underlying policy that is driving events beyond control. That policy is the protection of creditors wealth though hell freezes over.

    An EZ or an EU based on such priorities will crumble very quickly.
    The El Pais article posted by DOD makes the point well.

  22. @Joseph Ryan
    About two years ago an Italian lady economist based in London outlined what ECB/IMF hoped to accomplish. Austerity which used to be known as belt tightening was supposed to lead to a turn around after governments reduced their budget deficits by cutting programs, increasing taxes or both. High unemployment should have led to lower incomes and increased competitiveness. Her major concern was high rates of unemployment leading to unrest before austerity worked its magic. She was right on the money since Greece and Spain are now near the point where civil wars normally occur. Italy is reverting to type which is serial devaluations, the more the merrier. Merkel has a broad streak of opportunism as evidenced by her response to the Fukushima incident.

    It is in everyones interest that we have a large tight trading bloc the EU and a currency that has the heft to withstand speculators the Euro. The Euro has been and still is a success. The Euro can be saved because it is in the best interest of the EZ members to save it. As Von Clausewitz said nations do what is in their best interest and it is not in Germany’s interest to abandon the Euro so as it can become a cork bobbing in the wake of larger economies.

    Germany is not in good condition today, it has high national debt, a razor thin positive margin in export markets, an aging work force, low birth rate. Germans know they are vulnerable and are upset that they are bailing out countries that are wealthier (per capita) and have higher incomes than Germans. They are concerned that the PIIGS + will drag them into poverty.

    We are at that juncture where we must rely on the adage “Hope springs eternal in the human breast.” and the main hope is things will work out because the alternatives are depressing for small countries.

  23. Europe was dealing with a much smaller global market in 1989 than it will be in coming decades.

    Chinese born in 2009 will consume 38 times more than those born in 1960. Indians born in 2009 will consume 13 times more than those born in 1960.

    Some say austerity is not working and academics usually add that Germany should counter any pain.

    Even just on official retirement ages, Germany and France have divergent positions.

    It gets difficult when spending has been boosted by temporary tax windfalls.

    Richard Bruton says an unfunded pension is a property right, which could have interesting implications elsewhere.

    Jim O’Neill, the outgoing head of Goldman Sachs Asset Management, forecasts that German exports to the Brics will double by 2020 and the Eurozone share will dip to 34%.

    He remarked about a recent conference he attended:

    “A monetary union between countries with no growth, rising unemployment and decreasing levels of trade with each other is just not credible. Grillo and his cohorts’ desire to shake up the political status seems quite important to me, and probably more so than any of the vague – and generally odd – economic proposals flying around.

    I repeated a remark I often make that on current trends, by 2020 Germany would rather be in a monetary union with China than with France. Predictably, most of the people present found it an irritating idea and suggested that either the data wasn’t accurate, the trend won’t continue, or – one idea I often hear – that Germany benefits from a weaker Euro which would not be the case with the (stronger) Deutsche Mark still in existence.

    These kinds of answers are partly reflective of the broader European problem: Denial and the lack of desire for change aren’t the sort of things to help bring a better economic future. The world is changing dramatically, and with it patterns of world trade. Concepts created for a more stable post-World War II world need to be adapted to survive.”  

  24. @MH
    Jim O’Neill and others like him do not see what is going on outside of their NY, London, Frankfurt, Tokyo bubble. For over twenty years now Chinese students have been studying science and engineering in universities in the developed world. In Canada, Chinese students make up over one third of the students in prestigious science and engineering institutions. Likewise the Brazilians are sending their brighter students abroad to the same institutions.

    When the prediction is that Germany will continue to make inroads into BRIC markets they assume that the BRIC will not become more competitive. That will turn out to be a fatal mistake based on what has been happening for the past half century. First for Japan, then Taiwan, then Korea who have eaten the developed world’s lunch. Now we have Huawei, Lenovo, Chery (Volvo) who are going through their US competition like a hot knife through butter. The onslaught has barely begun.

    Germans see their manufacturing sector as being in grave danger. They look enviously at the London financial juggernaut and believe that replicating that in Frankfurt would be a safer bet than continued investment in manufacturing. Granted I hear this from Frankfurt development bank economists and lecturers at schools of commerce. Undoubtedly they are biased but they are paid to pick the best bets worldwide.

