Now the high priests are confused. Our bond performance kept weakening and the downgrades have kept coming, even after all our fiscal sheep and goats were sacrificed (and earnest assurances that our bank bail-outs are affordable and manageable). So, instead of questioning whether they got the translation wrong, the high priests have turned on the gods themselves. The economy hath no fury like a deflationist scorned. Some of us, however, never treated the rating agencies as anything other than culprits in the international financial crisis.
But that doesn’t mean we shouldn’t be worried. Maybe the ‘international markets’ know something that is not being reported here. Take the recent projection of the ESRI.
According to the ESRI, if the Government persists with its present strategy our debt as a percentage of GDP will be 106.9 percent by 2020 and rising. With regards to GNP, it will be 134.1 percent and rising. No wonder the Government’s policies are getting hammered.
What has been the response? What little there has been shows that old habits die hard. It was suggested that the Government should, maybe, considering cutting €4 billion out of the next budget, not €3 billion as they have announced. Shovel. Hole. Dig.
What effect would this have? Hardly any. Using the ESRI’s real growth projections (and taking the consumer price estimates as a proxy for the deflator) I calculate the following.
Our general government debt will be approximately €275 billion by 2020. Is anyone really suggesting that cutting an extra billion in 2011 is going to have any impact whatsoever? Even on a static basis, it would only reduce the debt by a couple of percentage points. Actually, it would be less because the impact of the cut would be to slightly reduce economic growth, slightly reduce tax revenues, and slightly increase unemployment costs. Overall, the impact would be a fraction.
Cut €2 billion more? Cut €3 billion more? Twice, thrice a fraction still remains a fraction.
We are at the end of the road but the deflationary wagon train still keeps going forward. It’s heading towards the abyss. And the problem is that we can’t jump off. Unless we stop the train – and stop it now – we’ll be heading over the edge with it.
And no doubt the high priests of deflation will then find a new scapegoat. I nominate the decadent effect of raspberry vinaigrette on modern fusion cooking. For the purposes of avoiding the truth, it works as good as any.
The fractional impact of any further cuts is central, what's most depressing is that this analysis simply isn't filtering into the public debate (or rather isn't being allowed to). The theological nature of some of this, at least in terms of holy writ which is unquestioned, is remarkable.
Posted by: WorldbyStorm | August 28, 2010 at 12:30 PM
I see that the New York Times has called a spade a spade. Particularly like this part:
"Ireland’s gross domestic product did grow in the first quarter of 2010, but that was not the good news that many news media and officials claimed.
This misunderstanding stems from Ireland’s success as a tax haven. Many years ago, Ireland cut corporate taxes to attract business. This created one of Europe’s most impressive tax havens — it is possible to set up a corporation in Ireland, channel sales through that head office (with some highly complicated links to offshore tax havens in order to avoid paying Irish tax) and then pay a minuscule corporate profits tax. Ireland boasts a large industry of foreign “tax minimizers” that do this, but these tax minimizers hardly employ any people. Nearly one-quarter of Irish G.D.P. comes from the profits of these ghost corporations."
http://economix.blogs.nytimes.com/2010/09/02/in-ireland-dangers-still-loom/
Posted by: Conor McCabe | September 03, 2010 at 10:39 AM