What stopped Irish eyes smiling and how we can avoid the Irish fate

Saul’s recent column in the Age – I’m responsible for the headline (NG).

For a country which accounts for less than 0.25 per cent (that is, less than one four-hundredth) of the world economy, Ireland has attracted a disproportionately large share of world attention over the past couple of weeks, as it confronts the massive cost of cleaning up its failed banking system (which has blown the budget deficit for this year out to a mind-boggling 32% of GDP) in the midst of a recession which is now in its third year, during which its economy has shrunk by 17% and its unemployment rate almost trebled, from less than 5% to nearly 14%.

Ireland is now implementing another round of swingeing expenditure reductions, tax increases, and a raid on its national pension fund, in order to comply with the requirements of the bailout package from the IMF and the European Union announced last weekend. Not only is that causing considerable unrest among the Irish people at the implied erosion of national sovereignty, but it is also likely to prolong the current recession.

Ireland’s woes illustrate a point, which I have made before, that one of the principal lessons of the global financial crisis is that inappropriately low interest rates can be as damaging as inappropriately high interest rates.

Once Ireland joined the euro area at the beginning of 1999, short-term interest rates in Ireland were no longer set in Dublin in accordance with Irish conditions, but rather in Frankfurt in accordance with conditions across the euro zone as a whole. Thus Irish short-term interest rates fell from the 5½-6% range in which they had remained during the second half of the 1990s (which the Central Bank of Ireland had deemed appropriate for an economy that had been growing at rates of 8-11% per annum) to 3.0% (which the European Central Bank considered appropriate for an economy that had been growing at around 2½% per annum). And from then until the onset of the financial crisis, short-term interest rates averaged 3¼% per annum in Ireland, as they did across the euro zone, even though Ireland’s economy grew at an average annual rate of almost 6% (compared with less than 2% for the euro zone as a whole) and Irish inflation averaged 3½% per annum (compared with 2¼% per annum for the euro zone as a whole).

Because Irish interest rates were substantially lower than they should have been for an economy growing as fast as Ireland’s was, Irish households and businesses borrowed (and Irish banks lent) far more than they would otherwise have done, resulting in (among other things) an unsustainable property boom in which Irish house prices more than doubled in less than seven years (they have since fallen by almost one-third).

Much the same thing happened in Portugal, Spain and Greece.

The European Central Bank can’t be blamed for this: it has only one interest rate at its command, and it can’t set different interest rates for different parts of the euro zone any more than the Reserve Bank of Australia can set different interest rates for different parts of Australia. Just as the interest rates which the ECB deemed appropriate for the euro zone as a whole were “too low” for Ireland, they were arguably “too high” for Germany, where economic growth averaged just 1½% per annum between 2000 and 2007, inflation averaged 1¾% per annum, and house prices barely moved at all.

In federations such as Australia or the United States, where regions with quite divergent economic structures share a common currency and interest rates, the government’s budget provides a means of offsetting the impact that a common monetary policy may have on different parts of the economy.

In Australia and the United States, the personal and company income tax systems collect relatively more revenue from regions experiencing strong economic growth while the social security system distributes relatively more to regions which are in some way “missing out”.

The euro zone has no corresponding mechanisms (although the IMF has this week recommended that they should develop some). The Irish Government could have run sufficiently tight fiscal policy to offset the consequences of inappropriately loose monetary policy, but it didn’t: as the beleaguered Irish Finance Minister Brian Lenihan has explained, “when we had it, we spent it”. Ireland’s ‘structural’ budget surplus averaged just 0.6% of GDP between 2000 and 2007. Spain, Portugal and Greece were even worse: they all ran large structural budget deficits during this period.

There are two important lessons for Australia from all of this. First, on the assumption that the mining boom continues for a number of years, it is almost inevitable that interest rates will be “too low” in Western Australia (in particular) and “too high” for much of south-eastern Australia, as they were during the first phase of the mining boom in 2005-07. That’s why Perth property prices rose by almost 75% during that period, in the process giving Australia’s fourth largest city the country’s second highest real estate prices, while property prices in other capitals rose by less than 20%, on average, during the same period.

So we – and Western Australians in particular – should be thankful for mechanisms like the Commonwealth Grants Commission which redistribute some of the GST revenues away from WA towards other States (and which will redistribute it back to WA when the mining boom is over), complementing the effects of the Commonwealth income tax and social security systems at the individual level.

The second lesson is the one spelled out by Reserve Bank Governor Glenn Stevens in his address to the 50th Anniversary dinner of the Committee for the Economic Development of Australia (CEDA) on Monday evening – that the government should seek to run “considerably larger budget surpluses in the upswings of future cycles than those to which we have been accustomed in the past”, and that consideration should be given to “the management of any net asset positions accumulated by the government as part of such an approach … in a stabilization fund of some sort”. This is something I have been advocating since 2005 – although the idea actually goes back as far as the Biblical prophet Joseph, who (according to Chapter 41 of the Book of Genesis) advised Pharoah that “20% of the produce of the land during the seven plenteous years [should be] laid up … as a reserve for the land against the seven years of famine which are to befall the land … so that the land may not perish through the famine”.

Australia has often thought of itself as ‘the lucky country’, at least since Donald Horne coined that phrase in the 1960s (with an ironic intent not recognized by most Australians, then or since). But if we don’t want the current boom to end with the luck of the Irish, then we need to think carefully and boldly about how we use our current run of luck.

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77 Responses to What stopped Irish eyes smiling and how we can avoid the Irish fate

  1. The Beverage Curve says:

    On Ireland Sinclair Davidson makes a very sloppy and lazy remark that it all because of excess spending.

    in 2007 the Irish government thought by 2009 the Structural defcit would be 1.5% ( down from 1.8% in 2007) of GDP, Unemployment would be 4.6% (4.4%) and expenditure would be 35% (35.4%).

    By 2009 these projections had risen to 4.8% , 7.3% and 41.8%. By the time of their last budget it had risen again to 7.2% , 12.6% and 45.9%.
    U
    He then does not take any account of the package of spending cuts ans tax rises in 2009 that the IMF show totalled 4.5% of GDP. some spending spree!

    This is because Austerity gave them a minor depression not the spurt of growth often promised by Davidson and people of his ilk.

    A fund as espoused by Stevens makes sense for the reasons outlined by Saul but also it makes a larger budget surplus easier to sell politically.

    Most punters do not like large budget surpluses. They would rather the money spent.

    A ‘Joseph’ fund enables the money to be saved for the future when it will be needed.

  2. Paul Frijters says:

    I am happy to add to the chorus of economists advocating a sovereign wealth fund to store the profit from the current mining boom, modeled on Norway. I note the Keynesian position that interest rates should be higher in a faster growing economy because if they are not high enough, a property boom will then emerge to soak up the excess savings. This reflects the status quo in the policy of the RBA.

  3. The Beverage Curve says:

    of course they have to be higher.

    Ken Henry recently said
    “But consider the orders of magnitude here. Over the past decade, world prices of our non-rural commodity exports have increased, on average, by about 300 per cent. Exports of these products represent about 10 per cent of GDP. Clearly, offsetting the full income boost from higher non-rural commodity prices on aggregate demand through a fiscal contraction would require an implausibly large reduction in government spending, possibly equal to, or even greater than, the total current level of government spending in Australia. That is, to completely sterilise the terms of trade boom through fiscal policy, we may have to abolish all government spending. Note that we would, however, have to keep raising the same level of taxes as presently.’

    In other words fiscal policy cannot offset higher interest rates

  4. The Beverage Curve says:

    Something that Saul has missed is Glenn’s implicit agreement with Warwick McKibbin that the Government should be saving all the MRRT revenue through a larger budget surplus not spending it on recurrent expenditure as they mistakenly plan to do.

  5. Fyodor says:

    I rather like Eslake and his work, but his argument here is unconvincing.

    The key lessons from Ireland’s fubarity are not that one needs to save for a rainy day, but that:

    1) Countries should never shackle themselves into an inappropriate and inflexible currency union; and
    2) Governments have no business socialising private sector losses, particularly in the foolhardy, “here-let-me-write-you-a-feckin’-blank-cheque-Mein-Herr”, manner of the two FF Fuckwits, Cowen and Lenihan.

    The fact is that Ireland DID save during the boom years. As shown in this chart, Ireland reduced materially its debt/GDP ratio in the years leading up to the crash. Okay, the Irish government could have saved MORE, and there was undoubtedly stupidly spent largesse, but there is simply no way that a democratically elected government could have saved enough to provide for the colossal clusterfuck that subsequently engulfed the Irish banking system.

    What has destroyed the financial position of the Irish state is not its inability or unwillingness to save during the boom, it was:

    1. An extended period of grossly inappropriate (i.e. too low) interest rates due to the monetary union that led to a bubble in domestic property financed by – mostly – European lenders to the Irish banks; AND
    2. The fatal decision of the Irish government to guarantee the debts of those Irish banks and not to force those banks through a managed default and restructuring.

    The result is that the Irish government has forced its owners, the taxpayers, to subsidise the folly of European lenders. Time will tell whethey they accept continental bureaucrats cramming this gargantuan debt down their throats or respond in a more typically Irish fashion.

