Crystal Ball Gazing: Economic Forecasts and Commentary for Ireland and Beyond (Updated with new commentary on global economy and NAMA)

Economic Forecasts 2010

Preliminary Economic Forecast 2009

1st January 2009. Revised forecasts below.

The most notable feature of 2009 will be that the global economy will contract. While traditional sources such as the OECD and World Bank continue to forecast positive economic growth, it is hard to see this occuring in the context of significant contractions in the US, the Eurozone, Japan and the UK. The two main growth economies - Brazil and China - are going to see growth rates halved in 2009, as the knock of effects of economic crises elsewhere reverberate back home.

A report carried in the Guardian on 1st January warned of a contraction of up to 3 percent in the Eurozone. Meanwhile, the British Chamber of Commerce today predicted a contraction of up to 2.9 percent in Britain. If anything, this seems optimistic given othe predictions (also from the Chamber of Commerce) that unemployment would rise to 10 percent during 2009.

Official forecasts from the US are more noted by their absense. One finds vague references to an economic upturn during the third and fourth quarters of the year. It is surprising that such arrant nonsense is still being pedalled when all the indicators are for things to get much worse. Unemployment in the US will rise throughout 2009, and the level of personal debt likewise. Manufacturing output will fall. Consumer spending will be massively down.

The news from the Eurozone is little different. All the major economies in the zone are in trouble of one sort ot another. The economies of some of the smaller nations - notably Ireland and Hungary - are in desperate crisis. One of the more interesting statisitics from Ireland in 2008 was that the number of new house completions only fell to about 49,000 units (from 78,000). The final figure was much higher than predicted by the Sustainability Institute at the start of the year ( see 2008 commentary for more on this).

One explanation is that a number of one-off houses granted permission prior or during to the frantic building period of 2004-7 suddenly got finished. But the real story is in the rise of unemployment, and the contraction in the Irish economy ( both far worse that predicted by most commentators, and significantly worse than the Sustainability Institute's forecasts) which occured during a year in which domestic construction activity - if based on the number of completions - contracted by about 37 percent. Conventional wisdom was that for each 10,000 less housing units completed, one percent would be knocked off economic growth. Thus one might have expected economic growth to have fallen by about 3 percent between December 2007 and the same month in 2008. Yet the economic growth of 5.3 percent in 2007 became a contraction of 2-2.5 percent in 2008, a change of almost 8 percent.

Another bit of wisdom was that each 10,000 less housing units built would add 0.5-1 percent to the unemployment figures. This was closer to what actually happened in 2008, as unemployment rose from just under 5 percent at the end of 2007 to about 8 percent a year later. However, by no means all job losses occured in the contruction industry. Many losses also occured in the hospitality sector, particularly in hotels and resturants.

From the number of commencement notices, and registrations with Homebond and Premier Guarantee, one can get an approximation of how many dwellings may be completed the following year. Thus 62,000 registrations in 2005 translated into 93,000 completions in 2006, while the same number of registrations in 2006 translated into 78,000 completions in 2007. In 2007 the number of registrations had fallen to 38,000. In 2008 the number of registrations had fallen to less than 12,500, with only 3500 in the final 6 months.

The figures for house commencements ( commencements registered with local authorities) tell a similar story . 77,000 in 2004, slightly less than the number of completions the following year. There were also 77,000 starts in 2005, 76,000 in 2006, and 49,000 in 2007. In 2008 there were about 23,000. Anecdotal evidence suggests a number of housing projects started in 2008 have already been abandoned, as developers went bust or the money ran out.

It would be a brave gambler who would bet on more than 25,000 completions in 2009. In all likelihood, house completions will fall by another 25-30,000 in 2009, roughly the same as the fall experienced the previous year. In addition however, commercial (non-domestic) construction - which enjoyed a full year of continued growth after the domestic sector had crashed - is also showing signs of serious contraction. Surplus office space can now be found in every single town and city across Ireland.

As late as 2006, the construction sector accounted for 14-16 percent of the Irish economy. The figure for 2008 was nearer 10 percent. The figure for 2009 will be only half that. While the performance of the remainder of the Irish economy must be taken into consideration when estimating employment and economic activity, it is noted that some other sectors are already in serious trouble. Tourism, in particular, will be annihilated.

The government is still talking about an economic contraction of 3-4 percent in 2009. Elsewhere, forecasts are generally in the 4-5 percent range. While, it is understandable that no-one wants to make an excessively bad forecast, there is little to be gained from making an unrealistically optimistic one. The chickens will come home to roost sooner or later.

When unrealistically rosy forecasts are repeatedly made by the State, it begins to look like a deliberate ploy to mislead the public in relation to the true scale of the disasterous mishandling of not just the economy, but the country, that has taken place over the last ten or twelve years. Also, it seems nothing has been learned. The latest mantra, that Ireland 'must position itself' so that it is ready to exploit any 'upturn in the global economy', is yet another chapter from Alice in Wonderland, spiced with the disaster capitalism of Friedman.

The good news is that the price of rented property will continue to fall. Given the surplus of property in the rented sector, this is a very good year for tenants to take issue with landlords who lease sub-standard housing stock.

Preliminary Economic Forecast 2010

1st January 2009. Revised forecasts below.

18th January

Dell waves Bye Bye while Irish State Nationalises Anglo Irish

Amid a torrent of bad news raining down on Ireland, Dell announced the relocation of its Limerick plant to Lodz in Poland, with the loss of 1900 jobs. That this should come as a surprise to is quite incredible, as it was always going to happen sooner or later. While the current low corporation tax in Ireland is undoubtedly attractive to foreign owned multinationals, Dell saw the advantages in moving to Eastern Europe at least half a decade ago, when its plant in Lodz was first planned. Workers on the Dell assembly line there earn under €3 an hour, though admittedly rents are low in Lodz and one can buy an apartment for €60K (expensive by Polish standards). Rumour has it that Dell secured a lucrative exemption from corporation tax as part of the package in setting up base in Poland.

In spite of gross profits of €1.4 billion in the year ending to February 2008, only €17.6 million was paid by Dell in corporation tax to the Irish State.

The knock on effects of Dell's departure include further job losses in supply companies, €50 million added to national welfare payments, and a devastating impact on the local economy around Limerick and South Clare.

Meanwhile, the Irish State has abandoned plans to pour €1.5 billion into Anglo Irish bank, and instead has opted for nationisation. This move has been strngly criticised in many quarters, mainly on the grounds that the State may be required to pour huge sums into Anglo Irish to cover bad debts. Many of the largrest debts have been run up by property developers, including ones known for their patronage of Fianna Fáil in the past. According to recent press reports, the largest debtor is the Quinn Construction Group, owned by Sean Quinn. While is has been repeatedly claimed that the banks assets exceed its liabilities. what is not clear is the degree of default in the banks loan book.

One possible benefit from the nationalisation of Anglo Irish would be the assets the State might aquire in lieu of repayment of outstanding loans. For example, the State could agree to take ownership of unfinished housing developments at a nominal price (perhaps around €30k per dwelling unit). The State would then take responsibility for completing the developments to the highest standards of energy efficiency, before offering the units for rent. This would create jobs- albeit short term ones - and offer some long term income to the State from rents collected.

Given the cosy relationship between Fianna Fáil and the construction sector, this would represent a very bold move on the part of the State. It is however, the only option if ownership of the bank is not going to be a further burden on the Irish economy.

Irish State Approaches Bankruptcy

In spite of reasurances from the Irish Government, there is growing evidence that ireland is becoming an economic basket case. The gap between spending and income is growing at an alarming rate, and the State appears unable to prevent the situation getting much worse. The Irish Governemtn lurches from one half baked solution tothe next. Incredibly, it is still talking about Ireland positioning itself for the global upturn. Even if wages are cut, this will only serve to reduce consumer spending further, leading to more job losses in manufacturing, retail and transport. Anyone who thinks the Irish economy will only shrink by 3 or 4 percent in 2009 is living with Alice in Wonderland.

As the budgetary deficit grows, Ireland will be perceived as becoming a bad risk for more loans. Inevitably, this will raise the interest rate on money borrowed, in order to compensate for the growing likelihood of default. Eventually, money will only be available under extremly onerous conditions. Although the governent has denied it has sought help from the IMF, this remains a very likely scenario. Exactly what conditions would be imposed by the IMF are unclear. However, one only has to look at what happened in other countries 'helped' by the IMF - in particular Poland in 1989 - to get a flavour of things to come. The usual condition is the forced sale of State assets. This could include the railways, Bus Eireann, and land owned by Coillte. The fire sale of any State assets in such circumstances would be an unmitigated disaster. In particular, the sale of State owned land to venture capitalists - aka corporate asset strippers - would seriously compromise the future ability of Ireland to run its own affairs, or even survive as an independent State.

