GOVERNMENT MINISTERS HAVE been more than miffed in recent days. The media has not bought the Great Turnaround Story.
Employment totals are up by 58,000; Dublin house prices are up 15 per cent year-on-year; mortgage defaults have finally hit rock bottom. Some ministers think that, by now, the country’s financial journalists should be in a circle doing the hokey cokey on roller skates.
Instead the miserable, whey-faced hacks are moaning about the lack of emergency ECB credit lines in our post-bailout world. They would prefer us to go on pleading poverty at the back door of the Bundesbank.
So who’s right and who’s wrong? Should we be optimistic or pessimistic?
For a little country like Ireland this is the most important question of all. It’s absolutely vital that Irish consumers get their mojo back and stop saving 10 per cent of their incomes each year. Retail sales are still flat as a pancake, not helped at all by the property tax money-grab sanctioned by government in the run-up to Christmas. And of course nobody has told the State-owned banks that a bank without loans is like a day without sunshine.
First, the good news
On one level the evidence is convincing. You should be willing to splash out now. But are you?
The 3.2 per cent growth in employment is unambiguously good news. It has nothing to do with net emigration, which is continuing at about 40,000 per year and which keeps a lid on the dole queues. It represents new jobs, mostly full-time, for real people who will pay income tax and help the government meet its budget targets.
Dublin house prices are back to 70 per cent of the level hit in 2005, two years prior to the bust. Even the CSO figures for the year to October, which cannot pick up many cash transactions, may understate the true rate of increase.
The doomsters tell you it’s all due to lack of supply, that the numbers are based on a thin market. They are partially right. People with tracker mortgages costing a typical 1.2 per cent can’t afford to move to a variable rate loan at over 5 per cent. They remain under a modern form of house arrest.
It’s a very, very strange market. In some districts 40 per cent of the homes placed on the market are executor sales. The houses are then bought by people who have done well overseas. The agents of the deceased may be selling to the solicitors of the departed.
We may have a problem
But that does not alter the fact that market psychology is changing. The chattering classes are renovating their houses again. You can’t get scaffolding for love or money. Even those in negative equity are seeing the gap between their mortgage debt and the value of their houses close quickly.
But there may be a problem. And it is a very big problem indeed.
Much of the change in economic fortunes is being drive by global fiscal and monetary policies that are misguided in the extreme and are driven by fear. In Washington, London and Frankfurt the base rate is being kept between zero per cent and half of one per cent and is likely to remain so for several years.
Central bank governors may not be printing money. Instead they are simply pushing buttons on their computers that allow them to generate vast amounts of new credits. They are terrified of deflation.
In the UK the Bank of England is going to hell in a handcart. Quantitative Easing (QE) is Stg£375bn and up to 20 per cent of government debt is held directly or indirectly by the central bank itself. Is this not what we call monetary financing of the public deficit, which this year is still a hefty 7 per cent of GDP?
Convinced deflation is setting in
In the US Mrs Yellen’s Fed has increased the value of QE by $85bn per month since September 2012. The QE total to date is $3.5 trillion and heading due north. Obama’s government is forced to adjust its borrowing limits upwards every three months.
Both the Bank of England and the Fed are now so convinced that deflation is setting in that they have publicly pledged that interest rate policy will be determined by the rate of unemployment and not by monetary realities.
The ECB’s Mario Draghi does not do QE. But he did produce more than €1trn in low cost liquidity for European banks when markets began to creak shortly after he was appointed. He further claims that he has limitless approval for OMT – the cash needed to pump up Club Med gilt prices – if that is what is required to maintain the solvency of Spain and Italy.
These central bankers are using huge amounts of funny money to pump up asset prices. The process of debauching the money system is now so entrenched that it’s not just government stock that trades at bloated values. Mortgage-backed securities (remember them) are surging in price. And US stock market indices have closed at record levels each day for the last forty trading days.
What happens when the music stops? And it does have to stop sometime. Will the value of the treasury bills, the stocks and shares and the properties that underpin bank solvency across the globe simply implode? And if that happens will trading conditions in the real world of business deteriorate very rapidly indeed?
The problem is that all the funny money that has been created since the fall of Lehman and especially in the last two years has not made it to Main Street. The central banks may have been putting lipstick on a corpse.
US business school students think that there’s easy money to be made on Wall Street. But they should be asking why sales at shops run by the likes of American Apparel and Abercrombie and Fitch, where the same students buy their clothes, are down 40 per cent in the last quarter.
In Europe economic growth is on the floor across the southern periphery. Youth unemployment exceeds 50 per cent. The rot is finally spreading to France where unemployment is over three million.
Who will tell the emperor?
It’s as if an emperor with a huge palace could not heat the rooms and decided to spend enormously to deal with the problem. Therefore his engineers built vast state-of-the-art boilers and water storage systems but neglected to include the sort of pumping systems that would get the hot water around the palace. As a result everybody at the royal court was still freezing in their beds. And nobody had the courage to tell the emperor.
This absurd global monetary policy may seem a little remote from Ireland. But consider the following. In Ireland base rates are 0.25 per cent and a majority of mortgage holders have tracker loans. Yet 18.5 per cent of borrowers are in arrears, many of them for one year, two years or longer. Some 27 per cent of buy-to-let mortgages are in the doghouse. If the cost of money was suddenly to increase what would happen to Ireland’s housing market, to its remaining banks and ultimately to its public finances?
Reasons to be cheerful, yes. Reasons to be cautious too.