    There is simply no connection between Ireland’s travails and the argument that the Australian government should run large fiscal surpluses during resource booms and then retain those funds in a sovereign wealth fund. The situations are completely different. As is the bizarre biblical comparison with the agricultural cycles of Pharaonic Egypt.

    Finally, if it is such a brilliant idea for the Australian government to be running a fiscal surplus during a resources boom, why is there no criticism here of the Rudd-Gillard government running large DEFICITS amidst one of the biggest resources booms in our country’s history?

  6. JC says:

    Fyodor: Hi

    I think it’s a mistake a lot of people are making by suggesting that a balanced budget is somehow indicative a country is running conservative finances.

    Ireland’s spending wasn’t falling. It was rising, badly so with heavy duty recurrent programs. Receipts were too but the bet they made was that those receipts weren’t very frothy and they were. Possibly ti wasn’t even a bet, they may not have realized what they were getting themselves into and what the risks were.

    I don’t think the issue is running a surplus or saving for a rainy day so much as whether the recurring programs are matched with reliable receipts, which don’t disappear with a large gust of wind leaving you in an impossible situation you could be left with a huge gaping hole to fill as a result. Cutting spending is hard.

    I think you indirectly mention this anyway.

    What has destroyed the financial position of the Irish state is not its inability or unwillingness to save during the boom, it was:
    1. An extended period of grossly inappropriate (i.e. too low) interest rates due to the monetary union that led to a bubble in domestic property financed by – mostly – European lenders to the Irish banks;

    However the ECB was running the same policy with all the member states. Germany, France even Italy never experienced the same boom and for a large part of the decade they were the sluggish members. Why was Ireland the stand out? If Ireland boomed why were the three big guys not experiencing the same sort of over-leveraged consumer. Population growth? Dunno, but France is no laggard having healthy population growth and they have an under-leveraged consumer sector without a stand out property boom.

    I’m speculating that Ireland was not as conservative fiscally on the spending side as we would think at first blush.

    Lastly, the ECB was perhaps thought of as the most Bundesbankesque central bank in the world adhering to a hawkish monetary policy, so I’m not so sure they are to blame because of a low interest rate policy.

    2. AND
    2. The fatal decision of the Irish government to guarantee the debts of those Irish banks and not to force those banks through a managed default and restructuring.

    What choice did they have as stand alone? I’m not condoning it but they had to follow or they would have seen this occur earlier as the banking sector would have failed in 2008/09 perhaps

    I think there’s a damn good lesson here. You can easily go from happy hour to being thrown out of the bar by the bouncers (bond market) in three years with a standing start of (some people say) lowish debt to GDP of 30% heading TO 130% by 2013 estimates.

  7. JC says:

    Paul F:

    What is the purpose of a sovereign wealth fund in Australia when the government is running deficits in a boom and we have adequate savings vehicles such as superannuation funds, which unlike a behemoth, people don’t have to plan a year or so ahead of time to dell down an investment they don’t like due to liquidity reasons? Wouldn’t it be simply a better choice to raise the ceiling on the amounts that can be withheld in super if indeed savings is the objective?

  8. The Beverage Curve says:

    yeah a spending splurge.

    it ranged from 34-37% over the previous decade and then suddenly it rose to 46% in 2009.

    Prior to the GFC the government had structural surpluses!
    That is when the government took 4.5% out of GDP!

    They simply makes things up at Catallaxy!

    The Deficits are declining very quickly. government’s run sovereign wealth funds from pubic funds.
    Super is private savings.

    In a once in a generation commodity boom The Government needs to something with all the money it should accumulate as Chile did

  9. . says:

    “Finally, if it is such a brilliant idea for the Australian government to be running a fiscal surplus during a resources boom, why is there no criticism here of the Rudd-Gillard government running large DEFICITS amidst one of the biggest resources booms in our country’s history?”

    Excellent point.

    “The Government needs to something with all the money it should accumulate as Chile did”

    What return on investment did they get?

  10. The Beverage Curve says:

    Just as Ireland was hit by the GFC and its idiotic reaction to it which made it worse expenditure as a % of GDP was 35.4% so it didn’t even have an increase over time. It went up and down.

  11. JC says:

    Hi Homer.

    Irish spending was rising at around 10% per year. All this Irish retrenchment seems to be fiction.

    Here:
    %
    2004 6
    05 10
    06 11
    07 11
    08 9.4
    09 7.7

    They even raised spending when GDI collapsed in 09. Where’s all the spending retrenchment, Homes, as I don’t see it in these figures. Do you?

  12. derrida derider says:

    Ken Henry has hit the nail on the head here (see [email protected]). Discussion of economic policy is futile without working out rough numbers, because you need the numbers to show what are first-order and what are third-order effects. Do the maths on Ireland, for example – no conceivable level of fiscal surplus in the boom could have saved Ireland from its present troubles. These troubles arose from the inherent instability of investors’ animal spirits along with loss of domestic control of the money supply.

    As Paul Krugman noted, people are prone to see economics as a morality play. The old Marxist in me says that’s because they have a vested interest in drawing a particular moral. And the moral being drawn about “reckless government spending” in Europe and the US is a good example.

  13. the Beverage Curve says:

    They didn’t deliberately raise spending at all in 09 they cut 4.5% of GDP for petes sake.
    you can read all about it in chapter 3 of the latest IMF report.
    It is the report that completely demolishes classical economics and gets people banned from Catallaxy for daring to mention it

    Fancy spending increasing when you bring on a depression. Who would have ever thunked it.

    wow spending is increasing each year hey what was the economy doing?
    Relative to the economy it wasn’t increasing much at all.
    hey was was governbment consumption doing?

    There was a structural surplus as well for most of the time!

    It helps to know something if you are going to write about it.

    There is no comparison with the previous commodity boom which was only in good times and the commodity boom now.

    We are getting out of the GFC. It also takes time for the boom ( it has really only been this year) to translate into taxation receipts. It in fact took time last boom as well.

    Assumming RBA commodity forecasts then the budget defcit could well be a lot lower this financial year and surpluses upgraded as they were last time.

    The return is no recession. Less people porportinally leaving the workforce than in 2001 despite Mark’s rantings as we can see in the treasury paper on structural side ofbudgets.

  14. Ken Parish says:

    A commenter signing him/herself “.” has just begun posting here at Troppo. He/she appears to be intent on introducing a theme of extreme ad hominem abuse, and reprising old squabbbles from catallaxy. Please note that, while you are welcome to contribute to discussion here at Troppo, ad hominem abuse is not welcome and will simply be deleted. Constructive robust discussion is encouraged; trollery is ruthlessly censored.

  15. . says:

    “Constructive robust discussion is encouraged; trollery is ruthlessly censored.”

    May I ask why Mel is allowed with her “Sinclair Davidson makes me take an acid bath, the unpublished Tim Lambert is the truth, light way” schtick?

    Success troll Mel is successful. It’s at least panhandling for Lambert.

    You should at least charge her for the pleasure, a prodigious cottage industry may arise.

  16. Fyodor says:

    I think it’s a mistake a lot of people are making by suggesting that a balanced budget is somehow indicative a country is running conservative finances.

    Ireland’s spending wasn’t falling. It was rising, badly so with heavy duty recurrent programs. Receipts were too but the bet they made was that those receipts weren’t very frothy and they were. Possibly ti wasn’t even a bet, they may not have realized what they were getting themselves into and what the risks were.

    I don’t think the issue is running a surplus or saving for a rainy day so much as whether the recurring programs are matched with reliable receipts, which don’t disappear with a large gust of wind leaving you in an impossible situation you could be left with a huge gaping hole to fill as a result. Cutting spending is hard.

    I think you indirectly mention this anyway.

    No, I didn’t, as it’s an irrelevant point. The point you should have picked up on, but didn’t, is that Ireland had no problems with its budgetary position heading into the crash. The only reason why it’s in such a parlous position now is because of the decision to bail out the banks. This has nothing to do with the relative size of its fiscal deficits or surpluses pre-crisis. You’re simply focusing on the wrong issue.

    However the ECB was running the same policy with all the member states. Germany, France even Italy never experienced the same boom and for a large part of the decade they were the sluggish members. Why was Ireland the stand out? If Ireland boomed why were the three big guys not experiencing the same sort of over-leveraged consumer. Population growth? Dunno, but France is no laggard having healthy population growth and they have an under-leveraged consumer sector without a stand out property boom.

    Yes, the ECB was running the same policy across all Eurozone member states. I take it you don’t see a problem with this? Different economies at different stages of growth, joining a monetary union with over/under valued currencies…you don’t think this has macro implications?

    Let me make this clear for you: the ECB set rates for the Eurozone based on the aggregate macro outlook, which was naturally dominated by its largest economies, Germany foremost. The smaller countries on the periphery thus had their monetary policy set for them based not upon THEIR requirements, but those of Germany. The result? Excessively loose monetary policy in these peripheral countries and an entrenchment of Germany’s productivity and currency advantage within the eurozone. The result of that? Massive current account surplus for Germany with these countries, offset by massive capital flows, much of which went into property bubbles in Spain and Ireland, funded by German and other Eurozone banks. If the PIIGS had been running their own monetary policy, their currencies would have depreciated against the euro and they would have had much higher interest rates than the eurozone. This wouldn’t necessarily have prevented property bubbles and excessive borrowing, but it would have dampened the macroeconomic imbalances that developed within the Eurozone over a prolonged period.