Contrary to the free market thinking that has underpinned the Fianna Fáil economy strategy, the 'invisible hand' of the market can be guaranteed to do only one thing: make matters worse. The State needs to take a decisive leadership role. It needs to restructure taxation so that wealth is more fairly distributed. Instead of cutting wages, taxes should be increased. A new higher tax band should be created for the wealthy. The rules governing tax exemption for Irish 'non residents' should be tightened up and corporation tax should be brought into line with the Western European average (about 29 percent). It will not lead to a mass exodus of multinationals. It takes 4-5 years to relocate to another country, and it will be an unappealing move for any well established company given the uncertainties of the global economy. Any companies that jump ship in the next 2-3 years can be assumed to have their exit plans well advanced at this stage.

Next the State should initiate mass employment projects in building schools, railways and canals, planting sustainable forestry, and in the recycling of waste. Granted, these suggestions have been made (repeatedly) on this site but the need for action grows each passing month. Instead of improving public transport services, the Government seems determined to do the opposite.

The State should help kick start new strategic industries built around steel production (using the 700,000 tonnes of scrap ferrous metal Ireland produces per annum). The majority of Coillte land should be leased to community owned cooperatives on a long term basis.

The €100 million or so per annum that subsidises scheduled internal air services should be diverted into public transport. The metro link to Dublin airport should be put on hold, and priority given instead to a direct underground train line linking Hueston and Connolly stations, and more tram lines linking all sides of the capital. Busarus should be relocated to near Heuston Startion (or even further west and linked to Hueston by rail ). A proper bus station should be built in a strategic location in every large town in the country and bus services increased.

Finally there should be a massive effort to encourage the Irish population to grow more food for home consumption. In many respects this is the biggest priority. As stated elsewhere (see below) the economy will probably crash no matter what. However, there are still some good long term strategic options available. These options must be thrust in the faces of those who claim to represent the citizens of this State, until they begin to get the message. Welcome to the emergency.

Economic Forecast 2009

24th January 2009. 7th March forecast below.

Commentary

The sharp rise in unemployment experienced in Ireland at the end of 2008 has continued or possibly accelerated in the first three weeks of 2009. The rate of unemployment is now rising at around 0.5 percent per month. The first three to four months of 2009 are likely to be particularly nasty as many retail outlets go bust. Closures of hotels are likely to follow. However, many will try to hang on till the tourist season begins, in the hope that trade will pick up. While the recent gains made by the dollar against the euro may bring more visitors to Ireland from the USA, the opposite will apply to Britain, where the value of sterling against the euro has declined by 20 percent since last Autumn.

Companies supplying the retail, catering and hospitality industries are also likely to be badly hit. The growing number of vacant premises will lead to some openings for new businesses that can run with minimal overheads. Small cooperatively run enterprises in which the workers share in the take may find niches in consultancy services, retrofit insulation work in the domestic and commercial sector, or in providing low cost meals.

Although there may be some summer time optimism, the year is expected to finish as it began, with collapsing retail trade, sharply rising rates of unemployment, and growing levels of debt. So far, the Irish government seems unable to develop any clear straegy aimed at mitigation. The bank bail out is expected to impact only marginally, if at all, upon the worsening social and economic circumstances experienced by Ireland.

The State's determination to run public transport as a profit making venture rather than as a public service - the recent announcements of reductions in the provision of public transport service are an example of this - will prove extremely counter productive in the long term. While efficiency is certainly desirable, the implicit message that people should drive (and presumably own) cars instead of using public transport simply leads Ireland even further into a cul de sac. While this is not too apparent with oil prices at 5 year lows, the cost of maintaining a personal vehicle goes far beyond the price of fuel. When the next oil spike comes, the country will not be prepared.

Economic Forecast 2010

24th January 2009. 7th March forecast below.

28th January - Ireland

Taoiseach Brian Cowan acknowledged that the Irish econony 'could' contract by 10 percent by 2010. He neglected to explain the historical events in Ireland - and in particular the decisions taken by his own party for the last 12 years -that have led to this situation. Like many other national leaders, Cowan blamed the global economic recession, as if this were some contagious disease that had run riot throught the world economies, causing mayhem wherever it spread.

Meanwhile, the IMF has realised it got its sums wrong and has revised downwards previous 2009 estimates of the main global economies. It now predicts the British economy will contract by 2.8 percent in 2009, still somewhat optimistic compared to the Sustainability Institutes own forecast. The IMF estimates global economic growth will fall to 0.5 percent in 2009.

4th February - Ireland

The latest figures from the CSO show unemployment in Ireland reached 9.2 percent, up from 8.3 percent in December 2008 and 7.8 percent in November. The month on month increase of 12 percent in the numbers unemployed is one of the biggest monthly jumps ever. It does not bode well for the coming year. On this evidence, unemployment could reach 10 percent sometime in March (or earlier), 12 percent by the start of the summer, and as high as 15 percent by the end of the year. The additional welfare burden of 200,000 more unemployed will cost at least €4 billion per annum.

Unfortunately, the current administration does not have one single idea which might lead to job creation on any significant scale. It's sole strategy: offering sweeteners to multinationals to set up shop in Ireland, is a strategy that could only work once, albeit with a very limited shelf life. Ireland is now an economic basket case facing - without proper remedial measures - unemployment of over 30 percent within the next 5 or 6 years, and with no financial means to provide the necessary State welfare.

One might expect a responsible Government to acknowledge the full scale of the emergency and then take the initiative to create new long term employment. As repeatedly stated, many of the best future employment opportunities will be found in growing or processing food, in new forestry intiatives, in building canals or railways, and in the re-processing of waste. These are mostly activities that would benefit from State support of one form or another. One school of thought says things haven't got bad enough yet for the penny to drop: that the type of thinking which led to the collapse of an economy is not going to lead the way out of it.

16th February - Ireland

A report from Goodbody Stockbrokers today forecast a 6 percent contraction of the Irish economy in 2009. The report, which also predicted a 7 percent fall in consumer spending, forecast that unemployment would rise to 12.6 percent by the end of the year. The latter two figures closely match forecasts made by the Sustainability Institute back in January. Interestingly, Goodbody's forecast consumer spending to contract more steeply than the overall economy, suggesting an expectation that the public will begin rein in unncessary spending in anticipation of worse times to come.

Europe

Meanwhile, recent data from Europe shows the Eurozone economy contracting at at ever increasing rate. Data from the final quarter of 2008 shows the annual rate of contraction is currently about 1.5 percent, with a growing expectation the annual contraction will be greater than 3 percent by the end of 2009.

United States

The latest US financial bail out , a trifling $800 billion from new boy Obama (approved by the Senate last week) appears set to follow all the previous bail out money into the ever growing hole that is now the US economy. For a different take, take comrade Orlov, witty as ever:

Dmitry on Obama

27th February - US economy shrinking at fastest since early 1980s

Latest data from the US has indicated the economy there is shrinking at an annual rate of about 6 percent. Figures for the final quarter of 2008 showed a 6.2 percent contraction, almost twice the contraction of the third quarter,

Earlier in the week, Federal Reserve Chairman Ben Bernanke - who may live in a parallel universe where different mathematical laws apply - told Congress that 2010 could be a "year of recovery". Don't think so Ben. The smart money - a scarce commodity these days - says the best hope for the US is that the rate of decline stops accelerating by 2010. Not quite the same as levelling out.

4th March

Ireland

Latest figures from the Central Statistics Office show the unemployment rate in February to have reached 10.4 percent, up from 9.2 percent in January. This suggests the Irish economy is unravelling at ever increasing speed. The big rise in unemployment in January was a given, as many ailing businesses that had hung on till the end of 2008 gave up the stuggle or downsized their workforces. There was a possibility - albeit remote - that the unprecendented month on month increase between December and January would not be repeated in February. However, the latest figures suggest that unemployment will reach 12 percent by May at the latest. Looking further ahead, it is not a question of will unemployment exceed the record levels of the 1980s, but how soon will it happen? In the meantime, Ireland is governed by a party that is completely unable to acknowledge its own role in creating an economic bubble, and that is incapable of offering anything better than platitudes about 'making Ireland great again' as a solution.

World

Meanwhile, Romania has joined Hungary and Latvia in the list of bankrupt EU nations looking for a bail out from the International Monetary Fund. A closer examination of the Romanian economy will reveal that the supposed economic growth of the last few years was largely confined to the super-rich, and was accompanied by the now familiar stripping of State assets, and attendant corruption, nepotism, and burgeoning debt.

