Lower Irish bond interest rates the solution to economy's recovery?

[patslatt]

See today's Irish Times on the lesson of Finland's experience with deflation,which was ended only after a massive 40% devaluation of the currency that boosted recovery of exports http://www.irishtimes.com/newspaper/...245890044.html

The dire arithmetic of the national budget is that 2009 spending is supported by taxes that have sunk to levels early in the decade. Ireland can borrow huge sums for a short while,maybe a year,to cover the deficit. But if drastic cuts aren't made in spending, the concern of the bond market which funds the deficit will grow,driving up interest rates to ruinous junk bond levels of 7% or more in a deflationery environment.

Taxing our way out of this crisis is not an option as further increases in taxes would deflate the economy with little net gain in tax take,while the impact on long term competitiveness of any more income tax increases on high earners would seriously damage economic recovery prospects.

Cutting public sector pay by 25% would take about €5 billions out of spending and cutting social welfare 15% would take about €3 billions more,with a high multiplier effect on economic demand in the latter case. These cuts could be spread over two years and would certainly be deflationery,depressing demand in the overall economy by maybe 2% a year for two years.

But this deflationery effect would likely be offset by a drop in interest rates.As soon as the international bond market is assured that the government is seriously undertaking those cuts,presumably with the bitter resignation of Irish public sector workers after some futile,sporadic industrial actions,Irish interest rates would drop by about 2% to close to German levels. That 2% would be a huge boost to heavily indebted consumers and government in the Irish economy,reducing interest payments by maybe €5 billion a year over time.

In addition,domestic and international business confidence in the Irish economy would be restored,helping a recovery in business capital spending and inward investment.

The worst case scenario is that the government fails to face down the public sector and make insufficient or no cuts in pay,maybe settling for another increase in the pension levy of 4% next year. Then the rising debt burden would swamp the government finances,with interest costs taking a huge and increasing share of the tax take as junk bond interest rates kicked in on the rolling over of government and private sector bonds.

It would be impossible to recapitalise the banks as interest on the capital for their recapitalisation could not be afforded. Without a bank rescue, the economy could experience a depression in which the economy drops 20%. That would force the government to call on an IMF rescue,which would be conditional on drastic government spending cuts that should have been undertaken in the first place.

[Cael]

You plan seems to be based on the idea that the US economy will recover within 12-16 months. Do you really think that possible? And if not, how long can the state operate on borrowed money?

[eurosceptic]

Article clearly points out the need for a currency devaluation.

[youngdan]

Well you get the gold medal for avatars anyway.

[Cael]

Well you get the gold medal for avatars anyway.

Its cool isnt it...

[youngdan]

I think it reflects yourself Cael, your heart is in the right place but I am afraid the Soviets did not have much time for Christ and a few of your economic beliefs are likewise bearing little relationship to the real world.

I mean this as a complimentary comment

[eurosceptic]

How do you get a custom avatar?

[Cael]

How do you get a custom avatar?

If you ask a mod, they can do it for you.

[Cael]

I think it reflects yourself Cael, your heart is in the right place but I am afraid the Soviets did not have much time for Christ and a few of your economic beliefs are likewise bearing little relationship to the real world.

I mean this as a complimentary comment

I know that, a chara. It takes a leap of faith to follow either Jesus or Marx. If your shoes are weighed down with too much "reality" you can never make that leap.

[cactusflower]

It takes a leap of faith to follow any religion, and a lapse of faith in favour of science to follow Marx. Your avatar has a certain cool kitch quality all the same.

Pattslatt - did you read that article at all. The headline said IT MAY NOT BE POSSIBLE TO DEFLATE OUR WAY OUT OF A CRISIS.

McManus said that the Finns tried exactly what you suggest and it didn't work.

I found it interesting that McManus is hinting at withdrawal from the Eurozone to allow a radical devaluation - that is what he says did it for the Finns, along with competivity as an exporter. He says that a R and D and low corporation tax have to be central to Government strategy.

The problem with what he says is that we and our banks are bust - we can't afford not to deflate. I see our systemic bank Anglo Irish is looking for another €2.5 billion today. That could relate to a loan to a single developer.