    I’m speculating that Ireland was not as conservative fiscally on the spending side as we would think at first blush.

    Irrelevant.

    Lastly, the ECB was perhaps thought of as the most Bundesbankesque central bank in the world adhering to a hawkish monetary policy, so I’m not so sure they are to blame because of a low interest rate policy.

    Du meinst bundesbankisch. Who else would you blame for low interest rates in the Eurozone? Rosicrucians?

    Remember, we are talking about low interest rates for the vulnerable countries. An EUR interest rate setting might be high for Germany, but catastrophically low for Greece.

    What choice did they have as stand alone? I’m not condoning it but they had to follow or they would have seen this occur earlier as the banking sector would have failed in 2008/09 perhaps.

    There’s no perhaps about it. The Irish banking system failed in 2008. Providing a blanket government guarantee without forcing the equity and debt holders of these banks into a managed default and restructure was the height of folly. Passing the buck to the Irish taxpayer has only delayed the inevitable, amplified moral hazard and given a free subsidy to investors who are in the business of taking risk and should have shared the pain.

    I think there’s a damn good lesson here. You can easily go from happy hour to being thrown out of the bar by the bouncers (bond market) in three years with a standing start of (some people say) lowish debt to GDP of 30% heading TO 130% by 2013 estimates.

    There is a damn good lesson here, but you’ve failed to learn from it. The bond market would not have had a problem with the sovereign if the sovereign hadn’t blown off both his feet with catastrophically bad banking policy. The vast majority of that increase in debt/GDP from 30% to 130% was the bank bailout, not the budget contribution of the Irish state.

    Is Bev here the Stoushist Formerly Known as Homer Paxton?

  17. Ken Parish says:

    “May I ask why Mel is allowed with her …”

    I considered deleting that comment when I saw it but decided to let it go through to the keeper as an isolated instance of distasteful ad hom. However it’s now apparent (from your comments as well) that an unwelcome trend is redeveloping. I’m simply giving clear notice that we won’t tolerate it and will delete such comments. The warning equally applies to Mel and anyone else who might be tempted to substitute abuse for serious discussion.

  18. Ken Parish says:

    “Is Bev here the Stoushist Formerly Known as Homer Paxton?”

    Yes.

  19. . says:

    “The warning equally applies to Mel and anyone else who might be tempted to substitute abuse for serious discussion.”

    Good.

    Homer is wrong about the rise in hidden unemployment, why he disputes this I have no idea.

  20. JC says:

    Hi Fyodor:

    The point you should have picked up on, but didn’t, is that Ireland had no problems with its budgetary position heading into the crash.

    They did. It was basically hidden by boomtown tax receipts that were never going to last masking a spending binge going up around 10% each year. See comment 11.

    From memory, their last budget figures, prior to the banking crisis becoming apparent earlier this year, was a deficit of around 13%. You think that’s “no problems”?.

    Bonds rates and CDS swaps were quite elevated for Ireland well before the clusterfuck of the banks this year.

    Remember, we are talking about low interest rates for the vulnerable countries. An EUR interest rate setting might be high for Germany, but catastrophically low for Greece.

    It’s not as simple as that and you seem to think that the introduction of the Euro was somehow year 1. Europe had the EMS prior to the Euro with relatively narrow currency bands within the snake. There was a decade of consistent tightening up to harmonize throughout the 90’s. Although I must admit Greece lied.

    There is some degree of differential growth rates within currency systems. However Ireland was not a commodity exporter to cause a shock in the terms of trade and it was growing consistently way over the rest of the EU. Ireland’s budget was out of whack.

    Du meinst bundesbankisch. Who else would you blame for low interest rates in the Eurozone? Rosicrucians?

    Remember, we are talking about low interest rates for the vulnerable countries. An EUR interest rate setting might be high for Germany, but catastrophically low for Greece.

    So CPI targeting is a faulty system? Funny that because you never suggested that before. You are of course buying into that argument by default as the ECB was Germanic in the way it conducted monetary policy and the CPI target.

  21. Paul Frijters says:

    JC,

    I expect the overhead on a sovereign wealth fund to be much lower than on superannuation. Also, it is a clear pre-commitment devise to treat boom-surpluses as ‘abnormal income’, making it easier to spend less of it. Finally, a sovereign wealth fund can ignore the incentives that other funds have to invest in Australia, and instead invest the money in overseas assets. It is thus better able to risk-spread in the national interest than any commercial investor is able to do (because national tax laws matter to commercial investors but are irrelevant to a sovereign fund).

  22. JC says:

    Hi Paul:

    I think the overhead issue is a little exaggerated as it’s pretty immaterial in the whole scheme of things.

    Also, it is a clear pre-commitment devise to treat boom-surpluses as ‘abnormal income’, making it easier to spend less of it.

    Wouldn’t it be better categorized as a price signal rather than abnormal?

    If you wish to encourage saving there is a pretty good vehicle for that right now with Super.

    Finally, a sovereign wealth fund can ignore the incentives that other funds have to invest in Australia, and instead invest the money in overseas assets.

    No large fund can ignore politics. That’s just hoping against hope. And why would investing overseas necessarily be the answer? The effect of the fund moving funds across the exchange rate may simply depress the FX rate for foreigners wanting to take advantage of the higher returns here. why sell cheaply through government intervention? Restricting to overseas investments would unnecessarily impinge on the fund’s ability to make the best investment decisions in terms of asset/geographic allocation.

    It is thus better able to risk-spread in the national interest than any commercial investor is able to do (because national tax laws matter to commercial investors but are irrelevant to a sovereign fund).

    Are sovereign wealth funds making higher returns at present/ and historical. Are they beating the Morgan Stanley global index?

    Lastly there is the issue of liquidity. large stock positions are hard to get rid of. If they weren’t concentrated they may as well place the money in MSGI.

    Lastly governments have a nasty habit of raiding the cookie jar when trouble arises.

  23. The Beverage Curve says:

    fyodor,

    Yes the idiotic decision to support the banks and not let shareholders and bondholders take a haircut was a large decision in the however so was the introduction od austerity economics which Catallaxy tells us leads to strong growth. In fact they have had a minor depression.

    The only time spending looked like getting out of control was AFTER GFC not before it.

    Mark, what about looking at chart 2 from the Treasury paper Estimating the structural budget balance of the Australian Government written by
    Tony McDonald, Yong Hong Yan, Blake Ford and David Stephan.

    oh dear wrong AGAIN.

    going for a record I see.

    JC why read what Glenn Stevens or read the Treasury paper on Sovereign funds.

    Their purpose is not beating any index either

  24. Paul Frijters says:

    JC,

    I think a discussion on the merits of a sovereign fund deserves a separate post and thread, but nevertheless:

    – overhead is not small-fry at all. With the annual overhead of super funds being in the order of 1.5% of the total value invested, accumulated overhead after 40 years is close to 50%. That is a whacking great bill.
    – I get your point about the absence of guarantees against raids, but the labeling and separate operation of the fund is of course designed to make it hard for governments to dip into these funds. One can only make it hard, not impossible for governments to raid these funds. After all, there are circumstances in which you would want our representatives to be able to spend what has been saved up by the population it serves.
    – when thinking about taxes, i am thinking about franking credits and other investment-related taxes that make it more attractive for a private investor (including a bank) to invest in Australia rather than abroad. These taxes should not hamper a sovereign fund.

  25. JC says:

    I think a discussion on the merits of a sovereign fund deserves a separate post and thread, but nevertheless:

    Fair enough.

    overhead is not small-fry at all. With the annual overhead of super funds being in the order of 1.5% of the total value invested, accumulated overhead after 40 years is close to 50%. That is a whacking great bill.

    I’m not so sure.

    $1,000 invested for 40 years 2% dividend payout and 7 capital growth gets you $14,575.

    lop off 1.5% of that and you end up with around $10,300.

    Personally I’d rather $10,300 in my pocket than the money in SWF that isn’t mine and I can’t touch.

    I don’t honestly think most investments are as tax driven as you think that are in regards to the comment you made about tax issues.

  26. . says:

    “Yes the idiotic decision to support the banks and not let shareholders and bondholders take a haircut was a large decision in the however so was the introduction od austerity economics which Catallaxy tells us leads to strong growth. In fact they have had a minor depression.”

    Austerity for banks, largesse for Governments?

    They tried that in Greece.

    “The only time spending looked like getting out of control was AFTER GFC not before it.”

    Before, during and after. Your ideas about macroeconomics are so perverted. Spending has positive automatic stabilisers which enable stability &touch button control of GDP, but austerity will lead to an inevitable debt spiral – which is the exact opposite of what happens in debt ridden nations. To paraphrase Ken Rogoff – you seem to think when Governments indebt themselves in unecomic projects and debase the currency, their citizens will find the currency all the more desireable and appealing.

    “what about looking at chart 2 from the Treasury paper Estimating the structural budget balance of the Australian Government written by
    Tony McDonald, Yong Hong Yan, Blake Ford and David Stephan.”

    How about looking at the data? You’re wrong. The stimulus saw hidden unemployment rise more than Rudd claimed jobs saved.

    Why do you engage in this calumny? Are you incapable of reading the data or find it convenient to stay with the same broken fallacies?