    Not so long ago France was doing well and Germany was the sick man of Europe. I used to joke about the dissolute French beating the highly responsible Germans at their own game. Then came the drunken Irish having near the highest incomes in Europe. As the late great Pierre Elliot Trudeau once said, things change and fate unfolds as god intended.

    We are living in a time of major changes as the US declines, Europe struggles and the developing world makes inroads into developed world markets.

  25. @Mickey Hickey

    When I was a student at the LSE in the mid seventies communist chinese students were already there. One of them subsequently went on to become China’s foriegn minister.

  26. @ John ‘When I was a student at the LSE’ Corcoran

    Presumably it follows that we may need a good few Irish communist students? A good belt of the dialectic might freshen up all those stale minds …. can you imagine a communist gifting €65 Billion from the lumpen proletariat to the financial system?_didn’t think so.

    Did you hear the one about the ‘savings on the promissory notes’ doing the rounds? As Anto [age 5 yrs] pointed out – “but they still have to pay de bleed1n lot!_are de stupid or wha?

  27. @ MH

    Jim O’Neill is forecasting that despite sluggish growth in the US, Europe and Japan, global GDP will be propelled by emerging economies to an average annual rate of 4.1% from 2011 to 2020. In the previous three decades, that growth rate never exceeded 3.5%.

    While Chinese companies have been acquiring companies in the West in recent years, they have been gaining experience in other developing and emerging economies.

    According to China’s Foreign Minister Yang Jiechi, China’s trade with Asian countries is now more than its trade with the US and Europe.

    Beijing’s trade with its neighbours rose to $1.2 trillion in 2012 – – $120m more than its combined trade with the European Union and the US.

    China is now a middle income country and as with India, there is still a lot of development ahead. For the next decade at least Germany is strongly positioned in capital goods, cars and Germany’s food and drinks sector has raised its export ratio from 17% in 1998 to 29.5% in 2011.

    Germany is the third largest exporting nation for food and drink products on the global market with 6.13% of the market compared with the UK at 2.29% and Malaysia’s 2.11%. The US and the Netherlands are in the lead.

    Germany solar and wind companies have struggled against Chinese rivals.
    Japan and Germany show the lowest propensity by far to take risks and also come in at the lower end of the fertility scale, together with Russia.

    Germany reported in August that 13.1m minor children (up to 14 years of age) were living in German households in 2010. Ten years earlier – – in 2000 – – this number was 2.1m higher, amounting to 15.2m. So the plunge was 14%.

    Only 6% have direct shareholdings, compared with a ratio of roughly 25% in the English-speaking countries; only about a third of Germans own a credit card. About the same amount engage in online banking. In Norway, the corresponding rate is 83%; 77% in the Netherlands carry out transactions online. Almost 70% of Germans still have a conventional savings book with next to no interest paid.

    They are good at running international companies while the record of the Japanese is poor. In 2009 Japan had the lowest score of any of the International Monetary Fund’s advanced economies on the Test of English as a Foreign Language, administered to foreign students who want to study in the United States. It had the second-lowest score among Asian nations, outperforming only Laos.

    English is not easy for Japanese but the Koreans with a similar language manage it.

    Europe and Japan share one problem — most of their big companies are very old and are in old sectors.

    Only 2 of the top 100 Swedish companies were founded after 1970.

  28. DOD,
    The Chinese bailed out their banks in 2005 prior to floating them. The rumour is that they will do it again to clean up after the post 2009 stimulus.

  29. @ All

    FYI

    http://blogs.ft.com/brusselsblog/2013/03/when-economists-attack-krugman-vs-rehn-part-3/

    The draft wording for the conclusions of the European Council that the FT has seen seems innocuous enough.

    “There should be an appropriate mix of expenditure and revenue measures, including short-term targeted measures to boost growth and jobs, particularly for the young, and prioritising growth-friendly investment. In this connection, the European Council recalls that while fully respecting [EU debt and deficit rules], the possibilities offered by the EU’s existing fiscal framework to balance productive public investment needs with fiscal discipline objectives can be exploited in the preventive arm of the [rules].”

    This can be contrasted with the views of the HSBC economist linked to above.

