Bren­dan Keenan

Irish Independent - Business Week - - FRONT PAGE -

Trump speaks, the UN laughs ner­vously and Ir­ish econ­o­mists shud­der

YOU daren’t take your eye off the ball these days. I have no par­tic­u­lar rea­son to fol­low the com­ings and go­ings of in­ter­est rates and it came as quite a sur­prise to see that, if you lend old Un­cle Sam money for 10 years to­day, he will now pay you 3pc in re­turn. That seems pretty rea­son­able and pretty nor­mal, if a bit be­low long-term his­tor­i­cal av­er­ages, but we haven’t had nor­mal in a long time.

I can un­der­stand why I was sur­prised. Lend the money to Ber­lin and you will get half a per cent for your trou­ble.

That is not nor­mal, even though it has been go­ing on for some years and is ex­pected to go on a while longer.

It is even more strange when one looks at price rises, which were also near zero a few years ago. Ger­man in­fla­tion was 2pc in the twelve months to Au­gust (an­other sur­prise, but not as sur­pris­ing as Greece’s 1pc) and 2.7pc in the USA.

There are a lot of stresses, strains and ten­sions in such fig­ures.

Only pro­fes­sional in­vestors and wealthy peo­ple lend money di­rectly to gov­ern­ments. But stresses in the euro area can be seen even more clearly in the rates most of us ac­tu­ally deal in.

In Ire­land, mort­gage rates are his­tor­i­cally good value at 3pc – which makes for dearer houses – but or­di­nary rates are a dif­fer­ent mat­ter, with con­sumer loans cost­ing 6pc.

For most peo­ple, wage rises will eat only slowly into the real cost of a fixed-term loan, and prices are ris­ing at less than one per cent.

These in­ter­est rates com­pare with an av­er­age of less than 4pc in the rest of the euro area. It is an ex­act­ing ques­tion whether Ir­ish banks still need this kind of cush­ion but, apart from An Post, and one Span­ish bank, no-one seems in hurry to com­pete for the busi­ness.

Too much scar tis­sue from the 2000s, and per­haps grow­ing fear about the fu­ture in gen­eral.

Those far-off ‘nor­mal’ days, be­fore the Celtic Tiger, the ‘Greenspan Put’ which promised no down­turns, and the Great Re­ces­sion was not all plain sail­ing.

Far from it. Some­thing was al­ways go­ing wrong some­where. Wise in­vestors be­lieved equi­lib­rium was some­thing one found briefly; ei­ther on the way up or the way down.

There are chilly re­minders of all that in the present sit­u­a­tion. Emerg­ing mar­ket crises for one thing; es­pe­cially one caused by that late 20th cen­tury in­no­va­tion, US dol­lars for ev­ery­one in the au­di­ence.

Forty years ago, de­vel­op­ing coun­tries had to pay good in­ter­est on their dol­lar bor­row­ings. For the last 10 years, they did not have to do even that.

In­evitably, they have filled their boots. The all too fa­mil­iar pat­tern is that, as US rates rise, mar­kets switch back from emerg­ing cur­ren­cies into green­backs. The af­fected coun­tries have had to raise their rates to stem the out­flow, which de­presses their economies and makes their cur­ren­cies even less at­trac­tive.

Tur­key has been the ca­nary in the mine this time, be­cause of its size and so­phis­ti­cated con­nec­tions with the world econ­omy. In­ter­est rates are cur­rently at 24pc. But it would not be this kind of prob­lem without Latin Amer­ica, and es­pe­cially not without Ar­gentina. In­ter­est rates there are at 60pc and the head of the cen­tral banks re­signed last week.

All this is eerily fa­mil­iar but one thing is quite new: The Don­ald.

That tit­ter dur­ing his UN speech was ner­vous laugh­ter.

Mr Trump is quite right to say he has achieved more in two years than any pre­vi­ous ad­min­is­tra­tion. It is just that most, if not all of it, should not have been done. In the dic­tio­nary def­i­ni­tion, achieve­ment does not nec­es­sar­ily im­ply wis­dom.

Ex­pect more such achieve­ments in next few years.

