Aengus Fanning: We're just a German economic outpost

[Chris]

http://www.independent.ie/opinion/a...e-just-a-german-economic-outpost-2288830.html

I saw this headline on the news stand on Sunday morning and decided to look up the article online. In a way I wish I hadn't. Anyway, after a long rant to myself I decided to dissect the text and shed some light. Maybe Mr. Fanning even reads this forum and realises what load of rubbish he has made his readership endure. It's a bit long-winded, and I didn't want to veer off topic by giving a more in-depth explanation of what inflation actually is, so I added another thread on inflation here:
http://www.askaboutmoney.com/showthread.php?t=141913

Aengus Fanning: We're just a German economic outpost
An overseas obsession with near-zero inflation and a strong euro is devastating this country and its economy, writes Aengus Fanning
The story we are being told is that we are technically out of recession but we won't feel that things are getting any better for a long time. If you believe that, you'll believe anything. The consumer economy is still sinking, yet nobody seems to care.

I agree, the story being fed by this government's PR machine is utter nonsense; the reason the public does not feel any better is because there is no recovery. However, it is not the "consumer economy", as if it were somehow sensible to look at this in isolation, that is still sinking, it is total productivity. The past decade has show, that an economy based on debt fueled consumption inevitably collapses. In order yo get the economy back on track Ireland has to be more productive, and pay off debts; under no circumstances should there be any further fueling of debt based consumption.

Streets in towns and cities are becoming more derelict by the day as beaten retailers shut their doors for the last time, leaving behind a shabby wasteland that is increasingly peopled by beggars and junkies.
Still, nobody seems to care.
House prices are more or less at zilch and look like they will stay that way.
Does anybody care?
Apparently not. But what's even worse is the suspicion that this is how they want it to be.

I assume he mainly refers to the newly created commuter towns surrounded by many of the now infamous ghost estates. I can't say that I have visited any commuter town recently, but I think this assertion could resemble some accurate observation. But these retailers and other businesses that are closing down are a direct result of malinvestments of the boom, and there is no point in doing anything to keep businesses alive just for the sake of it. Many businesses came into being because all sense went out the window during the boom's consumption binge; the only way to keep some companies in business would be to create a new consumption boom; again, this is the last thing we want to happen.

It is my belief that the brutal deflationary policies of the past few years are not the desire of our Government but are dictated to us by Frankfurt.
Near-to-zero inflation and a strong euro are the monetarist gods and the associated dogma is that Ireland must drive down wages and costs, no matter what the human price

Now this is where he is completely out of bounds of any reality. The last ten years saw a long period of extremely low interest rates. Then a brief period of a slight increase in rates was reversed as soon as the financial crisis struck, return to 1% interest rates. This very low interest rate policy, of most of the world's central banks, was inflationary, NOT deflationary. Was the housing and equity bubble anything but the result inflationary policy? Consumer prices in this country also went through the roof. It is these low interest rates that made the total abundance of cheap credit possible, which in turn caused the increase in prices, with some sectors turning into massive bubbles.
It is also ridiculous to say now that a low inflation, strong euro policy is to be blamed for Ireland's troubles. If there had been low inflation, there wouldn't have been the massive increase in prices of nearly everything. Now I don't believe that monetary policy alone was to blame; fiscal policy in this country has a huge burden to share.
As for the human price, yes, wages and costs have to come down, and they have to come down a lot, otherwise ireland will not be able to compete internationally. There is no easy way out.

Men and women who have lost their jobs or have had their wages cut and good companies which have closed are regarded as no more than the casualties of war.
Thousands of Irish men and women have had their lives blighted, but the ECB and the Bundesbank (it is no coincidence that both have their headquarters in Frankfurt) are insulated from their pain.

Central banks should under no circumstances be looking at economic matters of individuals or businesses. As bizarre as it may be, monetary stability is what central banks should focus on. And monetary stability means price inflation as low as possible.
And yes, the Bundesbank and ECB are in the same place, because Germany wanted to make sure that non-inflationary, strong currency policies are maintained after it gave up full control over monetary policy making. But this is no secret or conspiracy, it was the only way Germany was going to share a currency with inflationary counterparts in especially Spain and Italy.

Their doctrine says that our recovery must be export-led, we must be more competitive and that any growth in consumer demand or property prices would be inflationary.
Inflation, to the Frankfurters, is the greatest evil known to humanity. From the depths of my pitiable ignorance, I beg to differ.

Yes, inflation is the biggest evil there is, as it is a form of taxation (transfer of wealth from savers do debtors). Even Keynes (NB I disagree with almost every part of his theory) understood it when he said: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Germany became such an economic "power-house" because of a stable currency. How can anybody possibly contend that inflationary, currency debasing policy, instead of hard work and production, could be a solution to recovery?!?! I actually think the author answers this well with his self-judgment of "the depths of my pitiable ignorance"; his ignorance truly is deep!!! Higher consumer demand and house prices would be the result of monetary inflation, as it was in the past decade.