  27. JC says:

    Yes the idiotic decision to support the banks and not let shareholders and bondholders take a haircut was a large decision in the however so was the introduction od austerity economics which Catallaxy tells us leads to strong growth.

    Homer, they didn’t do much different than all the other western countries in supporting their banking systems. If they hadn’t supported them they would have failed as a result of runs etc. Again I’m not defending the action but that is the reality.

    It’s not true shareholders weren’t punished. They were, as they were materially diluted. Perhaps junior debt holders should have taken a haircut, but it’s a little more complex with large portions of senior debt holders, as they rank with depositors in bankruptcy. Did you want the depositors to take a hit as well? I have no problem with that, but do you?

    The only time spending looked like getting out of control was AFTER GFC not before it.

    Again, you making the same mistake as Fyodor by looking at the the difference between the tax receipts/ spending which of course appears balanced but we know a large portion of tax receipts was boomtown froth that could disappear quickly while spending was hardcore recurrent for the most part. You understand the problem, right?

    In any event they didn’t really retrench on the spending side as badly as you suggest. See the 11

    JC why read what Glenn Stevens or read the Treasury paper on Sovereign funds.

    I did read the excerpts and am most unimpressed with the concept. And as Fyodor suggests earlier, this is hardly anything more then a theoretical discussion seeing we’re currently running a budget deficit.

    Their purpose is not beating any index either

    Their purpose is to get a reasonable return and if they don’t match the index they are effectively behind.

  28. Paul Frijters says:

    JC,

    :-) I see you are smuggling yearly dividends into your numerical example. Then, of course, overheads matter less than if the pay-out comes at the end (like the bulk of superannuation payouts come only many years after the investments). Your 1000 dollars at 7% return is worth 14,974 dollars after 40 years without overhead and without interim dividends, but only 8,513 with a 1.5% annual overhead, i.e. 45% less.

    As to the importance of domestic taxation to explain ‘Home bias’ in domestic investments, let me copy here the abstract of a 2010 paper by Anil Mishra and Ronald Ratti from UWS in Perth titled ‘Foreign investment and taxation’:

    “The relationship between cross border taxation and free float home bias is examined. This explicitly recognizes that insider shares are unavailable to foreigners. Other important explanations for home bias – information asymmetry, behavioural and governance issues – are controlled when examining the impact of cross border tax variables. In our sample of countries about half (three-quarters) withhold taxes on realized capital gains (dividends) of foreign investors and about half of the mature economies provide imputation of taxes paid on dividend income by domestic corporations. A tax credit variable for foreign taxes paid is constructed and found to be statistically significant in reducing home bias. A foreign tax rate too high to be fully offset by tax credits is found to significantly increase home bias. Dividend imputation is a statistically significant impediment to cross border equity flows. The benefit of investor familiarity with foreign opportunities for reducing home bias is found to be mitigated by higher potential for foreign taxation of capital gains. “

  29. JC says:

    Paul:

    People don’t as a rile invest for a simple 2% div. they also buy growth potential etc. etc. . But you know that.

    I added yearly divs because ASX has had about a 2% historical div average and the capital growth rate has been around 7% from memory. So it’s real life , or as close as we can get.

    Your 1000 dollars at 7% return is worth 14,974 dollars after 40 years without overhead and without interim dividends, but only 8,513 with a 1.5% annual overhead, i.e. 45% less.

    I lopped .5% of the div and 1% off the historical capital growth rate so your 8.513 figure isn’t correct. My mistake though as I should have explained what i had done with the second part of the example.

    Thanks for the extract… I don’t disagree with their view, however i don’t believe asset allocation is made solely by tax driven reasons.

  30. Fyodor says:

    The point you should have picked up on, but didn’t, is that Ireland had no problems with its budgetary position heading into the crash.

    They did. It was basically hidden by boomtown tax receipts that were never going to last masking a spending binge going up around 10% each year. See comment 11.

    I saw your comment 11, and it’s irrelevant. Relative to high levels of nominal GDP growth the spending growth wasn’t extraordinary. The fall in tax receipts has likewise been trivial relative to the projected increase in debt/GDP which, as I keep telling you – and you keep ignoring – is driven by the bank bailout, not the underlying fiscal position.

    From memory, their last budget figures, prior to the banking crisis becoming apparent earlier this year, was a deficit of around 13%. You think that’s “no problems”?.

    The bank crisis became apparent in 2008, JC. Do you remember 2008? It was the year before last year. And yes, the deficits of 2008+ would have been readily manageable with Ireland’s starting debt/GDP in 2007, pre-crisis, of 25%.

    Bonds rates and CDS swaps were quite elevated for Ireland well before the clusterfuck of the banks this year.

    “This year”? This year was far too late to start your count – you’re cherry-picking. CDS spreads for Irish 5yrs were way down at 20-30bps before October 2008. The bond market had no problem with Ireland’s fiscal position then. They spiked after Lehmans and the Irish bank bailout, then peaked in March 2009 before falling to the low 100s. They only ratcheted up again in March of this year and have continued climbing as the scale of the bank bailout has become evident. The trading in CDS tells us that Ireland had no issues before the crisis – it is the bank bailout that has been the key point of credit stress for the sovereign because it is the key contributor to government debt.

    Remember, we are talking about low interest rates for the vulnerable countries. An EUR interest rate setting might be high for Germany, but catastrophically low for Greece.

    It’s not as simple as that and you seem to think that the introduction of the Euro was somehow year 1. Europe had the EMS prior to the Euro with relatively narrow currency bands within the snake. There was a decade of consistent tightening up to harmonize throughout the 90?s. Although I must admit Greece lied.

    Irrelevant – I didn’t state it was “somehow year 1” [sic]; I wrote that the imbalance within the Eurozone has been a long time building. The fact remains that Ireland had interest rates set for a slowly growing Eurozone core when its far more rapid growth warranted much higher interest rates.

    There is some degree of differential growth rates within currency systems. However Ireland was not a commodity exporter to cause a shock in the terms of trade and it was growing consistently way over the rest of the EU. Ireland’s budget was out of whack.

    Non sequitur. Ireland’s budget was not “out of whack” and commodities are irrelevant to the discussion. Ireland was growing faster than the core and thus should have had a different interest rate regime. It didn’t – it therefore had an inappropriate monetary policy.

    Du meinst bundesbankisch. Who else would you blame for low interest rates in the Eurozone? Rosicrucians?

    Remember, we are talking about low interest rates for the vulnerable countries. An EUR interest rate setting might be high for Germany, but catastrophically low for Greece.

    So CPI targeting is a faulty system? Funny that because you never suggested that before. You are of course buying into that argument by default as the ECB was Germanic in the way it conducted monetary policy and the CPI target.

    Who mentioned CPI targeting or it being “faulty”? And there’s no “buy-in by default”. Your assertions are illogical and incoherent.

  31. Fyodor says:

    fyodor,

    Yes the idiotic decision to support the banks and not let shareholders and bondholders take a haircut was a large decision in the however so was the introduction od austerity economics which Catallaxy tells us leads to strong growth. In fact they have had a minor depression.

    The only time spending looked like getting out of control was AFTER GFC not before it.

    Homerkles, I don’t know the background to your stoushette with the Cat Crowd, but you’re kidding yourself if you think Ireland’s large budget deficits of recent years represent “austerity economics” or caused Ireland’s “minor depression”.

    Furthermore, the idea that Ireland could have avoided a recession after its property boom and bust and banking system collapse with some Keynesian Krugmania is fucking berko. There’s simply no way that the Irish government could have prevented a hangover after the party that economy had over the past decade.

  32. JC says:

    I saw your comment 11, and it’s irrelevant. Relative to high levels of nominal GDP growth the spending growth wasn’t extraordinary. The fall in tax receipts has likewise been trivial relative to the projected increase in debt/GDP which.

    30% debt to GDP is not “trivial” in my opinion. You seem to think it is. We differ.

    A 30% peak to trough fall in tax receipts over two years is pretty materiel if not “extraordinary”. In each year the spending pac man continued to ratchet up by 10%. That’s an eye popping increase.
    Tax Receipts Spending
    Euros
    2003 34.4
    2004 37.5 37.5
    2005 40.8 41.3
    2006 48 45.8
    2007 49.3 50.9
    2008 43 55.7
    2009 35.3 60

    As i keep repeating to you, anyone who considers matching risky receipts against hardcore recurring spending is asking for trouble. They were already at 15% deficit to GDP before the banking collapse hit them. They were about as close to a safe harbor in terms of getting through this as someone in the canoe in the middle of the Pacific. Let me know if you ever go for a job as CFO at a public company please.

    The bank crisis became apparent in 2008, JC. Do you remember 2008? It was the year before last year. And yes, the deficits of 2008+ would have been readily manageable with Ireland’s starting debt/GDP in 2007, pre-crisis, of 25%.

    It was closer to 30%. How manageable is that starting point when the deficit begins to blow out to 15% even before the banking issue hit them? Is that why by most metrics they were considered to be elevated risk within the EU from 2008 onwards?

    This year”? This year was far too late to start your count – you’re cherry-picking.

    No not really, as Irish CDS and bond yields have been in the most elevated group since 2008.

    CDS spreads for Irish 5yrs were way down at 20-30bps before October 2008. The bond market had no problem with Ireland’s fiscal position then. They spiked after Lehmans and the Irish bank bailout, then peaked in March 2009 before falling to the low 100s.