    “he alternatives [to nominal GDP targeting] fall into the trap of offering unwarranted precision in an uncertain world: it is surely better to spell out what the central bank can reasonably achieve rather than hinting at potentially spurious trade-offs. And, to the extent that the ultimate split between growth and inflation would no longer be the Bank’s responsibility, it would serve to emphasise that the UK’s economic problems relate not only to a lack of demand but also to persistent productivity shortfalls which suggest that monetary stimulus on its own – even in the absence of Kryptonite – will not be enough to overcome our economic woes.”

    One would assume that even the UK can sign up to the proposed text, even if it has opted out of the fiscal pact.

    When events fail to bear out plans, the sensible thing is, rather obviously, to adapt the plans in question.

    @ MH

    What your data reveals is that Germany is a remarkably conservative country and reluctant to take on “newfangled ideas”. There is little point, however, in asking Germany to accept things which (i) it is under no obligation to do and (ii) probably would not work in any case e.g. a budgetary stimulus or a further reduction in the key interest rate by the ECB. What it can legitimately be asked to do is conduct an economic policy which avoids skewing its economy towards exports to the detriment of other participants in EMU. The new macro-economic imbalances procedure allows for the necessary debate but there is continued beating about the bush with regard the negative impact of excessive current account surpluses. This is unlikely to change before the German elections.

  30. @Fiat for austerity doom fans,this is rather well written.The New Yorker is offering 30 day free trial-the article is unfortunately behind pay wall,for those not inclined to endure the hassle of signing up here is an extract,it’s also widely quoted in second link.

    “Explains its roots in the structure of the European Union and the euro zone. Describes the political situation in Spain, and a political protest in Madrid. The circumstances in Spain are grim: unemployment still rising, young people fleeing, loans failing, banks folding, hospitals and schools closing, and corruption scandals metastasizing.”
    http://www.newyorker.com/reporting/2013/02/25/130225fa_fact_paumgarten

    The author here references Nick’s piece….crash bang…it’s all over in China.
    “So, how many empty apartments are there in China? It’s impossible to know for sure, since, should such information even be accurately collectible, no official in his or her right mind would ever make it public. Still, the media seems to be running with 64.5 million empty apartments in China, based on electric meters that read zero.”
    http://www.vancouverobserver.com/city/realestate/bursting-real-estate-bubbles-china-spainvancouver

  31. You can witter on about Chindia, Asia and the BRICs all you like, but 2015 will not be 1945, and there will be no three decade ‘boom’ – a bust is more probable. The world simply lacks the necessary energy and raw materials for a ‘boom’ by 3 billion plus folk. We’ll get perhaps a decade more. After that … ??

    @ Fiatluxjnr: “How much human destruction is that objective worth?”

    As much as the survival of the state (or any state) mandates.

  32. @Tull

    The Chinese have a Central Bank. We have the ECB (whose mandate denies it key central bank tools)!

    I hear you are reading Hegel?

  33. fyi
    China – the World’s Emerging Financial Superpower

    The US magazine Worth published a report with its analysis of who were the 100 most powerful people in global finance. Four were from China – Shang Fulin, Chair of China Banking Regulatory Commission; Zhou Xiaochuan, Governor of the People’s Bank of China; Lou Jiwei, Chair and CEO of China Investment Corporation and Jiang Jianqing, Chair of the Industrial and Commercial Bank of China (ICBC). They were respectively ranked 14th, 15th, 27th and 31st.

    That only four of China’s top financial figures were included in the list in fact showed how much understanding of the power of China’s financial and banking system still lags behind its reality. There are exceptions – for example Bloomberg journalists Henry Sanderson and Michael Forsythe in their recent book China’s Superbank simply stated that Chen Yuan, chair of China Development Bank, was ‘the world’s most powerful banker.’ But in banking it would seem Deng Xiaoping’s famous advice that China should ‘hide brilliance, cherish obscurity’ is alive and well.

