Friday, April 10, 2009

Government spending not the answer.

How Ireland became an economic basket-case (...and the lessons for Britain)

Article on Ireland, who seem to be facing up already to what the UK must one day come to terms with. "As one Irish economic expert told me last night, pressing the spending button in an open economy like Britain or Ireland can never work. It only fuels more consumption and more imports." I think so too.

Posted by stillthinking @ 01:33 PM (1134 views)
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7 thoughts on “Government spending not the answer.

  • japanese uncle says:

    However, the private sector has already reacted smartly to the economic downturn – with private sector wages down 8 per cent over the past 12 months.

    Coming to a cinema near you.

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  • There is something slightly surreal about the soveriegn debt markets.

    Ireland, whose economic outlook looks utterly appalling, whichever way you view it; is now having to pay about 2.5% more for its government borrowing than does Germany.

    Big deal. 2.5% return for accepting the very real risk that you’ll never get your money back – or a large part of it, at any rate.

    Ireland built its economic boom on air – and a great deal of debt, both public and private.

    The bubble has now burst, and it is very clear that they have no longer have the means to service and pay down their debts to overseas lenders; and while they remain within the eurozone, they can no longer attract inward investment to their rain-soaked isle.

    Something has to give – either a debt default or a break with the eurozone leading to devaluation – there seems little chance of the ECB giving them an indefinite supply of blank cheques..

    For the overseas lenders, the median of all possible outcomes suggests a loss of perhaps 20 – 30% of their cash, and the median timeline before things come to a head is perhaps 2-3 years (but the situation could implode much sooner..)

    So the penalty for accepting the risk of Irish debt should really be in the order of 10% – not a measly 2.5%

    Sooner or later, the markets will wake up to the fact that some countries really are going to go bankrupt, or devalue dramatically; and when the penny drops, the rapid increase in borrowing costs for countires like Ireland will precipitate the inevitable.

    As for the UK, well, we’ll just keep on devaluing..

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  • UT, speaking of devaluing the insidious creep of imported inflation is becoming ever more apparent especially on items with a rapid turnover cycle. e.g. New model Citroen C3 picasso starts at £15900 a ridiculously high price for a small french car without discounting and as has been mentioned before spare parts for bicycles are rocketing with for example a Shimano Alfine rear gear hub going up from a reasonable £120 to an astronomical £190. These are all manufactured in places other than the PRC and although consumer durables I fully expect similar large rises in industrial equipment, plant and machinery which will make a budget mockery of any large infrastructure and capital expenditure programmes.

    Expect government projects to be shot to budgetary pieces and make hitting the spending button more like hitting the economic suicide button.

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  • stillthinking says:

    I think for those unlucky to be in the private sector and also in debt, you have to consider the pressure on wages in terms of the reflected cost of servicing debt. So presumably if you wage goes down by n% then your effective interest rate on your debt goes up by the same.

    Which is kind of interesting because it means that the government haven’t actually managed to lower debt servicing costs at all. If wages are going down then the cost of servicing any nominal debt must go up. Which puts them in a bind because the only block on wage collapse they can perceive is the state sector, and holding up wages in that sector creates a worsening division in society, which we do already see people complaining about.

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  • Ennui. That C3 Picasso will be about 15000€ here in France. Maybe the French buyer will get a govt trade-in / green bonus thrown in, bringing it down to near 12,000€. The average French person hasn’t seen devaluation like the UK, so the 12K€ price tag is the same as about £8K was to a Brit 18months ago.
    In essence, the Brit is now paying 2x the price as a French person for the same car. That’s the reality of the mess……….

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  • UT – what are your thoughts on Australia and NZ?

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  • “UT – what are your thoughts on Australia and NZ?”

    I don’t study the detail of the economies of the countries down under in such great depth, but my general perception is that Oz and NZ will sort themselves out economically much faster than the UK, US and eurozone.

    Both countries have scope to devalue if necessary, and both have sound export products that the rest of the world wants to buy. Neither country is short of living space, and both have a culture of being open-minded and positive when it comes to tackling problems.

    Although they both have some serious issues to deal with in the near term, the longer term outlook is pretty good.

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