A little bit of inflation, in my uneducated opinion, would be no bad thing. It would ease the debt burden of nations, corporations, small companies and individuals, and might help to get things moving again.
Not good news for savers, perhaps, but not the end of the world either -- and their losses will be softened by rising interest rates.

Wow, this is an even better example of his "pitiable ignorance", it genuinely is pitiable. He is actually saying that those in society that due to prudence, good fortune, or whatever other reason have savings, large or small, should pay in order to reduce debts of others!!!
As already mentioned, inflation transfers wealth from creditors to debtors. And to say that savers losses would be "softened by rising interest" is positively insulting to savers.

I realise that this is heresy, though I remind myself that history is littered with heretics who spoke the truth or near enough to it.

Actually it is not heresy, as most central banks (Fed, ECB, BoE) are on an inflationary warpath. History is littered with men shouting pro-inflationary dogma: French hyperinflation of 1720s and 1780s; American hyperinflation of civil war; Weimar republic of 1920s; the list goes on! Mr Fanning is not some sort of isolated, lone proponent, but merely another pro-inflationary in the neo-Keynesian, inflationary world we live in.

The worst of it is we have no say in fiscal things, we are little better than an economic colony of Germany -- the end result of nearly 80 years of Anglophobic economic nationalism in the Department of Finance -- and we think we have no option because we might need Angela Merkel to bail us out some day.
German guilt was mobilised after the Second World War and we, who had not fought the war, were well up in the queue for money transfers. We did well out of it for 35 years, and now it seems we're stuck with it. Like a bad marriage, it became a dysfunctional co-dependency, in which Germany was the dominant paymaster and we were the doormat spouse. Such docility, I am sure, is not good for our minds or our spirits.

Of course Ireland has a say, the Irish Central Bank can bring up any monetary policy suggestions at the ECB meeting. Whether they can convince others is a whole different matter, but his is exactly what Ireland signed up for!!!
Calling the relationship between Ireland and Germany, or the EU for that matter, some "dysfunctional co-dependency" is insulting to Germany and any other country that has been net contributor to the EU. Ireland enjoyed an inflow of billions of euros, thanks in large part to the German economy. I cannot believe he actually chose to try and paint a negative picture of this relationship. Maybe he thinks Ireland would be better off without the inflow of EU/German funds. Maybe he should ask Mr. Lenihan to send back any new cheques coming this way.
Ireland could only be so lucky as to be a German economic colony. Ireland would greatly benefit form some German fiscal policy and attitude to saving and work, although even Germany has lately shown its imprudent intentions with the handling of the Greek debt crisis.

This sense of impotence is at the heart of the prevailing feeling that we are paralysed and drifting helplessly. As Mark Fielding of ISME said on Thursday: "Government policy is wait and hope for growth."
There is nothing more demoralising for normal human beings than the idea that they have no control over their lives.

No, Ireland is not paralyzed due to some external powers. And it was not some external powers that caused Ireland's problems, like Bertie Ahern constantly repeats by saying "it was Lehman Brothers". Ireland has full control over its future, not form a monetary point of view, but from a fiscal point of view. The solution: increase savings, pay down debts and become more productive. Not easy, but the only way to a long term recovery.

After all, apart from some mystics, we are all control freaks and the illusion of being in control is crucial to most of us. Stripped of that illusion, we have become demoralised and apathetic. As an antidote, we need action, such as the cleaning up of streets that are slowly decaying, the tidying up and painting of closed shop fronts and the moving on of beggars and junkies.
If the Army was able to fix the lifts in Ballymun, then surely there are other useful things it could do. And there are many unemployed who would relish the prospect of doing something worthwhile.

He has a point here. I think unemployed people should be told that they have to do some community or charity work in order to receive full benefits. This would go a long way to incentivise people receiving €200 per week for zero hours of work, to take a job paying minimum wage (€340 per week) for 40 hours.

The alternative to action is inertia, hopelessness and self-protective cynicism.
And that is no way to live.

The only action that can pull this country out of the mess is a reduction in consumption and increase in production. Germany was in a far worse situation after WWII, with 20% of all buildings destroyed, huge loss of life and massive war and reparation debt. Within 2 years of creating a solid currency (Deutsche Mark), reducing marginal tax rates, abandoning minimum wages and abolishing price controls, Germany was booming.
Ireland does not need government to intervene or stimulate the economy through currency debasement or fiscal imprudence; the best way to stimulate the economy is for government to reduce the level of interference through taxation, licencing, regulation and protectionism. The last decade is a picture perfect example of what happens when governments interfere.