As if on cue, the Organisation for Economic Cooperation and Development (OECD) has admitted its January forecast of a 0.5 percent growth in the global economy in 2009 was unduly optimistic, and will be revised downwards in the near future.

6th March

In a bid to stimulate greater 'financial liquidity' - more borrowing by any other name - the European Central Bank of England has reduced its interest rate from 2 percent to 1.5 percent. It has also sharply revised downwards its forecasts of economic activity in the Eurozone for 2009, and has warned of an economic contraction of up to 3.2 percent this year (more pessimistic than the forecast made by the Sustainability Institute in January).

Meanwhile, the Bank of England has reduced its lending rate to 0.5 percent. In a further indication of the real panic within official circles in Britain, the government has elected to take the unprecendented step of putting an extra £75 billion (initial reports suggested the figure may eventually rise to £150 billion) of money into circulation in order to buy back its own bonds from financial institutions having cash flow problems. Printing more money in order to get more cash in circulation is always a high risk strategy. The risk is of inflation, and the accompanying deterimental effect on savings, which tend to become devalued as inflation overtakes the rate of interest paid. In such circumstances there is no incentive to save, only spend, thus further destabilishing the economy as banks are emptied and all provisions for the future are abandoned. This temporary 'surplus' of money pushes up prices of essential commodities, thus causing fresh cash shortfalls and the cycle repeats itself.

Other commentators have likened this to the final days of the Weimar republic in Germany, when currency devalued so fast it had to be moved around by wheelbarrow and was used as fuel instead of wood, or modern day Zimbabwe with its trillion dollar currency notes. That's 12 zeros for those only familiar with mere millions or billions. While Britain hasn't gone down that road yet - common sense suggests that the pound sterling will be supported by other currencies at some stage as it has strategic importance at a global level - certainly the alarm bells should be starting to ring.

The irony for Britain is that its leader Gordon Brown has been repeatedly calling for global cooperation on tackling economic collapse, yet simultaneously Britain is engaging in unilateral practices aimed (however mistakenly) at pushing Britain onto higher ground while the rest of the global economy sinks. Which of course is no different to what everyone else is doing. In classic Orwellian doublespeak, protectionism is publicly decried by the same nations that are enthusiastically engaging in it. However, in many ways, protectionism is unavoidable, as the nature of capitalism is that once its ever increasing appetite for growth can no longer be sated, it begins to engage in cannibalistic practices and devour itself.

This is what is now happening. It may not signal the death of capitalism per se, but once again demonstrates that unregulated capitalism is a cancer that erodes human society and which has the potential to destroy it. From a survival of the species perspective, humanity needs not endless growth in the consumption of resources (as measured by Gross Domestic Product) but stable-state economic models in which there is a balance between the use of resouces and the natural rate of replenishment. So far, capitalism has not demonstrated it can provide this.

Economic Forecast 2009

7th March. See below for 11th April forecast

Commentary

Latest data from the final quarter of 2008 suggests that almost all global economies are experiencing major difficulties. Even in China, where double digit growth was presumed to be a given, trade has fallen victim to the collapsing markets in the US, Europe and Japan. The Chinese economy may achieve growth of about 4 percent, but this will be no cause for celebration in China when up till now expectations have been much higher. It will translate into significant hardship for many Chinese people. The consequence may be growing social unrest.

One outcome of the much lower prices of oil - compared to 2007 and 2008 - is that oil producing countries are experiencing their own financial crises as revenues from exports evaporate. Countries affected include Russia, Saudi Arabia, and Iran. The lower price of oil will also result in the curtailment of investment in the petroleum industries, leading to production difficulties. However, it is likely that oil will begin to rise in price by the end of the year as cut backs in production lead to temporary - or possibly more permanent - shortages.

The world's shipping industry is also in a crisis situation owing to the precipitous fall in the volume of goods being transported. The freight fleet was built on credit and the expectation of rising volumes of trade. Now much of it is lying idle. Ultimately this may impact on supply chains for essential goods, as these relied on the considerable trade in non essential goods to make up the tonnage numbers.

The general expectation is of a deteriorating situation, with the rate of deterioration continuing to steepen throughout 2009.

Economic Forecast 2010

7th March 2009. See below for11th April forecast

2010 Commetary (12th March)

Opinions vary as to what will happen in 2010. Will the curve of decline and contraction continue to steepen, or begin to level out? Past evidence of economic crashes suggests the first few years show the steepest rates of change. However, past crashes may not be a totally reliable indicator as the world now has the additional factors of fossil fuel depletion, global warming induced climate change, the imminent decline in global food output, and growing environmental degredation. The economic decline therefore, may last indefinately, with occasional periods of growth and expansion breaking the longer trend of contraction in consumer-related activity. In the long run, humanity has no choice but to adopt a much lower ecological footprint. For the wealthy nations, this will involve a 60-90 percent reduction in consumption of non-renewable resources.

It is now beginning to appear that the transition to a lean economy will be anything but smooth. Part of the problem is the failure to acknowledge that such a change is not only necessary but unavoidable. Therefore, the current focus is on trying to pump up the various global economies now in terminal decline, through injections of fresh 'capital'. The capital, unfortunately does not actually exisit, but is either conjured out of the ether through the creation of additional electronic money, or is a case of economic pass the parcel, whereby the accumulated global debt is re-packaged and sold on, with everyone hoping the music doesn't stop while they are left holding the parcel and its horrible toxic content.

The lack of planning towards making the transition to a lean economy means the road will be difficult, often treacherous, and extremely unpredictable. Some semblence of 'normality', if one can call it that, may continue for a year or two. This somewhat familiar landscape, however, will be framed against a drying up of global trade. Nations dependent on this trade will experience a very sharp decline in economic activity. Japan - the world's second biggest economy -is currently showing a 3 month decline of over 3 percent, translating ( if it continues) into a year on year decline of 12 percent. Such a fall will impact seriously on the countries supplying Japan with goods and raw materials.

Both the World Bank and International Monetary Fund have now acknowledged that there will be a global recession in 2009. They have hinted at a worsening situation in 2010. This acknowledgement is important and represents a shift away from wishful thinking and the 'trying to talk up the economy' approach favoured until now. The World Bank has warned of a 1-2 percent contraction in the global economy in 2009.

This suggests that China, as the main supplier of the goods enjoyed by the world's wealthier nations, will go into economic meltdown. Suggestions as recently as February that China will experience an 8 percent growth in economic activity can be dismissed with a pince of salt. However, by 2010, the Chinese economy will be in trouble as the full effect of falling global consumer demand begins to be felt. By late 2010, China will be on its way to recession. This will be especially painful for China as the massive recent capital investments in factories and power stations will quickly become bad debts.

But to return to the original question, is the curve still steepening, the answer appears to be yes. As more data becomes available, the forecasts made by the Sustainability Insitute only last week appear somewhat optimistic, and may have to be revised downwards in April.

Ireland 12th March

The Irish government has warned that the irish economy will contract by up to 6.5 percent in 2009. This latest estimate appears not to take into consideration the knock-on effects of the April 7th Budget. This austerity package is expected to result in the average citizen in Ireland being 7-10 percent worse off in real terms. Hence consumer spending over the remainder of the year will reflect the rapidly emptying domestic purses. Anecdotal evidence suggests many people are already assuming the worst and depositing spare cash into savings accounts or simply stuffing it into their mattresses.

Ireland 15th March

It was announced last night that Dr Alan Ahern is shortly to take up a post as economic adviser to Minister for Finance Brian Lenehan. Dr Ahern, who lectures in economics at the university of Galway, was one of the first economists to warn of negative consequences arising from the bursting of the credit-fuelled speculative bubble that had driven the Irish economy. He has become something of a media celebrity in recent months.

At possibly his last public talk prior to taking up his new job, Dr Ahern spoke to a packed public meeting in Westport last night. Most if not all those present would agree that Dr Ahern's talk, presented in rapid fire style with a multiitude of graphs showing recent economic trends and projections, gave much food for thought. The talk ended in upbeat note, with the message - unsurprisingly similar to the one already coming from the government - that Ireland could eventually look forward to a recovery if everyone shared the pain of a sharp economic contraction, tightened their belts and waited for the speculative bubble to pass through the economic digestive system. Dr Ahern argued four key factors driving the Irish recovery would be firstly the beneficial knock-on effects of an upturn in the US economy, secondly more indigenous production in Ireland, thirdly greater competitiveness (usually taken to mean lower wages) and finally responsible economic housekeeping by the Irish government.

