Anyone read Mcwilliams new book and agree with his alternative to the current mess?

nesf

SkepticOne wrote: »

I don't think this is correct.

Let us say before devaluation we owe 100 billion euros. How much do we owe after devaluation? Answer: 100 billion euros. No change. Our situation with regard to external debt has not improved, but neither has it deteriorated. The fact that internally we use punts or whatever makes no difference.

What determines our ability to pay foreign debt is determined by competitiveness and, as you point out, this is most easily improved by devaluation.

I think the issue is somewhat confused by hisorical examples of devaluation where debt has been denominated in the country's own currency thus devaluing had the effect of decreasing foreign debt. No one is suggesting devaluating for that reason here.

Yes we still owe 100 billion euros but instead of getting in 32 billion in euro in tax we get in 32 billion in punts now worth less than euros so the relative cost of our present borrowings increase as a % of our tax take. Even without adding any new Government borrowing our present borrowing will increase in cost to us when we devalue our currency. Any advantage we gain from devaluation for competition is counteracted by the need to repay debts denominated in Euro/Dollars. Ignoring this effect grossly overvalues the benefit of leaving the Euro.

johnnyskeleton

Flamed Diving wrote: »

Good points, especially about the Euro remaining within the system. They would have great difficulty getting rid of it.

Unless they scrap the constitution, it would be impossible I would think.

If they try to take the money I have under my mattress and convert it into new punts they are violating my right to hold private property (just as if they today took my USD and forced me to take Euro instead).

If they convert the Euro I hold in a non-Irish registered bank into new punts, I sue that bank - not in Ireland, but in their home country - for the Euro that they owe me, not the new punt equivalent.

The money I hold in Irish banks could potentially be at risk, but if they did that I'd happily spend more than that amount in constitutional challenges to the new legislation before I get the hell out of the country.

But fundamentally, a law cannot be passed in Ireland without approval from the dail and the signature of the president. Even in the best case scenario it would take a few days to pass by which stage the Euros would have fled so there would be nothing for them to convert to the new currency. A sudden change ala Argentinas depegging of the peso from the USD was capable of such an overnight change. Leaving the Euro is not.

There's just no practical way for us to leave the Euro, and that's before getting into the pros and cons (mostly cons) of such a move.

veryangryman

murphaph wrote: »

Leaving the Euro would let FF off the hook. Instant devaluation and the hidden paycut within would be lovely for Cowen. No tough decisions and REAL paycuts to the overpaid public sector would be required-just print more money and pay them. Would also stop people shopping in NI as the exchange rate would make everything so expensive there.

The Euro basically forces Ireland to behave like a grown up country as it's policies are driven by the ultra conservative Bundesbank. Ireland actually needs to go through this pain so people learn the lesson that you cannot build a real economy out of buying and selling property to one another.

Do you think that lending from the ECB to an unlimited extent is a viable alternative?

And lending from Germany non-stop, while great for them if/when they get their interest payments from YOU and I, is ruining our lifestyles, not just now, but for the rest of ours and most likely our childrens lives.

People are turning against each other (public vs private), families are seperating, and worse still, Fine Gael are looking like returning to power due to the hopeless policies that are being followed.

Changing currency would increase inflation but... would skip the bull that is currently occurring with pay cuts (as the wages would be worth less), trips to the north. People would buy more property as "It will be worth more tomorrow" and a new boom of sorts would begin. With one difference - people would realise their limits now. Once bitten, twice shy. The country could start again.

Lads, one way or the other, the next few years are going to be tough for everyone who is not a retired banker or FAS chairman. I see us far more likely to be IMF material if we stay with the currency.

baalthor

jackthekipper wrote: »

I think the main arguement against leaving the Euro is that the punt would be devalued alot, basically making everyone that bit poorer, and the Euro debt to be paid back works out more. Someone else will be able to explain it better.