    This is a serious error, as will rapidly become apparent. To grasp the underlying dynamic of the global financial industry it should be grasped that it is a mistake to understand the strength of China’s economy by statistics such as that China produces as much steel as the next 38 countries combined, more cement than the rest of the world put together, that it is the world’s largest market for TVs, refrigerators, mobile phones, cars, or that it has more than twice as many internet users as the US. These figures are impressive but far from illustrating the real core of China’s economic power. The real center of China’s economic strength, which determines both its domestic and global expansion, is unparalleled financial strength.

    http://www.irishleftreview.org/2013/03/12/china-worlds-emerging-financial-superpower-2/

  34. GDP fell €23.6bn after austerity was implemented, from end of 2008 to end 2011 (I doubt 2012 will change matters greatly).

    This was after fiscal tightenign of €14.6bn. This is a multiplier of 1.6.

    If supporters of austerity, or even those who argue it is a necessary evil, wish to claim that negative trends, such as in housebuilding, were independent of austerity, they also need to argue why positive ones, in terms of net exports, were related to it.

    Otherwise, it looks like austerity damaged the economy, and on all forecasts will have done so by for at least 8-10 years after it began.

  35. DOD,
    Indeed they do and we do not. However, that can change and I think it will. Either the ECB silences the hawks or the EZ will split. I think Draghi gets it as does Frau M but JW does not.
    It is a bit like the journey your favourite party is travelling. It is hard to give up doing bad stuff & you still get the odd lapse.

  36. @ All

    The further away the problem, the more intense the interest!

    Hibernia Inc. has to get its own irons out of the fire. It is for others to worry about theirs.

    A matter of immediate concern in this context is the pressure being put on Cyprus to raise its corporation tax rate.

    Someone might also care to volunteer an answer to the question posed by Rehn. Where is the money for a stimulus to come from?

    Regard might also be had to his dictum “pacta sunt servanda”. Nobody forced Ireland to adopt the euro. The rules were as they were at the time of adoption. They cannot be rewritten. The rules with regard to direct taxation are a case in point.

    According to the most recent opinion polls, 75% of those in Italy who support Grillo also support Italy retaining the euro. No one, even if one is Italian, can have his cake and eat it.

  37. @DO’D: China is a deeply corrupt, mercantilist state and it will not ‘rule’ anything until the Chinese politicians get their own house in order.

    If you want to be a financial power you must first be both a leading military power and commercial power which enables you to concentrate the ‘wealth’ you need so you can morph into a financial hegemon. This process cannot be telescoped into a few decades and you need a military hegemon (unless you are that also) to protect your protectorates that you are financing. China has a bit to go yet, and as I keep emphasising, the world does not have the resources available for China to become such a financial hegemon – no matter how persuasive various commentators are about the future of China. May look good from a distance. But if you get up close and personal, China has a few blemishes and warts.

    China has to grow faster and more intensively than its financial protectorates – or else! Cannot be done. This does not mean that the Chinese leaderships will not attempt to create a financial hegemon. But to do that they have to stare ‘outward’ and the moment they take their eye off their ‘internal ball’ things could easily go badly. China is not a stable democracy with a reliably functioning capitalist-style, market-driven economic system, as opposed to a Crony Capitalist one! In fact China was never a democracy – and I doubt the political leaderships intend it to become one.

    Just consider this carefully. If China (and India) continue to ‘grow’ economically as they have been doing, then in 15 years time they will between them, consume ALL of the liquid hydrocarbon fuels that will then be available for export – with NOTHING left for any other fuel importing country. Now to avoid this little predicament there needs to an increase in global exports of liquid hydrocarbon fuels of at least 5% p/a (compounding) – and that sure as hell won’t happen. The oil may be in place – we just will not be able to extract it and refine it in the quantities and with the speed, needed. It will be Nature 1: Humanity 0.

    Thanks for the link to the Sistine. VERY impressive!