While all of these factors will certainly influence the direction Ireland takes, this narrative was somewhat simplistic in that it failed to take into consideration the implications of fossil fuel depletion and in particular its impact on the price of energy. In the very unlikely event of a global economic upturn in the next few years, the price of oil will quickly return to the levels of July 2008, and the boom-bust cycle will repeat itself. However, as in the meantime the world population - and demand for energy - will have grown, while simultaneously the volume of remaining global oil reserves will have shrunk, the spike is likely to be higher and the subsequent crash that bit more precipitous.

Also, there is no evidence to suggest the US economy will bounce back any time soon, so the likelihood of Uncle Sam singlehandedly dragging the world economy back into positive figures is fairly remote. Unemployment is rising at record rates in the US, manufacturing is on its way back to the levels of the early 1930s (if not lower), while the black hole of debt in the US is vast enough to swallow up many multiples of the $800 billion recently tossed into the abyss by the new US administration.

How far can things fall in Ireland? According to Dr Ahern, the collapse of the domestic construction industry alone will knock out 12 percent of GDP. While much of this has already gone south (or perhaps west might be more accurate, given the tens of billions of dollars in corporate profits exported from Ireland to the US each year), there is still a distance to go before the domestic construction sector hits the bottom. House completions totalled about 50,000 units in 2008, while new house starts - an irrefutable indicator of completions this year - were around 20,000.

Then there is the commerical construction sector, which is also imploding and will take a further 5 or 6 percent of the Irish economy with it.

The change in the relative exchange rates between the Euro and Sterling will hammer Irish exports, while simultaneously detering British tourists from travelling to Ireland. Hence a few more percent of the economy wiped out. In addition there are the wider implications of a global recession - of unknown severity and duration - that is only just beginning.

Meanwhile, unemployment figures will have more than tripled between the beginning of 2008 and the end of 2009. This will take another 5-7 percent out of the Irish economy. If dole money is cut as expected in the April budget, it might save on public (state) spending, but will also mean the public themselves have less disposable income to spend, taking yet more out of VAT receipts. And then there are the knock-on job losses in secondary industries and retail sectors.

Collectively these factors add up to around 30 percent (and possible much more) of the irish economy.

Dr Ahern argued in order to balance the governement books, a 30 percent cut in public spending - spread over 5 years - would be required. This cut in spending, however, will have its own attendent consequences, namely that disposable income will shrink, and people will spend even less on non essential goods - things they don't actually need but might have bought in former times when credit was cheap and money plentiful.

There is no question that Dr Ahern is a very smart man. The government will benefit - in an educational sense at least - from his insights and macro-economic overview. However, one can sense the narrative is already being adjusted to take on board the political realities, namely that the government want a happy ending to sell to the electorate so that the drastic cuts planned for April 7th might be that bit more palatable. This narrative is likely to be quite interesting for the things that it will omit, namely the government's own role in fanning the flames of financial speculation through tax concessions to vested interest groups, poor financial regulation from the state, the cynical talking up of a debt-driven bubble economy for short term gain, and also the gradual but steady transfer of wealth from the less well off to the rich and the corporate sector during the last 12 years.

To the growing menu of additional negative consequences, one might add the erosion of civil liberties that almost always accompanies 'national emergencies' when those that created the problem then offer their own tailor made 'solutions' aimed largely at preserving the status quo. Hence it is essential that alternative narratives are offered, and the debate is not limited to narrow discussions on bookkeeping.

18th March

The International Monetary Fund has singled out the UK and Japan as the two worst performing 'major' economies in 2009. The Japanese economy is forecast to decline by 5 percent this year while the UK economy is predicted to contract by 3.6 percent. Overall the global economy is forecast to contract by 0.6 percent. Apparently the IMF still believes there will be growth in the global economy in 2010.

Meanwhile, it was reported earlier in the week that the Russian economy contracted by 8.8 percent in 2008, with a further large contraction predicted to follow this year. The Russian economy has been in freefall since the dramatic fall in the price of crude oil last summer and autumn, with growing speculation that this latest Russian crisis may be even worse than the economic collapse of the early 90s. The only glimmer of hope for Russia, if one can call it that, is that the price of oil is beginning to rise again on world markets.

As a result of Federal Reserve chairman Ben Bernanke - the man who totally failed to see the US economic crisis approaching - doing his best to pump some life into the deflating US economy, crude oil rose to $49 a barrel earlier this week, the highest price since the beginning of December. Bernanke should be careful what he wishes for. The first indication of a pronounced recovery in the global economy - admittedly a very remote possibility - will simply send crude oil back to the lofty heights of $147 a barrel, thus precipitating the next crash.

In other news, Shell announced today that it would no longer be investing in wind, solar or hydro energy. Apparently renewable energy is too risky an investment in recessionary times. Last year Shell pulled out of a £3 billion off-shore wind project in the Thames estuary.

21st March

Last week the US Federal Reserve announced that it would buy up $300 billion of US treasury securities and another $850 of mortgage-backed securities as part of a new initiative to inject new life into the US economy. Essentially this involves activating the vitual printing presses and running off $1.15 trillion of new money. This drastic measure mirrors action taken in the UK recently, albeit in a much larger scale. In truth, the options open to the US are now diminishing rapidly. Interest rates are close to zero and cannot be lowered any further. Direct outside intervention - although an outside possibility - would be psychologically very damaging to US morale, not to mention its global status. The next question is, how likely is success? The short answer, not very. Where will the US economy go from here? The most likely scenario is further activation of the virtual printing presses. To put these mind boggling figures in perspective, the US federal government is running at an annual loss of anything up to $4 trillion, or about 30 percent of Gross Domestic product

Recent federal estimates of a $1.8 billion deficit in 2009 and a similar amount in 2010, look very suspect given the unknown quantities of toxic debt currently being bought up by the US government.

Meanwhile, the World Bank reported last week that the majority of the major economic powers were resorting to creative protectionism to shore up ailing national economies. This should be no surprise: protectionism in its various guises was always the name of the game. Witness all the deliberate attempts to sabotage global agreements on greenhouse gas emissions. In the recent past however, national protectionism was to some degree subservient to the corporate financial scams and international pyramid schemes. Now that is all evaporating into thin air, governments are trying desperately to maintain whatever trading assets they have left.

25th March World Update

Not a good week so far for those who believe the global rescession can be turned around in a couple of years. Japan reported a 49 percent fall in exports for the 12 month period up till the end of February 2009, adding to speculation that the Japanese economy could shrink by over 10 percent this year. In Germany meanwhile, exports are also collapsing and independent analysts are warning of steep economic contraction in 2009.

In the US, economic data for the final quarter for 2008 showed a year on year decline of 6.3 percent, with the expectation of equally bad or worse figures for the first quarter of 2009.

Given that US, Japan and Germany rank first, second and fourth in the world GDP league (China now being third), this latest data points to the global economy taking a severe nose dive this year.Other top ten countries in deep trouble include Britain, Russia and Spain (6th, 8th and 9th respectively).

Back home, the latest CSO data from Ireland shows that GDP in the fourth quarter of 2008 contracted by 7.5 percent year on year. Taking into consideration the rapidly worsening situation in Ireland, with soaring unemployment in the first two months of 2009, falling manufacturing output, and vanishing retail sales, it is now likely that the year on year contraction for the first and second quarters of 2009 will exceed 10 percent, and could reach 15 percent if the trend continues.

4th April: G20 Summit signals more of the same

Amid the hype surrounding the recent G20 Summit in London, one thing stands out: nothing has been learned. Big business may be reassured that another $1 Trillion will be run off the global financial printing presses and lobbed into the black hole of debt created by the same institutions, and it may dream of a rapid 'recovery' to the days of high economic growth, but once the small print is examined it is clear the summit represents another step in completely the wrong direction. Leaving aside the issue of whether economic growth can be achieved at all - even temporarily - in a world of declining energy resources, G20 demonstrated once again that social and environmental issues are still considered of little relevance when compared to the more important business of turning a profit.

So what exactly was achieved? The setting up of a new regulatory body, the Financial Stability Board - apparently charged with making sure that global financial institutions clean up their act - and a massive increase in dosh for the International Monetary Fund. It all looks good from a distance. It is no surprise that the leading global economies want to avoid any more troublesome meltdowns of markets, and part of that strategy is to regulate the financial institutions. The rationale, however, is simply to create conditions that will allow business as usual to be resumed as soon a possible, not any altruistic desire to (for example) make the world a better place. The targeting of small states and principalities known for their enthusiasm for international money laundering is simply a protectionist measure aimed at redistributing wealth back into the pockets of the big nations - from the G20 perspective, a entirely logical move.