Not everyone
Someone with a suitcase full of €500 notes under their bed would be in a pretty good position.

Scenario
Let's say today Jane and Joan have €10k each in the bank.
Jane withdraws the money and puts it in a safe at home, Joan keeps it in the bank. Then euro-gone (EG) day happens.

Jane still has €10k but Joan now has NIKL* 10k which is worth how much now in euro? €8k, €5k, ,€2k ...? Sucks to be Joan...

So to avoid being lynched and to devalue all "Irish" euros, the government would need to do the following:

1. Implement EG day abruptly over-night while the banks are closed (no leaks, no warnings, no tipping off the wife or the neighbours or the lads at the golf club)

2. Activate Soviet style exchange and money controls. Euro notes (above a small amount) held by Irish residents are no longer legal tender and must be exchanged for NIKLs immediately. Possession of euro notes after the specified exchange period to be a jailable offence.

3. Seal the border, ports and airports. All passengers searched to prevent them taking euros out of the country.

Once the "transition period" is over the euro posession and monetary restrictions would be lifted.

Of course the government wouldn't have to take steps 2 and 3 but as I've argued above leaving the euro would massively devalue the savings of a large percentage of the population.
On the other hand, anyone holding cash euros is unaffected, their euros are just as good as the ones in circulation in Germany and France.
Now people with large amounts in cash in their posession often didn't acquire it through orthodox means or didn't want to declare their earnings to the authorities. So abandoning the euro would put dishonest and corrupt individuals at an advantage over the honest and law-abiding. This is pretty much what happened during the break-up of the Soviet Union.
It's hard to see how this wouldn't cause a huge social upheaval; at the very least Joe Duffy would have his busiest week ever:D
And what would happen to citizens of other euro countries who had just transferred euros to Ireland before the change over?

Step 1 would also be pretty much impossible in most countries, but in Ireland? Any hint or leak about leaving the euro would have thousands of people storming the banks demanding the withdrawal of their money.

The key point here is that we would be doing something unique in financial history; abandoning a functioning currency for a weaker new one while the old currency continues in circulation.
When other countries devalued, they devalued their currency; the notes in their pockets and under the bed were also devalued because they looked different from everyone else's. You couldn't bring kronors or australs to Germany, claim they were d-marks and exchange them on a 1:1 basis. When new currencies were created in the former Soviet countries and Yugoslavia, the core currency (e.g. ruble) had already collapsed and those societies were much less monetized anyway; barter was often used for everyday transactions.

So leaving the euro looks like a crazy idea so why is McWilliams suggesting it?
He is possibly thinking that Ireland leaving the euro would cause the euro to collapse, resolving many of the problems described above.
I get the feeling McWilliams thinks Europe would be better off with each country having its own currency and Ireland pulling out would achieve this but he doesn't want to say this explicitly.

NIKL = New Irish Kabbidj Leaf:D

Flamed Diving

veryangryman wrote: »

Do you think that lending from the ECB to an unlimited extent is a viable alternative?

And lending from Germany non-stop, while great for them if/when they get their interest payments from YOU and I, is ruining our lifestyles, not just now, but for the rest of ours and most likely our childrens lives.

People are turning against each other (public vs private), families are seperating, and worse still, Fine Gael are looking like returning to power due to the hopeless policies that are being followed.

Changing currency would increase inflation but... would skip the bull that is currently occurring with pay cuts (as the wages would be worth less), trips to the north. People would buy more property as "It will be worth more tomorrow" and a new boom of sorts would begin. With one difference - people would realise their limits now. Once bitten, twice shy. The country could start again.

Lads, one way or the other, the next few years are going to be tough for everyone who is not a retired banker or FAS chairman. I see us far more likely to be IMF material if we stay with the currency.

Devaluing causes inflation because the cost of importing goods rises. There are many fixed costs in the short-run.