  38. @Brian….have a little faith in human ingenuity…
    “Jogmec estimates that the surrounding area in the Nankai submarine trough holds at least 1.1 trillion cubic meters, or 39 trillion cubic feet, of methane hydrate, enough to meet 11 years’ worth of gas imports to Japan.
    A separate, rough estimate by the National Institute of Advanced Industrial Science and Technology has put the total amount of methane hydrate in the waters surrounding Japan at more than 7 trillion cubic meters, or what researchers have long said is closer to 100 years’ worth of Japan’s natural gas needs.”
    http://www.nytimes.com/2013/03/13/business/global/japan-says-it-is-first-to-tap-methane-hydrate-deposit.html?ref=world&_r=0

    Yikes….slightly irrational that the report currently only available in German,says it all really.
    “The Bundesbank thus increased its provisions for general risks by €6.7 billion to €14.4 billion. In 2010 and 2011, these were raised by €1.6 billion and €4.1 billion respectively. “This takes appropriate account of the risks on the Bundesbank’s balance sheet,” said Mr Weidmann”

    http://www.bundesbank.de/Redaktion/EN/Pressemitteilungen/BBK/2013/2013_03_12_annual_report_2012.html

  39. @BWS & Tull

    The task facing the Chinese leadership is simply massive. There is no necessary correlation between capitalism [or what used to be known as capitalism before its financial system morphed to a rogue] and democracy [or what used to be known as democracy before the financial system captured it]. It is simply an incredible story and noone knows the end; that said, they are making a far better fist of managing productive change than the soviets.

    “When the nation is misled and in chaos
    Ministers mouth empty promises” Tao Te Ching #18

    @Brian
    I’ve been in the Sistine – but before the ceiling was cleaned. Must revisit sometime on a long rugby weekend.

  40. @docm

    ‘Where is the money for a stimulus to come from?

    EEEEEECCCCCCCCBBBBee

    @
    “The kind of person who always insists
    on his way of seeing things
    can never learn anything from anyone.”

    Tao Te Ching #24

  41. @DOCM
    Re: show me the money
    David O’Donnell beat me to it. Obviously Ollie has little imagination.
    Printing machines if used wisely can be of great benefit.

  42. @ All

    To illustrate the point that there is no shortage of daft ideas or of political representatives who fiddle while Rome burns, the latest stunt from the European Parliament with regard to the long-term budget; borrowed from Washington, that paragon of budgetary behaviour, sequestration!

    http://www.ft.com/intl/cms/s/0/380658b2-8b24-11e2-b1a4-00144feabdc0.html#axzz2NMlmxXrs

    The European Parliament has zero responsibility for raising the revenue in question. The logical conclusion to be drawn is obvious, even if it has been obscured by a fog of debate about democratic legitimacy.

  43. Noteworthy appearance by Paul Krugman on Newsnight.

    The dynamic, and the likely takeaway by the electorate (they are the ones that matter, not the vanishingly small proportion of macro nerds in the audience ) is probably worthy of discussion.

  44. The support of almost three-quarters of Italians for retaining the euro in a poll as reported by Corriere della Sera, at least shows that there is little faith in returning to the lira.

    President Hollande has shown that switching from poetry to prose in a recession isn’t easy and Bloomberg reports that he’s the most-unpopular French leader in more than 30 years. A majority — or 53% — of the respondents in an Ifop survey for Paris Match magazine released today said they prefer Sarkozy over his successor. A BVA survey showed that 54% of the respondents believe Hollande isn’t doing enough to change France and most said he won’t fulfill his promise to reverse the trend of rising unemployment by the end of the year or make enough reforms to stabilize the country.

    Hollande would also be unpopular if he did roll-out a serious reform program.

    There are no utopias or heavens in the real world and at some point there will be a realisation that pre-2008 will not be back and what existed for some was at the expense of inequity for others.

    Mario Draghi, the ECB president, said last week on youth unemployment that countries which put “all the weight of flexibility on young people” would continue to suffer problems.

    The denialists react to citing China by arguing it’s just a soufflé ready to implode.

    The top 1,000 European companies spent 42% of their capital expenditure budgets in emerging markets in 2012 — up from 28% in 2007.

    http://www.finfacts.ie/irishfinancenews/article_1025713.shtml

    This year will be the 22nd straight year of economic growth for Australia, mainly due to commodity demand from China. There are problems with uneven growth and so on but what has also been important is that the economy has been managed well by parties of both the right and left.

  45. Oh! John. I have the utmost faith (from archeological evidence) in the ingenuity of us humans to trash our living space. It appears we have this propensity hardwired into our DNA so we never forget anything and never have to learn anything. Sigh*

    Those natgas videos are quite dramatic – luvly flame and all! – but getting that natgas to the consumer is another matter entirely. Natgas (methane) is hazardous and in liquid form its has to be kept chilled (very big energy Op Cost indeed!). Natgas infrastructures (tankers, pipelines, etc. require sophisticated engineering – and risk reductions mandate obsessive monitoring and maintenance – just more pecuniary and energy Op Costs!). Natgas wide-scale infrastructures (similar for normal liquid fuels) are not common at present. As someone mentioned above – “Show me the money!”