The steroidal injection of $500 billion into the veins of the International Monetary Fund is a matter of greater concern. The IMF has a long held and well defined role of global asset stripper and fire-sale auctioneer, working largely at the behest of its main paymaster - the United States. The 200 percent increase in the IMF budget will ensure much greater intervention in national economies. Recent recipents of IMF 'aid' include Hungary, Romania, Latvia, and Ukraine whilst the current list of bail-out probables includes most of the remainder of Eastern Europe, plus Ireland, Spain, Portugal and Greece. The usual deal is: 'we'll give you a dig out, but we want you to sell off all your state assets at fire sale prices, slash welfare payments, and savagely cut wages.There may be an additional but possibly unstated rider that the rate of corporation tax is cut. From the perspective of a CEO in a company suddenly able to buy state assets at bargain basement prices, complete with a demoralised workforce prepared to work for almost nothing, it is like a wet dream and ecstacy combined. However, in social terms, the presence of the IMF is really about as welcome as the simultaneous appearence of the four horsemen of the apocalypse.

Meanwhile, on March 31st, the Organisation for Economic Cooperation and Development, which represents the world's wealthiest 40 or so nations, warned that "The world economy is in the midst of its deepest and most synchronised recession in our lifetime caused by a global financial crisis and deepened by a collapse in world trade". The OECD forecast that the economies of its member states would shrink by an average of 4.3 percent in 2009, with the United States economy contracting by 4 percent, and the eurozone by 4.1 percent.

Ireland in Denial

In an recent address given to the irish Managment Institute, Taoiseach Brian Cowen accused Irish financial institutions of being 'in denial' last autumn when they first approached the governmen for assistance. This large rock lobbed by Cowen from the shelter of his cheap-credit, speculator-built glass house apparently meant that the banks were unable to see the writing on the wall regarding global markets. Turning back the pages to last autumn however, we find the Irish government was predicting a remarkably benign 0.9 percent contraction in the Irish economy in 2009, combined with a modest 0.4 percent growth in consumer spending. The reality is that consumer spending is set to fall by 7-10 percent in 2009, whilst the economy could contract by double digit figures. The latest government forecast is for a 6.75 percent contraction, a prediction still hopelessly optimistic. It appears that the Irish government is unable to distinguish between what it hopes might happen (if this were the age off miracles) and what is most likely to happen given the evidence available.

Latest unemployment figures show unemployment reached 11 percent in March, up from 10.4 percent in February. The government budgetary deficit for the first 3 months of 2009 reached €3.7 billion, up tenfold from the same period in 2008. The main contributary factors were collapsing tax receipts and the increasing number of welfare payments to the unemployed. In 3 months time, the quarterly deficit is likely to have increased further, as unemployment (which averaged about 9.6 percent during the first quarter of 2009) heads towards 13 or 14 percent, and tax revenues fall further as a consequence of worsening domestic circumstances.

April 7th - The Second Great Depression

The period August 1929 to March 1933 is usually referred to as the Great Depression. During this period, the GDP of the United States fell by roughly 32 percent. This was followed by a short lived recovery period, then a second smaller depression from May 1937 to June 1938 during which GDP declined by a further 18 percent.

During the Great Depression, the decline in GDP in the US was as follows:

1930 - 9 percent

1931 - 7 percent

1932 - 14 percent

1933 - 2 percent

There is no internationally agreed definition of economic depression. However, the two most commonly used criteria are:

1/ A prolonged economic downturn that leads to a reduction in GDP of more than 10 percent

or

2/ A recession of more than 3 years in duration

Thus according to the first definition Ireland will probably be in a state of economic depression by late 2009 whereas by the second definition the conditions will not be met until 2011 (by which time GDP may have declined by 17-24 percent).

Other countries extremely likely to have experienced a decline in GDP of more than 10 percent by 2010 include Japan, Russia, Latvia, Hungary, Romania, and Iceland, with Spain, Britain and the US probably joining the list late in 2010 or early in 2011.

8th April Ireland

Brian's Budget Blues

It was billed as the toughest in anyone's lifetime, but Ireland emergency budget of 7th April was a relatively benign affair, given the expected 40-50 percent discrepancy between predicted government income and expenditure during 2009. The super rich got to hang onto their dosh; corporation tax remained unchanged at 12.5 percent, while at the other end moves to cut welfare were postponed - at least until the local and European elections are safely in the rear view mirror.

Its not easy to sell the concept of sharing the pain to the electorate while the salaries of TDs and government ministers remain among the highest in Europe, and bonuses paid to bank executives are more than someone on a minumum wage would earn in a lifetime. Also, the recent revelation that certain company directors routinely evade tax payments of millions of euro by the simple (legal) expedient of parking their spouses in a nice suntan-enhancing location abroad for 183 days per annum probably does not sit too well with the growing army of unemployed.

It will be quite astonishing if the Irish government can make it to its next proposed budget in December without having to drastically revise (downwards) all its forecasts.

The one measure that is loudly ringing the alarm bells is the Government proposal to buy up all the unredeemable debts (aka toxic property assets) from the banking institutions using public pension funds. The nominal value of these debts is €80-90 billion - approximately three times the expected government income from tax receipts in 2009. According to press reports, these debts will be bought up at a 40 percent discount price. In other words, in order to recoup the purchase price, the same 'assets' would have to be sold on at 60 percent of the original valuation. This is simply a fantasy.

On March 20th the Irish media revealed that a report by Peter Bacon - commissioned by the Irish Government - had forecast that the value of commerical property and sites would fall by 50-70 percent, while residential sites would fall in value by 70-90 percent. Residential property was forecast to fall by 50 percent. As yet, the Bacon report remains unpublished. However, independent analysts - both inside and outside the property sector - have suggested falls in value of similar magnitude are likely.

A more realistic valuation of the toxic assets - one that fully takes into consideration all factors - might be somewhere between 10 and 30 percent of the orignal valuation. It may be concluded that the government is blithly prepared to pay between two and six times over the odds in order to bail out insolvent banking institutions and their developer associates.

Economic Forecast 2009

11th April 2009. See below for 14th May forecast.

Economic Forecast 2010

11th April. See below for 14th May forecast.

27th April: Ireland heads into economic depression

A Ireland slips its way towards economic depression, a report today from PriceWaterhouseCoopers has forecast that the Irish economy will contract by 8.7 percent this year, and by a further 2.5 percent in 2010. A week ago, Nobel prize winning economist Paul Krugman had pointed out that Ireland was soon to cross the line "that is sometimes used to distinguish between a recession and a depression.”

Krugman's comments prompted a flurry of denial and misinformation from the Irish government. However, Krugman was merely stating the obvious: the most commonly used definition of an economic depression is an economic contraction of greater than 10 percent. Given the Irish economy contracted by about two percent in 2008, and is now predicted to contract by 8-12 percent this year, its no longer a question of will there be a depression, but when will it arrive?

Krugman was very pessimistic about Ireland's chances of economic recovery:

“As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”

29th April: ESRI confirm depression will arrive in 2009

The latest quarterly review by the Economic Social and Research Institute has added more weight to the view that the Irish economy will be in depression mode by the end of 2009. The review forecast a 8.3 contraction in GDP in 2009, down dramatically from the previous forecast of 3.9 percent. Unemployment is estimated to reach 13.2 percent in 2009 and 16.8 percent in 2010. The latter estimate - which is an average figure for the whole year - points to the level of unemployment in Ireland exceeding the record 17.3 percent reached during the 1980s before the 2010 is out. The Sustainability Institute believes it will reach 21 percent.

The ERSI also forecast that the Eurozone economy will contract by 4.1 percent in 2009, the UK economy by 4.0 percent, Germany by 5.3 percent, Italy by 4.3 percent, France by 3.3 percent, Japan by 6.6 percent, and the US economy by 3.7 percent.

For a global perspective, an article by Barry Eichengreen and Kevin O'Rourke suggests that the global economy is following a steeper downward trajectory than in the Great Depression of the 1930s.

A Tale of Two Depressions

For another view, try Paul Krugman:

Erin go Broke

Latest Economic Forecast 2009

14th May 2009. See below for 14th June forecast.

Latest Economic Forecast 2010

14th May 2009. See below for14th June forecast.

14th May - Green shoots merely seaweed on the ocean floor

All the talk is of green shoots. The recession is bottoming out, the recovery will follow. Normal service will be resumed.

One might ask, what exactly is normal service? Is it, for example financial derivatives trading in which debt can be repackaged and sold on ad infinitum? Or maybe the assumption that global resources need not be nurtured or saved for future generations and can be completely squandered now?