The housing market is flat because there is no demand for thousands of houses in Longford, for example. It is a separate issue. If anything it will make the problem worse because Irish banks will need to borrow in foreign currency and lend in Punts.

Flamed Diving

There are two books people should read to convince themselves why this is a terrible idea, and both are written by Nobel Prize winning economists, not a former economist turned media hoor.

SkepticOne

nesf wrote: »

Yes we still owe 100 billion euros but instead of getting in 32 billion in euro in tax we get in 32 billion in punts now worth less than euros so the relative cost of our present borrowings increase as a % of our tax take. Even without adding any new Government borrowing our present borrowing will increase in cost to us when we devalue our currency. Any advantage we gain from devaluation for competition is counteracted by the need to repay debts denominated in Euro/Dollars. Ignoring this effect grossly overvalues the benefit of leaving the Euro.

But this tax take is coming down anyway through competitiveness which I would maintain is the core of the problem anyway. The only advantage of staying in the Euro is that we get to drag this out over several years rather than taking the hit up front. I can see why the current government would favour this option but the social cost and damage to the economic infrastructure is much greater.

SkepticOne

Flamed Diving wrote: »

There are two books people should read to convince themselves why this is a terrible idea, and both are written by Nobel Prize winning economists, not a former economist turned media hoor.

Interestingly Krugman supports the idea of lowering interest rates to get out of recession, something that is unavailable to Ireland within the Euro.

baalthor

johnnyskeleton wrote: »

Unless they scrap the constitution, it would be impossible I would think.

If they try to take the money I have under my mattress and convert it into new punts they are violating my right to hold private property (just as if they today took my USD and forced me to take Euro instead).

If they convert the Euro I hold in a non-Irish registered bank into new punts, I sue that bank - not in Ireland, but in their home country - for the Euro that they owe me, not the new punt equivalent.

The money I hold in Irish banks could potentially be at risk, but if they did that I'd happily spend more than that amount in constitutional challenges to the new legislation before I get the hell out of the country.

But fundamentally, a law cannot be passed in Ireland without approval from the dail and the signature of the president. Even in the best case scenario it would take a few days to pass by which stage the Euros would have fled so there would be nothing for them to convert to the new currency. A sudden change ala Argentinas depegging of the peso from the USD was capable of such an overnight change. Leaving the Euro is not.

There's just no practical way for us to leave the Euro, and that's before getting into the pros and cons (mostly cons) of such a move.

Yea, it would probably require a coup in the middle of the night. People would wake up to find the banks closed and the army patrolling the streets ...

Flamed Diving

SkepticOne wrote: »

Interestingly Krugman supports the idea of lowering interest rates to get out of recession, something that is unavailable to Ireland within the Euro.

Interestingly, Krugman offers chapter after chapter of examples of high-debt countries making a mess of currency management and making a recession worse, with many cases leading to IMF intervention. Perhaps reading the book may, interestingly, teach you something.

baalthor

SkepticOne wrote: »

But this tax take is coming down anyway through competitiveness which I would maintain is the core of the problem anyway. The only advantage of staying in the Euro is that we get to drag this out over several years rather than taking the hit up front. I can see why the current government would favour this option but the social cost and damage to the economic infrastructure is much greater.

Practically/technically, how would you suggest the country abandon the euro?

How would you manage the internal and external social and political fallout?

amacachi

SkepticOne wrote: »

Interestingly Krugman supports the idea of lowering interest rates to get out of recession, something that is unavailable to Ireland within the Euro.

What are our interest rates like at the moment? Hasn't made a huge amount of difference.

Flamed Diving

An excerpt from Krugman's book, use your imagination and apply it to Ireland after leaving the Euro...

The loss of confidence was to a certain extent a self-reinforcing process. As long as real estate prices and stock markets were booming, even questionable investments tended to look good. As the air began to go out of the bubble, losses began to mount, further reducing confidence and causing the supply of fresh loans to shrink even more.