    @DO’D: I think I’ll buy some popcorn and watch China from the safety of my sitting room.

    The last mid-Oriental who successfully ‘imported’ Buddhist philosophy into the West got himself crucified for his troubles. We are not Oriental. Whether we Occidentals can actually understand Oriental social and political systems is a moot point. They are. We are. And there is a significant difference between us. You MUST carefully observe what it is occurring and refrain from any attempt to “insist on my way of ‘seeing’ things”. Us Occidentals are awfully arrogant. But the Chinese and Japanese are awfully xenophobic. Interesting times ahead!

  46. @Brian Woods Snr

    Edward Said is good, and worth reading, on how the ‘West’ invented its view of the ‘East – the Other’ ….

    The Tao Te Ching and the more complex I Ching are also worth a perusal …

  47. I agree with the obvious conclusion that it will increase the debt to GDP ratio in the short run but disagree that it will ever lead to a decrease in the longer run. The reasons are
    A. As part of the Austerity drive education has and will be cut. This is one of the true paybacks for the states with an ROI of x 10 or greater, however it takes about 10 years for the payback so every government is tempted and do dip into this pot.
    B. Also there is no account of the additional interest that will be charged on the national debt as the debt/GDP ratio rises in early years.

  48. @Brian,good morning Brian,its first thing here,just finished browsing the papers the Washington Post has a decent article on this topic.Not my field at all,but expect to hear quite a bit about methane hydrate over the next few years.Apols,to John Mch for straying miles off topic.

    “Now, this is just an initial step — albeit a big one. The Japanese government says that it’s still five years away from commercial extraction of natural gas from methane hydrates. The drilling process itself is still tricky and expensive. But if Japan figures out how to unlock these hydrates, it could have huge implications for both energy and climate change.”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/12/japan-tries-to-unlock-the-worlds-biggest-source-of-carbon-based-fuel/

  49. @Jules

    I agree. Local economy can go into a path dependent slide (viable firms close due to lack of local demand and credit) …. main threat to Ireland is here; the FDI sector is a universe of its own – were this to also slide due to global effects then Ireland could become a wastelland ….

  50. Ireland can never become a wasteland, not as long as there are slanes, spades, shovels and picks in Kerry. Where else in the world do mothers worry that four year olds will dig a hole in the back yard deep enough to drown themselves in.

    China has the best educated government in the world. The results are evident in pulling hundreds of millions out of poverty in the past half century. Every Euro 10 billion plus contract you see being entered into from China comes with the transfer of intellectual property, patents and technical know how to China. Decades of anti communist propaganda has conditioned people in the capitalist world to denigrate the Chinese much as they denigrated the Japanese (they can only copy). I bought a ski jacket a few weeks ago that under its brand name was around Euro 400 the identical jacket direct from Dalian was Euro 170 shipping and tax included. Another brand discovering that outsourcing to China has a downside. So from tens of billions to a couple of hundreds inroads are being made.

    Comments that China will not be able to continue growing at more than 2% ring true to me. We have rolled on rubber and floated on oil since 1945 as my American relatives used to say. Sure ’twas great but it won’t last much longer.

  51. @ DO’D: and JG: Thanks to both of you. Said has been on my shelf for many years now. Also Sun Tzu and Miyamoto Musashi. As a former sailor the horizon has always been very seductive!

    Yeah, I take the points about the hydrates. Lets just ‘suck it and see’! The first critical issue that will arise is a confirmation that global production of liquid hydrocarbon fuels has plateaued (there are some dark signs). The second one will be the realisation that the nett hydrocarbon fuels available for export to importing countries has declined significantly. This latter is factually accurate. We need to sit this one out until late 2015.

    @MH: “Ireland can never become a wasteland, …” It may if those windmill artists and fracking jerks persuade the gullible. Was it Mark Twain remarked that “They no longer make land!” or some such.

    See you all around!

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