There is now a concerted effort by the usual suspects to talk up a deepening global recession. Cheap credit - a primary cause of the problem - is still being presented as the solution. This rather misses the point, that the minute there is any real sign of an economic upturn, crude oil will be back at $150 a barrel and world trade will once again come to a shuddering halt. Even the vague rumour of an upturn pushed oil back to $60 a barrel this week.

What may be happening is that the rate of descent is beginning to lesser. Or maybe not. Its too early to say. In any case, a marginally reduced rate of descent is hardly the same as a perfect three point landing: the point at which one can say the economic decline is probably over.

Which indicators can be best used to assess the situation? Not stocks and shares as their value may bear no relationship to real assets. Manufacturing output? Globally it is still falling. World trade? Ditto. Consumer spending? Ditto. Unemployment? Still rising.

Consumer spending is the interesting one as it reflects confidence. Confidence not just to spend, but confidence that there is a need to spend. As a high proportion of goods or services bought in the world's main consumer states are non-essential to survival, but merely lifestyle choices or accessories, trade in these products is very vulnerable to changing economic circumstances. With most of the goods being bought on credit , to be paid for at some unspecified time in the future, and the interest payments thereof being continually added to the slate, there eventually comes a time when the whole system reaches its maximum level of credit/debt. One might call this 'peak debt'. This point has now been reached.

A bank might simultaneously lend out the same $1 to many customers, even hundreds of them , and all is fine until two or more people wants to see real money at the same time. Then the bluff is called. The word bankrupt is derived from the Italian 'banco rotta' or broken bench symbolic of the insolvent moneylender. The imagery is even older, invoking a Biblical picture of an angry stick-wielding mob seeking vengeance and retribution for the wanton loss of their savings.

This image, suitably updated - bears an uncanny similarity to current events, except the scale is much bigger and the key actors wear different clothes. But there is a lot of anger. Anger that the dream bubble has burst. People have woken to reality and it ain't pleasant.

Local economic variations mean that some places are hit harder than others, while others still will go on denying the scale of the problem thereby making it worse. Either way it is very hard to conceive of any set of circumstances that can lead to a resumption of business as usual, even in a much diminished role.

Conventional economics might argue that when and if world trade (aka consumption) reaches a level of growth consistently two or more percent above population growth, the global economy is back on track. The extra few percent is necessary to facilitate the expectation of per-capita growth, plus the interest payments on monies borrowed.

However, this goal is not going to be achievable in a world of fast declining finite resources. A different economic system will be required in order to facilitate trade in circumstances in which there can be no long term increase in per capita consumption. This will represent a considerable challenge, and especially to market fundamentalists who can conceive of nothing other than the invisible hand of the ghost of Adam Smith, and infinite growth.

In the meantime, the world will follow an erratic path of economic contraction. The most likely scenario is a rapid but relatively short-lived initial contraction - the current phase - followed by a longer more open-ended period of gradual contraction and stagnation, possibly interspersed with the odd green shoot. Eventually, a new equilibrium of capital and resources may be reached.

As is evident from the rapidly changing economic forecasts from conventional and independent sources, no-one has any real handle on this. Predictions often represent nothing more than aspirations or best case scenarios. Conventional economics has shown itself to be fairly incapable of comprehending collapse conditions.

Our own analysis suggests the current rapid contraction phase may last two to four years. The steepest angle of the slope may have been reached in some of the major global economies, or will be arrived at within the next 4-6 months. But really, it's not much more than a guess.

Quote of the week:

“There was no supervision, no regulation and wild excess. Ireland saw the biggest building boom since the pyramids and this is going to be a painful adjustment,”

Professor Willem Buiter, former member of the Bank of England monetary policy committee, in an address to the sixth Mercer European Investment Forum.

20th May

Ireland: Ernst and Young sing those old deep depression blues

Job numbers in the Republic of Ireland will not recover to the levels of 2007 until 2021, according to an all-island economic forecast by international auditors Ernst and Young.

A report published today predicted the Irish economy would decline by 8.9 percent in 2009, putting Ireland technically into depression. This is no more than many other analysts have been saying.

However, Brendan Lynch, special adviser to the E&Y Economic Eye, warned that the economiy of the island of Ireland " is in the eye of an unprecedented economic storm and collateral damage is severe... recovery will be slow and the storm will leave scars on the economic landscape for years."

The report argued it would take over a decade for employment figures to recover.

Meanwhile, the fabled green shoots of the US economic recovery have withered once again in the face of worsening housing data. Figures released for April show the number of house starts down to 458,000, the lowest figure since records began half a century ago.

3rd June

Eurozone economy contracting at record rate

Latest EU data has shown the Eurozone economy contracted by 2.5 percent in the first quarter of 2009. The EU now forecasts the Eurozone economy will contract by 4.8 percent in 2009, down from the previous estimate of 4.6 percent. Meanwhile crude oil hovers just below the six month high of $68 a barrel set earlier this week.

Economic Forecast 2009

14th June 2009

14th June

The price of oil

The most interesting development of the last month has been the rapidly rising price of crude oil. This appears largely predicated on the belief among speculators that a global economic recovery is imminent. Also, US crude oil inventories have been somewhat lower than expected heading into the main oil-consuming period in the United States: the annual summer vacation. It could be that oil has reached or is about to reach a temporary spike, with prices gradually falling over the summer and into the autumn.

The other scenario, albeit less likely, is that the barrage of talking up of the global economy will continue the surge in speculation on oil futures, possibly pushing the price of crude beyond $100 a barrel before this in turn precipitates the next crisis.

The one mitigating factor in the economic recession has been the fall in the price of energy. However, the price to the consumer has already bottomed out, and is now rising. Further sharp rises in the price of crude oil will inevitably be passed on to the user, in turn reducing demand.

For all the talk of green shoots, there is still almost no evidence to back this up. At best, the economies of the US and Japan may be coming to the end of a period of sharp economic contraction. At worst, it is little more than temporary halt to a much longer period of decline.

Ireland

Irish economy to contract by over 15 percent

A report by Goodbody Stockbrokers has forecast that the Irish economy will contract by over 15.6 percent between 2008 and 2011. The report predicts that GDP (Gross Domestic Product) will contract by 8.7 this year, and by a further 4.6 percent in 2010.

This appears to be the first report from a mainstream organisation that has forecast a continued significant deterioration in the Irish economy beyond 2009. The government has consistently argued that the economy would show signs of recovery in 2010.

Economic Forecast 2010

14th June

Economic Forecast 2009

24th July 2009. September forecast below

Economic Forecast 2010

24th July. September forecast below

Latest Economic Forecast 2009

24th September 2009. Next forecast 26th October 2009

Latest Economic Forecast 2010

24th September. Next forecast 26th October 2009

Commentary

There is growing contradiction between the forecasts of economic recovery curren pedaled by cheerleaders representing the world's leading economies, and the harsh realities of finite resource depletion. Presumably this is to maintain the illusion that all is in order and that economic growth can continue indefinitely, thereby encouraging consumers to spend more...thus putting a shine back on the short term GDP and in the process borrowing more money that will have to be paid back, by someone, at some point in the future. It goes almost without saying that the longer this deluded behavior is continued, the steeper the eventual decline in resources, and the harder the final crash landing.

The business-as-usual narrative explains the current crisis as a temporary aberration that will be cured as soon as sufficient new money is poured into the global market to re-float the floundering economies of North America, Japan, Europe and Australia. Thus the economic trajectory is expected to follow a U shaped curve, with the return to the dizzy heights of 2006/2007 occurring within the next two to three years. This narrative conveniently omits some of the crucial details about why the boom that preceded the current financial crisis occurred in the first place: the provision of unlimited quantities of cheap credit - borrowed from the never-never land of the future - for speculative purposes or for financing domestic mortgages that had no chance of ever being repaid.

The maintenance of this Alice in Wonderland world was also contingent on continued, unrestricted supplies of cheap energy, mainly in the form of oil. Unfortunately, a few people in the financial world started to do the sums and realised that if this amazing level of growth continued, it would require global energy production to follow suit, and this simply was not going to be a runner when fossil fuel production was already at or close to the maximum levels achievable. It did not take a degree in mathematics to work out that if oil supply could not keep up with demand, it was going to become a very sought-after, and lucrative product before too long. And so the speculative investment in energy derivatives took off and completely lost the run of itself, in the process forcing the price of crude oil up to levels that were simply economically unsustainable. Once the price of oil began to filter its way down to consumers already maxed out on credit, there was only one way to go: down.