    Thanks for summarizing what the overall market was doing during those times in terms of volatility.

    What Irish Bailout was there before this? Irish CDS and yields have been elevated putting them in the high-risk group though out the period despite ebb and flows.

    it is the key contributor to government debt.

    One of.

    I don’t believe they would have climbed out even without the banks or at least if the banks were in okay shape. They would be seen in a similar situation to Spain where the banks are okay (just) but the budget is way out of whack while their debt to GDP is actually relatively small (around 65%).

    The fact remains that Ireland had interest rates set for a slowly growing Eurozone core when its far more rapid growth warranted much higher interest rates.

    I don’t think you can make this assumption. Interest rates can be “too low” even at 18% as we saw in the 80’s. Absolute levels are simplistic and actually quite misleading. You are being simplistic.

    Core CPI was generally well behaved in that period across the Euro region.

    Ireland was growing faster than the core and thus should have had a different interest rate regime. It didn’t – it therefore had an inappropriate monetary policy.

    What metric(s) do you think the ECB should have used? If not core CPI then what? I distinctly recall you once arguing core CPI was the best measure but now you seem to be walking away from that. Are asset prices perhaps important like we once discussed and you criticized?

    Who mentioned CPI targeting or it being “faulty”?

    So do you agree with CPI targeting or not? Forgive me but you were always a passionate believer in CPI targeting and belittled views about asset prices also being important.

    lastly I’ve asked you and Homer to suggest what the Irish should have done about their banking system when all the other western economies were guaranteeing theirs? So far I haven’t seen an answer.

  33. Kosh says:

    In a closed economy (assuming no external sector) the Government Surplus = Private Sector Borrowing / Indebtedness.

    This is a simple accounting identity derived from the National Accounts: (G-T)+(I-S)=0

    Comments supporting government surpluses are implicitly supporting higher levels of Private Debt – not a particularly sustainable path for the Australian economy

    Better for the Government to hold the debt – they can service it without the risk off default.

  34. . says:

    United together, we stand a chance for Homer’s re-education as a productive and non-berko economist. He’d probably be very balanced too.

    Homer – Paul, JC, Fyodor and myself are all robustly discussing whilst making genetle jabs without being complete jerks to one another. It’s fun, genial and we all might learn something from it.

    Phrases like

    “wrong AGAIN”

    “if only you read a little”

    “crackpot”

    etc should be avoided.

    BTW

    Your results are divergent.

    PS – note to Ken P – I’m only ever concerned about Homer’s progress as a scholar. My invective only serves to discipline a wilful and ignorant mind. Deru kugi wa utareru.

  35. . says:

    So kosh, what effect on risk premia for investments does sovereign debt have?

  36. Fyodor says:

    30% debt to GDP is not “trivial” in my opinion. You seem to think it is. We differ.

    We differ in many ways. One of them is in comprehension. I didn’t state that 30% debt/GDP is “trivial”. Read what I wrote, then attempt to comprehend it.

    A 30% peak to trough fall in tax receipts over two years is pretty materiel if not “extraordinary”. In each year the spending pac man continued to ratchet up by 10%. That’s an eye popping increase.

    Got your numbers out of Wiki, did you?

    Yes, I’m aware that you’re quite worked up over several years of deficits during a recession, but I notice you haven’t backed out the 4bn euros injected into Anglo-Irish Bank in 2009. That alone was worth 2.4% of GDP, and it’s going to be a lot higher than that when they’re done.

    Now tell me what these deficits contributed to the national debt relative to the bank bailout, then tell me which is more material.

    As i keep repeating to you, anyone who considers matching risky receipts against hardcore recurring spending is asking for trouble. They were already at 15% deficit to GDP before the banking collapse hit them.

    No, that was AFTER the banking collapse, in the second year of a recession and included expenditure ON the banking bailout.

    They were about as close to a safe harbor in terms of getting through this as someone in the canoe in the middle of the Pacific. Let me know if you ever go for a job as CFO at a public company please.

    I thought I was supposed to be a bank teller in Penrith? Now I’m a CFO applicant? Wonders never cease.

    The bank crisis became apparent in 2008, JC. Do you remember 2008? It was the year before last year. And yes, the deficits of 2008+ would have been readily manageable with Ireland’s starting debt/GDP in 2007, pre-crisis, of 25%.

    It was closer to 30%.

    Source? Mine, the National Treasury Management Agency of Ireland, says it was 25%.

    How manageable is that starting point when the deficit begins to blow out to 15% even before the banking issue hit them?

    After the banking issue hit them, in the middle of a recession. FFS get your timing right.

    Is that why by most metrics they were considered to be elevated risk within the EU from 2008 onwards?

    What metrics, when in 2008?

    “This year”? This year was far too late to start your count – you’re cherry-picking.

    No not really, as Irish CDS and bond yields have been in the most elevated group since 2008.

    What “most elevated group”, since WHEN in 2008?

    CDS spreads for Irish 5yrs were way down at 20-30bps before October 2008. The bond market had no problem with Ireland’s fiscal position then. They spiked after Lehmans and the Irish bank bailout, then peaked in March 2009 before falling to the low 100s.

    Thanks for summarizing what the overall market was doing during those times in terms of volatility.

    I didn’t summarise the overall market; just Ireland.

    What Irish Bailout was there before this? Irish CDS and yields have been elevated putting them in the high-risk group though out the period despite ebb and flows.

    The guarantee of Irish banks in October, 2008. What else? Irish government CDS spreads only became “elevated” relative to peers after this event.

    it is the key contributor to government debt.

    One of.

    Oh, yes? What were the others? Do tell, and list them by contribution. You might learn something from the process.

    I don’t believe they would have climbed out even without the banks or at least if the banks were in okay shape. They would be seen in a similar situation to Spain where the banks are okay (just) but the budget is way out of whack while their debt to GDP is actually relatively small (around 65%).

    Oh, let’s be clear about this: Ireland would have had a terrible recession regardless of the bank bailout. Both Ireland and Spain are fucked economically, but the Irish are more fucked because they bailed out their banks and now have an impossible debt burden, and the market knows this.

    The fact remains that Ireland had interest rates set for a slowly growing Eurozone core when its far more rapid growth warranted much higher interest rates.

    I don’t think you can make this assumption. Interest rates can be “too low” even at 18% as we saw in the 80’s. Absolute levels are simplistic and actually quite misleading. You are being simplistic.

    JC says, “You are being simplistic.” Oh, the irony. What you think is irrelevant.

    Ireland patently had an overheating economy, unlike Germany, yet both faced the same interest rate regime. It doesn’t need any more complicating than that.

    Core CPI was generally well behaved in that period across the Euro region.

    Is that right? What was CPI inflation in Ireland through the 2000s? More or less than Germany?

    Ireland was growing faster than the core and thus should have had a different interest rate regime. It didn’t – it therefore had an inappropriate monetary policy.

    What metric(s) do you think the ECB should have used? If not core CPI then what? I distinctly recall you once arguing core CPI was the best measure but now you seem to be walking away from that. Are asset prices perhaps important like we once discussed and you criticized?

    Again, you’re missing the point. Ireland should not have had the ECB running its monetary policy in the first place – there was no way that Eurozone CPI, which would NOT have been representative of Irish inflation or inflationary pressure, would have been a good metric for setting Irish interest rates.

    Also, where am I supposed to have said asset prices weren’t important?

    Who mentioned CPI targeting or it being “faulty”?

    So do you agree with CPI targeting or not? Forgive me but you were always a passionate believer in CPI targeting and belittled views about asset prices also being important.

    For inflation targeting? Yes, CPI is generally the best available measure of inflation. I don’t recall stating that asset prices weren’t “important”. Show me where I’m supposed to have said so.

    lastly I’ve asked you and Homer to suggest what the Irish should have done about their banking system when all the other western economies were guaranteeing theirs? So far I haven’t seen an answer.

    That’s because you didn’t ask me that question. I’ve already stated what should have happened, back in my first comment: the Irish should have forced their banks into a managed default and restructuring, and not socialised their losses. You should also remember that the Irish were the first to start guaranteeing their banks.

  37. Tel says:

    As Paul Krugman noted, people are prone to see economics as a morality play. The old Marxist in me says that’s because they have a vested interest in drawing a particular moral. And the moral being drawn about “reckless government spending” in Europe and the US is a good example.

    Morality is the foundation stone upon which every remotely sustainable economy must be built. People simply do not productively contribute to a system when they have expectations of being ripped off. Please consult a history book for horrific examples of the short-lived regimes that have attempted to make economic efficiency their only guiding principle whilst ignoring morality.

    If we choose to reward failure, we simply guarantee more failure… until failure is the only thing we have left.

    It’s not true shareholders weren’t punished. They were, as they were materially diluted. Perhaps junior debt holders should have taken a haircut, but it’s a little more complex with large portions of senior debt holders, as they rank with depositors in bankruptcy. Did you want the depositors to take a hit as well? I have no problem with that, but do you?

    I would have thought that if a government is handing out bailout money, then the entity with the gold gets to make the rules. Thus they can hand their bailout money to whichever entity for whatever reason comes to mind at the time. If needs be, let the bank crash and issue some sort of payment voucher directly to the depositors — don’t even wave it close to the senior debt holders.