Mr Trump may be wrong in be­liev­ing that the buoy­ant econ­omy and boom­ing econ­omy are down to his poli­cies, but he is right in think­ing that they are his best chance of suc­cess­ful mid-term elec­tions next month and re-elec­tion in 2020.

If there is a re­ces­sion brew­ing, past pat­terns sug­gest that might be the year it ar­rives. If it shows any signs of do­ing so, Mr Trump will throw the bath af­ter the kitchen sink he has al­ready hurled at US pub­lic fi­nances.

The bud­get deficit is now run­ning at $1trn a year: a thou­sand bil­lion, if you didn’t know.

I’m sure you did know but it is still unimag­in­able; what a US sen­a­tor fa­mously called se­ri­ous money. Mr Trump, though, is un­likely to take it se­ri­ously.

He has al­ready tested the fab­ric of the US con­sti­tu­tion to break­ing point. One of the big­gest, and most im­por­tant, may in­volve test­ing the in­de­pen­dence of the Fed­eral Re­serve – although many an­other pres­i­dent has ven­tured down that road.

Mr Trump may ven­ture fur­ther; tax-cut­ting, spend­ing and bor­row­ing at will.

If he does, the Fed would be ex­pected to raise in­ter­est rates to counter the ef­fect – which might mean be­yond his­tor­i­cal av­er­ages.

If there is one thing fi­nan­cial mar­kets hate, it is loose fis­cal pol­icy and tight mone­tary pol­icy. Those who have bor­rowed heav­ily in dol­lars will hate it even more.

De­spite what we all read and hear, there is as yet no such thing as ar­ti­fi­cial in­tel­li­gence, just more pow­er­ful al­go­rithms. Real in­tel­li­gence would in­clude in­vestors who de­cide to get out of po­si­tions they per­ceive as risky and not worry if it turns out they could have made more stay­ing in.

That sort of thing bal­ances mar­kets, but these days a fund man­ager who is beaten by the al­go­rithms gets the sack.

We don’t know when there might be a turn, but when it comes it may be se­vere.

A few brave souls in the fore­cast­ing pro­fes­sion have gone so far as to say that 2020 is the year that nerves will break.

It might be longer of course – and it might be next year. Re­cent ex­pe­ri­ence sug­gests that mar­kets have be­come more volatile, with up­swings in par­tic­u­lar last­ing longer than would once have been ex­pected, with down­turns cor­re­spond­ingly more vi­o­lent.

That is the back­ground to the ar­gu­ments about Ir­ish fis­cal pol­icy.

The ESRI had an un­ex­pected take on this last week; ar­gu­ing not for a big sur­plus to guard against hard times, as has been the norm, but for a neu­tral bud­get to keep the econ­omy run­ning nicely.

They smell danger too: per­haps the ul­ti­mate danger of a global down­turn com­bined with a bad Brexit. So bet­ter not risk that hap­pen­ing to an Ir­ish econ­omy al­ready slow­ing be­cause of tight fis­cal pol­icy.

It is worth re­mem­ber­ing that a neu­tral bud­get im­plies in­dex­ing in­come tax bands in line with earn­ings, which could be por­trayed by the govern­ment as a €200 ‘cut’ for top rate tax­pay­ers.

It would leave a tiny sur­plus in Bud­get 2019, which at least would break the long-stand­ing min­is­te­rial ta­boo on such a thing but is oth­er­wise pretty ir­rel­e­vant.

Trou­ble is, past re­ces­sions have shown how lever­aged the Ir­ish pub­lic fi­nances are to any change in eco­nomic growth. It would not take much to turn that small sur­plus into a deficit of 3-4pc of GDP, which might re­quire cor­rec­tive ac­tion, given Ire­land’s debt po­si­tion.

As al­ways, in­fra­struc­ture spend­ing would be the first ca­su­alty.

That is why the gen­eral call from an­a­lysts has been for sur­pluses of that mag­ni­tude to be built up over the past few years, when the econ­omy was grow­ing so strongly.

Those in the ESRI may not have changed their minds on the prin­ci­ple: they may just be say­ing time has run out.

That was ner­vous laugh­ter at Trump’s UN speech

US Pres­i­dent Don­ald Trump dur­ing a news con­fer­ence on the side­lines of the UN Gen­eral As­sem­bly in New York

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