 

[Purple]

Superb post Chris. I agree with every word.

 

[davebrien]

I suppose you add the failure to implement anything from the McCarthy report - snip nua - all thats really happening at the moment is a big fat nothing.

We have a Public Sector which is failing at management level in every department - similar to semi-states where bounses are still free flowing.

We have a welfare system which has become an entitlement system.

The biggest failure is the political system as much as they accepted the plaudits for the tiger miracle and pointed to about 5 reasons as to how they created the boom - they can only points to external factors as to why it burst.

Brian Cowen was rated as number Finance Minister in Europe by the FT in 2006. A point worth noting as the finger pointing goes on.

He is an abject failure as a leader - but how much of his failings just highlight a disconnect between the political system and its ability to influence the economic reality on the ground.

Obama lets have a change has hit the rocks also.

Cowens goal is simple its to stay in power for as long as he can and to say he got a few years as Tasoiseach. All the big hitters in FF are happy enough to keep their powder dry to let the entire mess be tagged with Cowen. Spineless yes but the real collateral damage will be the FF back benchers.

We have Eamon Gillmore the platitude king - the man who plays to the gallery with no policy to speak of.

Then we have the ongoing comedy show which is Fine Gael.

I'm always left head scratching when the political commentators think the political system has solutions to offer. We floated into a boom with all the ease of Dempsey travelling to Donegal - we floated up on the rocks with no real strategy. (during the boom it would be the equivalent of a team manager saying at half time - "Lads I don't know what ye are doing but just keep doing it") So Cowen might as well have spent the week in Connemara sitting by a rescus fire waiting for a ship to pass by.

The biggest scandal is the amount of hotels and arts centres which are more or less redundant up and down the country and national school kids getting educated in pre-fabs, fund raising to get fuel and supplies - thats the result of the boom.

There will be no solution whilst this failed political entity remains intact.

 

[Duke of Marmalade]

Chris, I didn't read that article but the bits you quote are truly awful. I happen to be dependent on savings and a private sector pension. Thank the lord for Germany. It is clear that without the Euro discipline that we would have been tempted to follow the Zimbabwean quick fix route.

Fanning attempts pathetically to depict this as some sort of struggle for independence. We won that struggle in 1922. To be sure a Civil War followed between those who wanted more independence and those would accept what was on offer. But neither side had it anywhere near their agenda to have complete monetary independence from the old enemy. For 57 years post independence we kept a rigid parity with sterling. Of course, London did not dictate this policy, it was of our own independent chosing but it had the same effect that we had to broadly match England's fiscal and monetary stance.

An Irealnd truly independent in its choice of fiscal and monetary policy is as illusionary as an Ireland free to set the price of oil.

 

[Chris]

The biggest scandal is the amount of hotels and arts centres which are more or less redundant up and down the country and national school kids getting educated in pre-fabs, fund raising to get fuel and supplies - thats the result of the boom.

There will be no solution whilst this failed political entity remains intact.

I completely agree, this countries' education system and especially facilities is the biggest disgrace. I also completely agree with your points about the "alternatives" that call themselves the opposition. No matter which one of the parties had been in power, we would now be facing the same situation, as none of them advocate that it was government intervention and not some lack of intervention that is the cause. And all of them say they would have used some other method of intervention.
When you have politicians with extremely short-term intentions and ambitions (elections), and give them the power to interfere in markets without ANY restrictions, it can only end in disaster again and again. Regulation of government is what is needed, not of the market.

Chris, I didn't read that article but the bits you quote are truly awful.....

Just to clarify, I didn't leave out anything from the article; all the quotes make up the entire article, so as to not be critisized for selective quoting. You actually highlight a very good point, in that the article is a couple of bizarre, rediculous, completely uneducated ideas loosly stiched together into literary/journalistic mess.

Superb post Chris. I agree with every word.

Thanks you kindly, it's nice to see that I'm not the only one. May the force be with us, and if not the force then hopefully the Germans ;-)

 

[canicemcavoy]

"House prices are more or less at zilch and look like they will stay that way."

It's amazing to think of the gulf between some of the great newspaper editors of the century, and this comic-tragic clown. House prices are not "zilch". The problem with this country in the first place was that we priced ourselves out of the market and allowed the property market to run rampant, thinking that we could have an economy primarily based on buying and selling houses to each other, allowing salaries to increase rapidly while our percentage of exports decreased. This idiot thinks that we should go _back_ to that situation.

 

[maturin]

>Brian Cowen was rated as number Finance Minister in Europe by the FT in 2006. A point worth noting as the finger pointing goes on.

Dave,

I'm curious. What number did the FT rate Brian Cowen in 2006? High or low?

 

[george.shaw]

--http://en.wikipedia.org/wiki/Inflation_in_the_Weimar_Republic