    However, personally I feel that depositors should not get off completely scott free, because to some extent they did have a choice where they deposited their money (not much different to shareholders) so because they had a choice, they are responsible for exercising sensible choice and selecting a bank that behaves itself.

    Better for the Government to hold the debt – they can service it without the risk off default.

    Debt is a promise, every promise stands a risk that it will not be fulfilled (including government promises). Debt and risk are intractably entwined, the belief that we can wave hands and make it safe is a complete dead end. By the way, I simply don’t accept that it is impossible for governments to draw down debt and also for private citizens to simultaneously draw down debt — if some accounting identity prevented this then it would necessarily also have prevented the generation of such large debts in the first place.

  38. JC says:

    Fyodor:

    I don’t disagree with your summation that the banking collapse basically did them in good and proper.

    However my difference is that you’re been indirectly implying that they would have made it through if the banks weren’t in as bad a shape. Perhaps. My hunch , all things being equal, is that they would still have been viewed like Spain to a large degree and they may not have escaped the clusterfuck. Even without the banking mess their finances were in perilous shape anyway.

    As your last comment;

    I done think they could have done it and got away with it when all the other countries were guaranteeing their banking systems. The fact that you correctly mention they were one of the first out of the gate is really neither here or there as they may have been simply the first to go public with that strategy.

    For instance I don’t think the Americans were looking to Ireland for any guidance and neither were the Brits.

    I don’t disagree with the idea that banks should have been put through the insolvency ringer. But this is where it does get tricky. Large portions of senior debt would be treated in the same way as depositors. Should depositors also take a haircut? I think they do. Do you?

    Was the Euro a horrible Idea. Yes. But I’m not sure they would have avoided a bad situation and of course coming out would have been easier.

    Frankly i don’t see how they get out of it short of consolidating their fiscal positions into one and Germany calling the shots.

  39. JC says:

    oops.. I don’t think..

  40. The Beverage Curve says:

    Mark,
    You can’t even read graphs , you still cannot and never look at history which is why you are always wrong. chart 2 enables even the most literate to compare 2001 and 2008!
    such a pity you never have evidence with any of your claims.

    Fyodor,

    Austerity lead to a depression you know 5 quarters of negative growth in 6 the economy heading south since 2007.
    I have never said Ireland could avoid a recession caused by the GFC given their banking troubles but they could have avoided a depression.
    A declining economy is much worse for a completely stuffed banking sector than an economy that is recovering don’t you think?
    Ireland have gained nothing from Austerity at all

    JC
    You should have made the shareholders and bond holders take a haircut and protect depositors as has happened here in the past albeit under a lot better conditions.

    You either have money in a sovereign fund designated for either a specific purpose or for a rainy day or you keep it in a general fund overall and buy other counties bonds like China for example.

    Any talk of returns is quite silly. They are not nor should they be trying to beat an index. They are in the act of protecting money so when the next great recession arrives we then can aging successfully avoid it and consolidate in record time

  41. . says:

    You can’t even read graphs , you still cannot and never look at history which is why you are always wrong. chart 2 enables even the most literate to compare 2001 and 2008!

    Homer you nong, the data I’m, referring to is for late 2008 – late 2009. The stimulus wrecked the economy and put more people out of work than it helped into a job.

    such a pity you never have evidence with any of your claims.

    WTF?

    62200TS0001 Persons Not in the Labour Force, Australia – Age by sex
    Released at 11.30 am (Canberra time) 24 March 2010
    TABLE 1a: PERSONS NOT IN THE LABOUR FORCE AGED 15 AND OVER, Age by sex, September 2008—September 2009

    “Any talk of returns is quite silly.”

    Homer. Say this to a superannuation seminar. See if you make it out alive.

  42. The Beverage Curve says:

    As I said when you originally raised this rubbish what was the historical record.

    less people left the labour force during the GFC crisis than in 2001 as anyone can see who has eyes and can read a chart!

    you understandably cannot

    A Sovereign fund is not superannuation and is use for completely different purposes!

    you understandably do not understand the difference between the two

  43. . says:

    “A Sovereign fund is not superannuation and is use for completely different purposes!

    you understandably do not understand the difference between the two”

    What is it for, pissing money away?

    “less people left the labour force during the GFC crisis than in 2001 as anyone can see who has eyes and can read a chart!

    you understandably cannot”

    Pipe down and you might learn something. For the period in question (i.e the stimulus effected time of the economy), about 197 000 people left the labour market. Net emigration was around 12500. About 150 000 people had their working hours reduced.

  44. . says:

    Homer – as for someone who accuses other of being incapable of reading graphs, the onset of the stimulus saw the slowdown in capital expenditures accelerate.

    This happened of course during the peak phases of the stimulus.

  45. The Beverage Curve says:

    As I said anyone who is literate can look at chart2 on the Treasury paper and then see what is truth.

    of course another thing the treasury paper shows is that when the States are included the Structural defcit is lower which of course is different in hillsville!

    The facts always are.

  46. . says:

    You can’t be taught can you, you reprobate?

    I’ve provided references, data, etc and you accuse me of having no evidence, then refer to a debunked, out of reference argument of yours on some reading list you’ve cooked up.

    Who cares what you say. Paul, JC and Fyodor are having an interesting discussion and have sensibly ignored you.

  47. The Beverage Curve says:

    yeah a treasury paper the page number and the chart number is no reference where anyone can see what happened in 2001/2 and 2008-10 which is relevant.

    you understandably do not understand.

    Really I have written nothing about what Paul has said.

    I have written somethings regarding Fyodor’s remarks to which he has also replied.

    You understandably missed them in the midst of your ritual abuse.

    you always abuse people when you are caught out all the time.

  48. . says:

    “less people left the labour force during the GFC crisis than in 2001”

    You’re batty if you think that happened.

    The 2001 recession reduced the participation rate all the way until 2004 did it?

    People exited the labour market AFTER the 2001 mini recession (commencing 2002-03, but you call this 2001-02). The 2008-09 or 09-10 saw an actual reduction.

    There is no point in discussing any issues with you as you have shockingly bad cognitive impairment.

    You can’t read a graph you inummerate fool and then procede to dress down people who can.

    Pontificate on economics once more when you’ve mastered the Cartesian plane.

  49. . says:

    If you want to look at the graph yourself gentle readers and draw your own conclusions, it is here:

    http://treasury.gov.au/documents/1881/PDF/04_Structural_Budget_Balance.pdf

    See p 7 of the PDF (57 of the greater document).

  50. The Beverage Curve says:

    the participation rate followed the economy with a lag on both occasions.

    The participation rate peaked at 65.7 in February 2009 . When a statistic peaks this means it was rising until then. Gosh when the economic growth go negative?

    You do not understand what a lag is for understandable reasons

  51. . says:

    Homer you cannot be serious. The participation rate INCREASED for one to two years after the earlier recession, and it fell during the latter one and more so when stimulus was introduced, then has begun to pick up now it is gone.

  52. The Beverage Curve says:

    Mark

    1) There wasn’t a recession on any definition in the early 2000s.

    2) Both times a lag influenced the figures.

    3) If it peaked in February 2009. This was AFTER the worst of the slowdown because of the slowdown.

    4) one might expect a different reaction between a slowdown and a possible recession where people such as Sinclair Davidson for example, were saying a recession was guaranteed!

    5) the fact is the fall in the participation rate was less than in a minor slowdown. this can easily viewed on the treasury paper

  53. . says:

    You cannot be serious. The lag took 2.5 years right, Homer? Nothing to do with rising family incomes (pre capcity constraints) and the baby bonus in 03-04?

    “If it peaked in February 2009. This was AFTER the worst of the slowdown because of the slowdown.”

    Then afterwards the bulk of the stimulus put more people out of work than Rudd claimed he could help.

    “There wasn’t a recession on any definition in the early 2000s.”

    “minor slowdown”

    …and you say Ireland is in a “depression”, despite your earlier gibber and misunderstanding “on” the commonly used technical terms.

  54. Fyodor says:

    I don’t disagree with your summation that the banking collapse basically did them in good and proper.

    However my difference is that you’re been indirectly implying that they would have made it through if the banks weren’t in as bad a shape. Perhaps. My hunch , all things being equal, is that they would still have been viewed like Spain to a large degree and they may not have escaped the clusterfuck. Even without the banking mess their finances were in perilous shape anyway.

    Mmmyeah…it really depends on what you mean by “made it through”. I agree that Ireland was fucked from the get-go, but I also believe that a better-managed banking collapse would have spared the Irish from the debt-catastrophe they’re entering, and what I think will be the inevitable default on the national debt and withdrawal from the euro. The reason why is that without the banking bailout the national debt/GDP ratio would have been both more manageable and on a par with stronger countries. I’m not certain about this, however, as a managed default of the Irish banks would have exacerbated the short-term pain for the economy, so it wouldn’t have been a costless or riskless alternative.

    I done think they could have done it and got away with it when all the other countries were guaranteeing their banking systems. The fact that you correctly mention they were one of the first out of the gate is really neither here or there as they may have been simply the first to go public with that strategy.