With fewer yen and dollars coming in, the demand for baht on the foreign exchange market declined; meanwhile, the need to change baht into foreign currencies to pay for imports continued unabated.

In order to keep the value of the baht from declining, the Bank of Thailand had to do the opposite of what it had done when capital starting coming in: it went into the market to exchange dollars and yen for baht, supporting its own currency.

But there is an important difference between trying to keep your currency down and trying to keep it up: the Bank of Thailand can increase the supply of baht as much as it likes, because it can simply print them; but it cannot print dollars. So there was a limit on its ability to keep the baht up. Sooner or later it would run out of reserves.

The only way to sustain the value of the currency would have been to reduce the number of baht in circulation, driving up interest rates and thus making it attractive once again to borrow dollars to reinvest in baht. But this posed problems of a different sort. As the investment boom sputtered out, the Thai economy had slowed—there was less construction activity, which meant fewer jobs, which meant lower income, which meant layoffs in the rest of the economy. Although it wasn't quite a full-fledged recession, the economy was no longer living in the style to which it had become accustomed. To raise interest rates would be to discourage investment further, and perhaps push the economy into an unambiguous slump.

All of this was according to the standard script: it was the classic lead-in to a currency crisis, of the kind that economists love to model—and speculators love to provoke.

As long as the baht-dollar exchange rate seemed likely to remain stable, the fact that interest rates in Thailand were several points higher than in the United States provided an incentive to borrow in dollars and lend in baht. But once it became a high probability that the baht would soon be devalued, the incentive was to go the other way—to borrow in baht, expecting that the dollar value of these debts would soon be reduced, and acquire dollars, expecting that the baht value of these assets would soon increase. Local businessmen borrowed in baht and paid off their dollar loans; wealthy Thais sold their holdings of government debt and bought U.S. Treasury bills; and last but not least, some large international hedge funds began borrowing baht and converting the proceeds into dollars.

All of these actions involved selling baht and buying other currencies, which meant that they required the central bank to buy even more baht to keep the currency from falling, which depleted its reserves of foreign exchange even faster—which further reinforced the conviction that the baht was going to be devalued sooner rather than later. A classic currency crisis was in full swing.

Like many governments before and no doubt many to come, Thailand's waited as its reserves ran down. On July 2, the Thais let the baht go...most people thought that the devaluation of the baht would pretty much end the story...And so there would not be a devastating recession. They were wrong.

This represents about 1/10th of a chapter (much less, I think), so I don't think any copyright laws are being broken? Anyway, I know people may whinge that this isn't a perfect mirror image of Ireland, but there are plenty more examples like it in history. Take your pick.

SkepticOne

amacachi wrote: »

What are our interest rates like at the moment? Hasn't made a huge amount of difference.

Our nominal interest rates are low but our real interest rates are high due to deflation. It is the real interest rates that count here.

nesf

SkepticOne wrote: »

But this tax take is coming down anyway through competitiveness which I would maintain is the core of the problem anyway. The only advantage of staying in the Euro is that we get to drag this out over several years rather than taking the hit up front. I can see why the current government would favour this option but the social cost and damage to the economic infrastructure is much greater.

Yes but for every % we devalue we add that % to our effective borrowings. If we devalue by 20% we effectively increase the amount we have borrowed by that much when you work out how much tax the Government needs to collect to service the debt. Now any competitive boost will take ages to kick in and a sudden increase in relative price of all imported goods won't do much for consumer sentiment further depressing tax take!

This is before any attempt to get Euros out of the system and other such problems. Really the idea is not as attractive as some make it out to be!

K-9

Thought this finfacts article was quite good on his book:
http://www.finfacts.ie/irishfinancenews/article_1018459.shtml

Its sad that despite the bubble and money available to invest, our indigenous exporters are still tied to the UK.

Maybe we'd be leaving the very thing that could get us out of the mess?

amacachi

SkepticOne wrote: »

Our nominal interest rates are low but our real interest rates are high due to deflation. It is the real interest rates that count here.