The other part of the narrative that is missing is what will happen in the unlikely event of a return to the days of 2007. Again one has to look at the price of oil. In spite of a 4 percent fall-off in demand this year, crude oil prices have recovered from a steep trough at the start of 2009 to a safe plateau somewhat higher than the average prices in 2006. When oil production was last at current levels (2004) the price per barrel, corrected to 2008 prices, was $43. The current price is $68 per barrel. Thus by recent historical standards, oil is already expensive. The price has remained high for a number of reasons, one of which being the oil producer countries became acclimatised to the high oil revenues. Thus the producers have a vested interest in maintaining prices.

The other reason is that oil production cannot be ramped up much more, if at all. Even during the crisis of early 2008, when oil-consuming nations were screaming for production to be increased so that the price would fall from unsustainable levels, and enormous pressure was brought to bear on producers, only an extra few hundred thousand barrels per day were squeezed out of the world's oil fields. Should demand increase, it is doubtful that production can follow suit. The production peak of 74,800,000 barrels per day reached in July 2008 probably represents the highest level of production achievable. So in the event of any real or perceived increase in demand, the inability of oil production to keep up with demand will inevitably cause another price spike, possibly one even higher than the one of July 2008. And so the merry-go-round will begin again.

There are some other factors to consider too, when looking at the likely trajectory of the major global economies. One is the implications of the creation of the trillions of virtual dollars (or euro) that have been injected into the US and Eurozone economies, in the process devaluing the respective currencies when measured against real resources or individual incomes. The use of monopoly money in this manner cannot disguise the far deeper underlying problems in the countries concerned, namely the dependency on the continued supply of oil and on other imports, the reliance on export markets that have no future, falling indigenous primary manufacturing, and the growing debt to China.

The sleight of hand in accountancy procedures practiced by the US and various European nations is well demonstrated by the backdating of debt. Thus earlier economic data for previous quarters is revised downwards, well after the event. As these economic periods are now safely quarantined in the past, no one worries too much about how bad the data looks. However, this transfer of debt from the present to the past creates the illusion that things are suddenly getting better. No matter what figures are presented at the end of 2009, they should be taken with a pinch of salt until the music stops and the parcel of debt stops moving.

There will be no U shaped economic recovery. Any economist who believes in such fairy tales should consider writing children's stories for a living instead. As the global financial empire (in its own eyes at least) futilely attempts to reflate the bubble economy. a more likely scenario is a series of oscillating mini-spikes and deeper troughs, possibly interspersed with flat periods of stagnation and inertia.

In a more sane world in which the finiteness of resources are fully acknowledged, and in which everybody acts sensibly, humanity might follow a gradual de-growth curve, that eventually restores some equilibrium between the demands of humanity and the resources available. Unfortunately the reality won't be anything like that. The growing protectionism exhibited in individual nation states, and the increasingly 'everyone for themselves' response of both individuals and particular interest groups, suggests a very messy time ahead.

Ireland and Nama: A fairy story without a happy ending

Although the Second World War did not conclude until September 15th 1945, most military historians are agreed that the Axis powers had effectively lost the war by the winter of 1942.  The Japanese navy was annihilated by US forces in June 1942, while the German advance into Russia floundered at the gates of Moscow, and more decisively, on the streets of Stalingrad. The second battle of El Alamein (23rd October - 5th November 1942), which resulted in a decisive victory for the Allied forces, effectively ended the German campaign in Africa.

Unfortunately for the millions of people who died needlessly, or were crippled from injuries received during the subsequent two and a half to three years, the German and Japanese forces fought on to the bitter end, long after their own military strategists realised that defeat was inevitable. Equally unfortunately, both countries had deranged or deluded people in positions of power.

And so it is with the global economy.  The  irrational and superstitious belief that economic growth can be maintained indefinitely on a planet of finite size and resources, has been exposed for the myth it is, yet its cheerleaders will fight on the end, irrespective of the collateral damage or the long term consequences for the planet and its inhabitants.

Nowhere is this irrationality more clearly exhibited than in the case of Ireland, with its government of trolls, goblins, and wannabe superheroes. In truth, this latest series of battles and skirmishes, which began with the formation of the 30th Dáil on 14th June 2007, was lost even before it began. Of all the Western economies, with the possible exceptions of Iceland and Latvia, Ireland's was the one that most closely fitted the definition 'unsustainable'. Almost one quarter of the economy was underpinned by a speculative bubble of unneeded and over-priced construction ventures, ranging from cloned housing developments to glass mausoleums masquerading as office blocks. Another key economic sector was comprised of companies that had set up shop in Ireland simple to evade tax obligations elsewhere, and that were already plotting their next move to a more facilitating tax haven as soon as they set foot on Ireland's shores.

Yet another pillar of this wonderful growth economy had been built on the backs of a bland, tacky and often crass tourist industry which attempted to market its own version of brand Ireland, complete with plastic paddy theme bars, lego-like holiday villages, and souvenir shops to match. 

The whole edifice was propped up on completely unsustainable levels of debt at all levels of society.  The country produced almost nothing of any real worth, had no primary manufacturing capability, imported 90 percent of its energy requirements, most of its raw materials, and three-quarters of its food. The only exports of any note, namely animal and dairy products, relied on unsustainable, fossil-fuel-dependent methods of agriculture, and high levels of subsidies from the EU.

In short a total basket case.

Like many other historical basket cases, there was exceedingly little awareness among those in positions of power who had been complicit in creating the problem, of the complete failure of their own particular economic strategies, and of possible remedial action that could and should be taken. Instead, all the talk was of throwing more money (that the State didn't have) into the black hole of debt thus created: bailing out the financial institutions that had fanned the flames of speculation, and lending more money to the bankrupt developers who collectively owed tens of billions to the same financial institutions.

The trolls and goblins, when faced with the first real financial crisis and test of their loyalty to the financial institutions, quickly hurried through middle-of-the-night legislation that gave an almost unlimited guarantee (totalling some €400 Billion - several multiples of country's GDP) to private savers and corporate investors alike. When that failed to achieve the desired effect of propping up the financial institution's share price, the worst, most unsustainable bank - a model of unethical practices and failed pyramid schemes (Anglo Irish bank) - was taken into state care and nationalised. When that failed to convince investors that Ireland plc was a safe place to do business, a few extra billions were obligingly donated to the other failed corporate banks.

When that (and yet more billions lobbed into the black hole) failed to achieve the desired result, and the share price of the various Irish corporate banks looked at risk of falling to zero, the trolls announced the government would buy up the outstanding loan books of all the insolvent financial institutions, at close to their market value at the height of the bubble. The sum of money involved was estimated to be (at the time), anything up to €70 Billion, almost one and a half times what the Irish government spends each year on education, health, the environment, housing, transport and social welfare combined. The one big problem was that the Irish government didn't actually have any money, and was already something like €20 billion in arrears for 2009 alone. Therefore the money to bail out the banks and developers would be borrowed at interest: from the EU, the IMF, or from any corporate moneylender happy to take the risk. From an EU perspective, the bailout (known colloquially as NAMA) was a great idea as it guaranteed Irish compliance and minimised the likelihood of embarrassing behaviour such as Ireland leaving the Eurozone and dropping out of the EU. Defections like that are bad for EU community morale.

In the storm of public criticism that followed the troll's announcement of the imminent implementation of NAMA, and their stated intention to pay significantly over the current market value for the failed speculative assets the State was to take on from the banks, the trolls fell back on the familiar free market mantras and invoked phrases such as 'return to economic growth', and 'investment for the future'. All in the public interest of course and for the greater good of all. The trolls hired an economic expert, a man with history working for the Fed (US Federal Reserve Bank), to expound a theory of economic cycles that implied everything would eventually rise in value (as before), the Government would sell on its failed asserts (that no-one would need for decades) at huge profit, the frog would turn into a prince and everyone would live happily ever after.

The various other apologists for the fairy story of endless economic growth quickly appeared out of the woodwork where they had been hiding in the hope public outrage would subside. The cast was predictable enough:  the bankrupt developer who couldn't wait for his debts to be put into permanent cold storage by the State; another corporate developer that owed a billion or more to a  motley assortment of banks, and which was  fighting a Stalingrad-like rearguard action through the Courts in a bid to delay liquidation long enough for the NAMA fix to take effect; the economists working for the  insolvent banks, who had cheered on the speculative bubble in the same enthusiastic tone as the exponents of the Thousand Year Reich some 75 years previously,  and who now saw an opportunity for reinstatement and new fat bonuses;  all the various underlings and minor political functionaries who were anxious to cash in on Celtic Bubble 2; and finally the wannabe superheroes of the current administration, with their underpants on  over their day-glo cyclist's lycra, who so desperately wanted to be seen as the good guys by an unforgiving public.