    You’re missing the point. The premise for the bank guarantee in Ireland, as in other countries that subsequently introduced similar guarantees, was that the banks simply needed access to refinance in the frozen debt markets of the time and that they would be alright once the government eased their refinancing with sovereign support. This assumption – that the Irish banks could survive – was hopelessly naive. They didn’t need rollover of maturing debt, they needed total restructure and refinancing, and the government should have forced them into this process from the start, rather than indulging in “extend and pretend”. In such an alternative outcome, the bank guarantee would have been unnecessary, because the Irish banks would not have been competing for funds with other nations’ banks, but forcing massive write-downs on their creditors instead.

    I don’t disagree with the idea that banks should have been put through the insolvency ringer. But this is where it does get tricky. Large portions of senior debt would be treated in the same way as depositors. Should depositors also take a haircut? I think they do. Do you?

    You’re seeing the situation as a typical insolvency, when it wasn’t. It would have been very easy for the Irish government to dictate terms to the banks’ creditors. Politically, there was no way an Irish government could force losses on small depositors and, more importantly, given these banks had LDRs well over 100% the bulk of the losses could have been forced onto shareholders, bondholders and other wholesale creditors anyway. The most egregiously rooted fubank, Anglo-Irish, had an asset base in Sep-08 of €101bn but only €51bn in deposits, of which €19bn was retail and thus politically sensitive. When the Irish government nationalised the zombie in early 2009 not only did they NOT negotiate a write-down on its debt, they kept pouring more money into it. The lunacy of the Anglo-Irish bailout alone beggars belief.

    Frankly i don’t see how they get out of it short of consolidating their fiscal positions into one and Germany calling the shots.

    That’s one way: selling themselves into German slavery, which is effectively happening as we type, but that “solution” doesn’t make the Irish economy better off. All it does is bailout the (mostly European) creditors of the Irish banking system with EU governments’ (i.e. EU taxpayers’) money and place the Irish taxpayer in bonded servitude to the rest of Europe. Feck that.

    The alternative, national default and withdrawal from the euro, is often considered to be “impossible”, but in my view is the least fucked option and probably the route that will be chosen once the Irish wake up to the nightmare ahead of them. I can’t think of a single democracy that would willingly suffer the deflationary contraction that will be imposed on the Irish by the EU/IMF.

  55. JC says:

    Interesting how Homer thinks the participation rate lags by 2 1/2 years. This isn’t obviously what he implies during the times he sermonizes about the economic genius of 30’s Germany.

    You should have made the shareholders and bond holders take a haircut and protect depositors as has happened here in the past albeit under a lot better conditions.

    Homer I’ve repeated this to you several times in the past and it doesn’t seem to sink. Shareholders across the western world did receive a haircut. Quite a few of them received crewcuts for that matter.

    The bond holders should have also taken a bath. However there are several layers on bondholders and the senior tranches would rank equal to depositors. Are you suggesting the depositors should have also received a haircut perhaps left just over the ears? Answer the question. I do, but do you?

    You either have money in a sovereign fund designated for either a specific purpose or for a rainy day or you keep it in a general fund overall and buy other counties bonds like China for example.

    Homer we have a deficit, the suggestion we run a SVF at the moment is preposterous. Despite a commodity boom we’re running a deficit.

    Any talk of returns is quite silly. They are not nor should they be trying to beat an index. They are in the act of protecting money so when the next great recession arrives we then can aging successfully avoid it and consolidate in record time

    Great idea. Stick the money in a Chinese lottery and then when they head over a cliff we’re there trying to sell them. You do realize that we can’t buy Chinese bonds at their lottery, right? They have capital controls.

  56. JC says:

    Fyodor:

    Credit Suisse thinks that a full on managed default in the EU ( think they also include Italy and Belgian waffle makers who have been racking up a real debt party) would be around $500 billion. That’s with all the miscreants going off to the barber, getting in line and getting trimmed inclusive of nose hair.. Bank bond holders, Sov. debt holders.

    They also think that if the miscreants don’t leave deflation in those countries will be around 5 to 10% for 3 years or so.

    I tend to agree with you that the only way out is through reflation are the labor markets and all the other markets are simply not flexible enough to withstand nominal cuts.

    I’ll get back on your well thought out comment a little later.

  57. Fyodor says:

    Fyodor,

    Austerity lead to a depression you know 5 quarters of negative growth in 6 the economy heading south since 2007.

    I have never said Ireland could avoid a recession caused by the GFC given their banking troubles but they could have avoided a depression.

    A declining economy is much worse for a completely stuffed banking sector than an economy that is recovering don’t you think?

    Ireland have gained nothing from Austerity at all.

    Homerkles, you’ve made several errors here.

    First, the Irish recession was not caused by the GFC. The Irish were always going to have a recession regardless of what happened to the global financial system because of their massive, unsustainable property bubble. The Irish economy had two consecutive quarters of GDP decline in 2Q and 3Q of 2007, had a modest rebound in 4Q07, then saw GDP contract for eight consecutive quarters over 2008-2009. Anyway you cut it, the Irish economy went into recession WELL before either the GFC commenced at the end of 3Q08 or the imposition of “austerity” this year.

    Second, “austerity” was hardly imposed on the Irish before this year. You’ve already seen the government receipts and expenditure data provided by JC. There simply was no fiscal contraction either prior to, or during, the economic contraction of 2008-2009. Large fiscal deficits with no material decline in government expenditure do not represent “austerity”. If anything they represent the OPPOSITE.

    Third, the real austerity package, involving material cuts to spending and increases in taxation, has only just been announced.

    Conclusion: you have no basis for stating that “austerity” caused – or even exacerbated – the “minor depression” that Ireland has experienced to date.

  58. The Beverage Curve says:

    Mark, go and read what lag means in economics.
    and yes something happened in 2000

    JC one is very risk averse with funds from a surplus which is why the return on the funds is absurd.

    It is there to use in the bad times like Chile , Norway ( and we did to a lesser point.)

    Fyodor did the Irish economy fall in 5 of the last six quarters?
    You claim the Irish went on a spending spree following 2007? wow.

    An examination of the spending from Irish budget documents would indicate not.
    Usually Politicians bellow from the hilltops about how they are saving the economy by spending money.

    The Irish finance minister was doing the opposite.
    He says in the 2008 budget ‘Our approach has been to reduce public expenditure as much as possible on the current side and as much as is sensible on the capital side.’

    no sign of spending money to reduce the impact of an impending recession.

    so in 2007 the budget had a small structural surplus which suddenly became a structural defcit of 5% the next year.
    Try to guess why they were wrong? The IMF actually talks about this. ( don’t talk to catallaxians though they get confused on the topic.)
    They try to reduce expenditure from 34% of GDP to 32% of GDP but what happened?
    They were projected to rise in the next budget to 46%!

    Yeah with catallaxian logic you are attempting to say they were spendthrifts?

    A graph involving a ratio usually means it pays to exmaine both what happend to both sides of the ration and finmding out why it happened.
    you haven”t and have come to the wrong conclusion.

    silly boy
    Governments that attempt to reduce the deficit in bad times almost always increase it with spending increasing and taxes decreasing.

    In 2009 the Irish government announced measures that the IMF has shown ( p4 Ch3 of latest IMF report) amounted to 4.5% of GDP.
    If that isn’t austerity then nothing is!
    Both the OECD and IMF specifically concurred in their reports of Ireland at the time.

  59. . says:

    “go and read what lag means in economics.
    and yes something happened in 2000”

    So the fall in the participation rate in 2003-4 is NOW because of the downturn in 2000?

  60. Disinterested observer says:

    Homer

    Can we step back a little so we can understand where you are coming from as your perspective interests me.

    You have I believe previously contended that the first and perhaps only genuine example of practical Keynesianism in the 20th century was the German regime of the 1930s under Chancellor Hitler.

    My question is this – would Australia’s response to the GFC be the second only example of practical Keynesianism so far?

  61. The Beverage Curve says:

    You are wrong in the first.

    Germany rightly got rid of classical economics after Bruning’s disastrous ‘reign’.

    Keynesianism works when fiscal policy is caused because monetary policy cannot be as there is a liquidity trap.

    It has worked both ways in Japan as Adam Posen has shown.

    The cited IMF report shows we live in a Keynesian world.

    classical economics was always a myth as Ireland shows now.

  62. . says:

    It may be of interest to you TBC that Adam Tooze strongly disagrees with you.

    Now from earlier – the fall in the participation rate in 2003-4 is NOW because of the downturn in 2000?

  63. Fyodor says:

    Fyodor did the Irish economy fall in 5 of the last six quarters?

    Yep. So what? Your point, if you have one, is irrelevant, as I pointed out that Ireland’s recession began in 2007, well before the GFC and any kind of “austerity” programme.

    You claim the Irish went on a spending spree following 2007? wow.

    No, I didn’t. I said there had been no material decline in government expenditure. This is accurate. If you disagree, prove it.

    An examination of the spending from Irish budget documents would indicate not.

    I’ve already discussed the expenditure of the Irish government, and I’ve read the official documents. If you want to argue the point, produce the data that disagrees with me. Pretend like you know more about the subject than I do.

    Usually Politicians bellow from the hilltops about how they are saving the economy by spending money.

    The Irish finance minister was doing the opposite.

    He says in the 2008 budget ‘Our approach has been to reduce public expenditure as much as possible on the current side and as much as is sensible on the capital side.’/blockquote>

    Wrong. That was in the 2009 budget and what Lenihan actually delivered in 2009 was an increase in expenditure, from €56.1bn to €60.1bn, and a decrease in receipts, from €44.6bn to €34.9bn. Now, it must be noted (as I did earlier) that 2009 expenditure included €4bn spent on Anglo-Irish, but if that’s austerity, I’m Evil Pundit.

    Both in absolute terms and relative to GDP, there was no “austerity” programme in 2008 or 2009.

    no sign of spending money to reduce the impact of an impending recession.

    Apart from spending the money, of course, and borrowing to spend it. You can’t have a deficit without spending more than you receive. You do understand arithmetic, don’t you? I’m only asking because you’re shaking my confidence in your mastery [sic] of basic accounting.

    so in 2007 the budget had a small structural surplus which suddenly became a structural defcit of 5% the next year.
    Try to guess why they were wrong?

    What? You’re more than usually incoherent here.

    The IMF actually talks about this. ( don’t talk to catallaxians though they get confused on the topic.)

    More confused than you? That would take some doing.

    They try to reduce expenditure from 34% of GDP to 32% of GDP but what happened?

    They were projected to rise in the next budget to 46%!

    Yeah with catallaxian logic you are attempting to say they were spendthrifts?

    Reply to what I wrote, not your strawman. I wrote that there had been no “austerity” until recently, and that expenditure had not declined materially. That is the case. If you disagree, prove it.

    A graph involving a ratio usually means it pays to exmaine both what happend to both sides of the ration and finmding out why it happened.
    you haven”t and have come to the wrong conclusion.

    Prove it.

    silly boy

    Pfft. To quote your friend and mine, your ad hominem is like being flogged with a warm lettuce. Quit while you’re behind.

    Governments that attempt to reduce the deficit in bad times almost always increase it with spending increasing and taxes decreasing.

    In 2009 the Irish government announced measures that the IMF has shown ( p4 Ch3 of latest IMF report) amounted to 4.5% of GDP.

    The latest IMFsurvey shows nothing of the sort, not on

    – page 4;

    – the fourth page of Chapter 3; or

    – any page in Chapter 3; or

    – any fecking page in the entire report.

    Link to your source, please, with adequate referencing.

    What the survey I’ve linked to DOES SHOW is that government revenue/GDP declined in every year 2006-2009 and government expenditure/GDP increased in every year 2006-2009 and was only projected [at the time of writing – this past July] to decrease from 2010 onwards. This is clearly visible in Table 3 on page 30 of the IMF Survey. What “austerity” are you talking about? Clearly, the size of the economic decline in 2007-2009 HAD NOTHING TO DO WITH AUSTERITY, real or imagined.

    If that isn’t austerity then nothing is!

    Logic FAIL.

    Both the OECD and IMF specifically concurred in their reports of Ireland at the time.

    Quotations and sources, please. Sorry, Homerkles, but I’m not taking anything you say on faith. You’ve proved yourself to be totally unreliable on the data.

  64. Disinterested observer says:

    Ok Homer, so following from what you said how many successful Keynesian interventions have there been? would Chancellor Hitler’s one have been the most successful? Did FDR’s qualify according to you? Is there enough of a sample size to make a judgement on the effectiveness of this doctrine?

  65. The Beverage Curve says:

    Fyodor,

    I haven’t used ann AH’s so please don’t so I have.

    Firstly I didn’t say when the recession started but that it had fallen in 5 of the last quarters.

    The Government attempts to reduce spending from 34% to 32% of GDP but it rises to 46%. You are saying it was deliberate.
    Good luck but as yet you haven’t shown it.

    Let us go through what happened.

    in the 2007 budget papers the government said it would have a small structural surplus. It turned out to be a large structural deficit.
    The reason being the economy.

    If it was DELIBERATE the economy would have recovered strongly since it is all strucutral spending. It didn’t. ipso facto it was cyclical.

    That is why the outcome was different to the projection.

    your assumption is simplistic to say the least

    the IMF report I reported was the October one with Chapter 3 showing the macro effects of fiscal consolidation. See footnote 10. I forgot the EC report as well.

    A weak economy affects both the structural and cyclical parts of the budget as we now know.

    So we have a government attempting to cut spending /raise spending and being unsuccessful.

    Why has revenue fallen and sspending increased?

    Same reason.

    Why no recovery?

  66. The Beverage Curve says:

    JC pray tell us of ONE successful example of classical economics

  67. Disinterested observer says:

    I’m not JC. Please answer the questions if you’re able to.

  68. JC says:

    Not me Homes. You’re on your own here, as I’m sick of pulling you out of holes you keep digging yourself in. You’ve dug so many one of the big miners is going to hire you to replace their digging machines.

  69. Steve Edney says:

    You can’t ague with this. Homer knows how the counterfactuals would have turned out. He knows that Ireland would not have had a recession if they had spent like mad, and would have had less debt as a result and he knows that Australia would have had a recession, and a larger deficit if we hadn’t borrowed and spent.

  70. JC says:

    JC pray tell us of ONE successful example of classical economics

    Hong Kong would be one, Homer. Switzerland would have been another up to the early 90’s. Those are two right out of my head.

    I gave you two, so thank me.

  71. . says:

    “He knows that Ireland would not have had a recession if they had spent like mad”

    Something tells me that won’t work at the end of an unsustainable, credit led property boom (caused by being part of an unworkable monetary union).

    It will be interesting to see which journal or report Homer mangles as a counterpoint to this.

  72. The Beverage Curve says:

    since 2007 Ireland had had not one not two not three not four but FIVE seperate plans to repair the budget.

    Each has not succeeded.

    It is absurd to say they have been on a spending spree.
    It is also very lazy thinking.

  73. The Beverage Curve says:

    JC,

    Hong Kong and Switzerland were in Depressions eh.
    They had liquidity traps.

    oh dear

  74. Fyodor says:

    I haven’t used ann AH’s so please don’t so I have.

    “Silly boy” is ad hominem. Trivial, so I didn’t respond in kind, but you’ve been warned.

    Firstly I didn’t say when the recession started but that it had fallen in 5 of the last quarters.

    Of course you didn’t say when the recession started, because it undermined your argument. That’s why I told you when it started, which makes your comment about the last six quarters redundantly immaterial.

    The Government attempts to reduce spending from 34% to 32% of GDP but it rises to 46%. You are saying it was deliberate.
    Good luck but as yet you haven’t shown it.

    No, I’m saying:

    1. I don’t understand what you’re on about, because you’re so incoherent; and

    2. The data I’ve presented SHOW that there was no material contraction in the fiscal position of the Irish state in either 2008 or 2009, the guts of the “minor depression” as you call it, so there is no basis for your assertion that an alleged “austerity” programme caused this downturn.

    That’s what I said, that’s what I proved and now the onus is on you to rebut or concede.

    Let us go through what happened.

    in the 2007 budget papers the government said it would have a small structural surplus. It turned out to be a large structural deficit.
    The reason being the economy.

    If it was DELIBERATE the economy would have recovered strongly since it is all strucutral spending. It didn’t. ipso facto it was cyclical.

    Non-sequitur and irrelevant to the argument.

    That is why the outcome was different to the projection.

    your assumption is simplistic to say the least.

    No, Homer. Your argument is incoherent, illogical and unsupported by the data. Those are the most generous things I can say about it.

    the IMF report I reported was the October one with Chapter 3 showing the macro effects of fiscal consolidation. See footnote 10. I forgot the EC report as well.

    WHICH REPORT?! The IMF publishes heaps every month. I hoped against hope that you meant the FSR, but no, you weren’t that clued in, as there’s no supporting reference there.

    FFFS, please provide a link.

    A weak economy affects both the structural and cyclical parts of the budget as we now know.

    So we have a government attempting to cut spending /raise spending and being unsuccessful.

    It did neither in 2008 or 2009. That’s the point.

    Why has revenue fallen and sspending increased?

    Same reason.

    No, the reason is that there was no “austerity” programme. Which kinda runs contra to your assertion, dontchathink?

    Why no recovery?

    I was going to go with the standard “prolonged recession following collapse of real-estate driven property and finance bubble” but following Homerillogic I guess I should have gone with: “the budget deficits of 7% and 14% in 2008 and 2009 weren’t enough! They should have borrowed even more money because capital markets are infinitely forgiving of fiscal lunacy in Krugmandia!”

    That’s the problem with you vulgar Keynesians. You’re like commies and other snake-oil salesmen – the problem is never with the “medicine”, just the insufficiency of the dose.

  75. . says:

    “Hong Kong and Switzerland were in Depressions eh.
    They had liquidity traps.”

    Never being in a depression would be an awesome commendation of classical economics.

    Homer forgets the protectionism and inflationism of pre depression America. Hint: they were not “classical” policies, unless Swan and Carr are now running “classical” policy.

  76. JC says:

    Hong Kong and Switzerland were in Depressions eh.
    They had liquidity traps.

    oh dear

    Homer, you asked me for one successful example of classic economics.

    I gave you two. Rather than thanking me I receive a backhander. Show a little gratitude Homes, as it goes a long way.

    I honestly don’t knwo about Switzerland, but HK has had some stinging real estate led recessions in the past, but it seems to get on its feet, dust itself off and keep on trucking.

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