Like all fairy stories, it has to end sometime. So here are the salient facts:

If  the trolls get their way, the failed speculative assets (the bad developer's loan book if you like)  will be taken on by the Irish government at a cost of €54 Billion, plus  interest repayments of  approximately 5 percent per annum. These assets were valued by self same trolls at €47 Billion. This valuation however is meaningless, as it is not based on recent sales receipts but more a case of wishful thinking or outright deception. Almost no failed speculative assets are going on the market, because everyone is sitting tight in the hope they will be bailed out by NAMA. The frantic efforts by the directors of Zoe Developments to delay liquidation proceedings demonstrates only too clearly the fear of forced sales that will expose the true market value of half-finished commercial developments or unsold, unwanted housing schemes.

The Government rationale is thus: historically economies have followed cycles of growth and decline, so eventually the abandoned development sites and other failed speculative assets will return to the prices of the height of the bubble. This ignores two rather large elephants in the room. The first elephant we will call reality. This elephant tells us that the most unsustainable bubbles, of which the Celtic bubble is one, never, ever reflate to former levels once they have burst. In Japan, 15 years after the collapse of the property bubble, residential land was back at its pre-bubble price while commercial land was worth only about 10 percent of its bubble value.

If the €54 billion the Government proposed to  borrow to finance NAMA takes 20 years to repay,  with repayments beginning in 5 years time,  then the total repayment will be of the order of €100 billion. For the money borrowed to be recovered, the value of the failed assets taken into care by the State will have to approximately double from their perceived Alice in Wonderland valuation of €47 Billion. Given the true market value of the development land or unfinished developments concerned may be as little as five percent of their peak bubble price, and perhaps ten percent of the State's current evaluation, and that most of these commercial or residential developments will be surplus to requirements for the foreseeable future, the happily-ever-after ending of this particular fairly story seems more likely to be of the ring-a-ring-a-roses nursery rhyme variety.

In order to final put this fairy story of endless economic growth to bed for the final time, we must now introduce elephant number two. This is a rather bigger elephant than elephant number one, and it has no clothes. We will call this elephant terminal resource decline.

History has shown that economic growth is predicated upon increase of energy availability. The era of increasing energy availability has ended, or will shortly end, as fossil fuel production peaks and goes into terminal decline. Unlike previous eras in which energy availability diminished, albeit temporarily, this new era will last indefinitely. There is no readily available energy resource with which to replace fossil fuels, and even if there were such a source, other resource limits such as food production and/or availability of other key raw materials necessary for the harnessing and utilisation of energy would make it irrelevant.

Nowhere will this be felt more keenly than Ireland, with its 90 percent dependency on imported fossil fuels, lack of political or economic might, and end-of-the-pipeline location on the periphery of Europe.

Even if the fairy story of growth cycles has held true in the past, Ireland has now entered a new era of decline and contraction. The bubble will never return.

NAMA is a disaster of unprecedented magnitude in the history of the modern Irish state. The inevitable failure of the State to repay the billions borrowed can have only one outcome:  a fire sale of all remaining strategic State assets to corporate asset strippers, and the impoverishment of the majority of the population for a generation.

Unfortunately, in this-post bubble, post-fairy tale narrative, the sleeping damsel (Ireland) does not get rescued by the dashing prince or even by a modern day superhero on a bicycle. The trolls and goblins eat her for supper instead.

25th September - More on NAMA

The principal argument presented by the Irish government in favour of NAMA is that it will enable the Irish banks to lend money. Just to clarify, these are the same banks that became insolvent as a consequence of previous excessive and reckless lending, that previously resisted attempts at greater regulation and transparency.   The main reason they are not in a position to lend money at the present time is that all deposits and savings are needed to plug the deep hole of debt that occurred directly as a result of this same reckless lending. This hole is so deep that it is likely that the first €10-15 billion of NAMA money will disappear largely without trace.

Of course, the banks that are due to be bailed out by NAMA do not have a monopoly on lending. For example, Ireland has a well established network of Credit Unions that also carry out this function, albeit on a relatively small scale. Although some are now in difficulties - partly as a consequence of lending money to householders who were foolishly attempting to maintain lifestyles they couldn't afford - mostly the Credit Unions are run tightly and sensibly, and present a good model of how financial institutions should operate. Over time, there is no reason why the Credit Unions cannot lend significantly larger sums of money, both to householders and to local businesses, cooperatives and not-for-profit organisations. In order for this to happen, the State simply needs to offer favourable credit terms to the individual branches, with clear terms and conditions in relation to lending.

Another option that is open to the State - one that was first mentioned twelve months ago when the Irish government was rushing through its middle-of-the-night €400 billion guarantee to the Irish corporate banking sector - is that the State simply opens its own bank, and invites depositors with the insolvent banks to jump ship. The State, if it so wished, could also pass legislation enabling it to transfer the good assets, plus some of the liabilities, from the insolvent banks to the new one. The remaining failed speculative assets and liabilities would be left behind for the respective banks to sort out. This type of solution has been proposed by many people, including sustainability-focussed economist Richard Douthwaite.

Richard argues that this course of action would leave all the losses with the insolvent banks' shareholders and bondholders. Any government capital would go into the new banks if they needed it.

This also raises the question of what level of lending is actually necessary in a sustainable, steady-state economy.  Probably ninety percent of all existing businesses will be non-viable in post-peak-oil Ireland. Therefore, sustainability-focused lending institutions should be extremely careful to whom they lend money at the present time. However, a new Ireland living within its means and within the resources available will also require many new businesses and cooperative ventures, and these may need start-up finance. Up-front money will also be required for large infrastructural projects, some of which may be undertaken by the State but will mostly be carried out by the private sector. These projects may include railway and canal building. The total amount of lending  (as opposed to direct State investment) needed  to service these various requirements is likely to be of the order of €10 billion per annum.

The huge sums of money borrowed by householders - essentially for lifestyle purchases - during the latter part of the Celtic bubble era give little indication of the level of domestic borrowing necessary in a steady-state economy. Leaving aside short term bridging loans which are something of a special category, the amount is likely to be on the lower side of €5 billion per annum: considerably less than the money already thrown into Anglo Irish, Allied Irish and Bank of Ireland.

Adding these two categories of lending together we arrive at a figure of about €15 billion per annum. Lending significantly larger sums of money will only lead to the development of another economic bubble, by encouraging speculative activity and other unsustainable behaviours.  A modest fund of perhaps €500 million per annum could be maintained separately by the State to provide emergency financial assistance and logistical support to members of the public who have become casualties of the bubble era, and to fund community employment initiatives.

13th October Colin Campbell on Peak Oil and NAMA

Peak oil strategist Colin Campbell on why NAMA just can't work in world of declining energy resources:

The National Asset Management Agency's flawed plan

A debate rages regarding the Government's plans to stimulate the economy by taking on a massive amount of debt, premised on the assumption that the economy, and especially property prices, will recover over the next few years to provide the essential collateral.

Ireland is not alone in facing the recent economic collapse as banks failed around the world, especially in the United States. This is widely attributed to no more than corporate misjudgement and inadequate Government regulation as banks lent more than they had on deposit, confident that Tomorrow's Economic Expansion was collateral for To-day's Debt. It is widely seen to be a temporary setback that conventional economic processes can remedy, but such a view fails to grasp an important underlying factor, namely so-called Peak Oil. 

Stated briefly, oil and gas are finite natural resources formed but rarely under now well-understood processes in the geological past. It follows that they are subject to natural depletion beyond market forces. They also have to be found before they can be produced, such that the peak of oil discovery, some forty years ago, which is a matter of historical fact, must inevitably deliver a corresponding peak of production. It is obvious that production in any endowed country starts and ends, passing a peak in between when about half the resource has been extracted, as is amply demonstrated in more than fifty countries that are already in long-term decline. Britain's production, for example, peaked in 1999, twenty-five years after the peak of discovery, and is declining at 7.5% a year despite an open market and the most advanced technology.

The growth of the economy over the past Century was essentially fuelled by an abundant supply of cheap oil-based energy that stimulated the growth of industry, transport, trade and agriculture, allowing the world's population to grow six-fold in parallel.  

The position would be self-evident were valid information available to the public, which is far from the case. The skills of the detective are called for to unravel misleading industry data and present sound evidence for the patterns of depletion. But there is at last an awakening : even the International Energy Agency, the OECD watchdog, now admits to the situation with the slogan : Let's leave oil before it leaves us.

Further commentary on NAMA and other related issues will be added in the near future.

2008 Commentary

Our Civilisation will Crash

Surviving and Thriving in Economic Recession

Negotiating a Financial Emergency

Peak Oil

Further commentary will be added in the near future.

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