So you'd support negative interest rates?

K-9

nesf wrote: »

Yes but for every % we devalue we add that % to our effective borrowings. If we devalue by 20% we effectively increase the amount we have borrowed by that much when you work out how much tax the Government needs to collect to service the debt. Now any competitive boost will take ages to kick in and a sudden increase in relative price of all imported goods won't do much for consumer sentiment further depressing tax take!

This is before any attempt to get Euros out of the system and other such problems. Really the idea is not as attractive as some make it out to be!

This in a time that our interest repayments are near €2 Billion a year and rising. They've nearly doubled in a year.

SkepticOne

amacachi wrote: »

So you'd support negative interest rates?

How do you suppose that? I don't think it follows from what I've been saying.

amacachi

SkepticOne wrote: »

How do you suppose that? I don't think it follows from what I've been saying.

Then how low would you like the interest rates to be?

SkepticOne

nesf wrote: »

Yes but for every % we devalue we add that % to our effective borrowings. If we devalue by 20% we effectively increase the amount we have borrowed by that much when you work out how much tax the Government needs to collect to service the debt. Now any competitive boost will take ages to kick in and a sudden increase in relative price of all imported goods won't do much for consumer sentiment further depressing tax take!

This is before any attempt to get Euros out of the system and other such problems. Really the idea is not as attractive as some make it out to be!

You are leaving out the fact that most of the governents outgoings will be reduced since the wage bill is the largest part of government expenditure. But the other point is that unless we sort out competitiveness we are not going to sort out the public finances problem which is merely a symptom of its lack. Although an improvement in competitiveness would take time to help with government finances, sorting it out through other means will take even longer.

SkepticOne

amacachi wrote: »

Then how low would you like the interest rates to be?

In real terms somewhat lower than they are now. Not negative.

K-9

SkepticOne wrote: »

You are leaving out the fact that most of the governents outgoings will be reduced since the wage bill is the largest part of government expenditure. But the other point is that unless we sort out competitiveness we are not going to sort out the public finances problem which is merely a symptom of its lack. Although an improvement in competitiveness would take time to help with government finances, sorting it out through other means will take even longer.

But tax revenues are also reduced.

Plus wages will be going mostly on increased mortgages and other debt and inflation affecting consumer spending, thus decreasing even more VAT and excise duties.

SkepticOne

K-9 wrote: »

But tax revenues are also reduced.

Yes, but my point is that maximising tax revenue at the expense of exacerbating the deeper problem is not the way to go. For example the government could jack up taxes to solve the short term finance problem but this does not solve the real problem, competitiveness, although it gets them out of an immediate fix so they can pass it on to the next government.

I suggested this earlier: imagine that our currency were to double relative to the dollar and sterling due to some event in another euro country. Does this improve government finances sustainably. Obviously not. Companies that depend on exporting to those countries will go out of business unless they can adjust quickly enough, and that adjustment is most likely to be in the form of redundancies rather than halving wages. Meanwhile the government won't be able to get public sector wages down so the tax burden on companies will be very high.

The answer is an appropriately valued currency for the economy in question.

Too high or too low is bad for the economy. What most people are doing on this thread is taking the "too low" side of the equation and using this to argue invalidly against an appropriately valued currency for Ireland.

K-9

SkepticOne wrote: »

Yes, but my point is that maximising tax revenue at the expense of exacerbating the deeper problem is not the way to go. For example the government could jack up taxes to solve the short term finance problem but this does not solve the real problem, competitiveness, although it gets them out of an immediate fix so they can pass it on to the next government.

Agreed, but that applies in the Euro or not.

SkepticOne wrote:

I suggested this earlier: imagine that our currency were to double relative to the dollar and sterling due to some event in another euro country. Does this improve government finances sustainably. Obviously not.

But that can happen now in the Euro. Sterling could continue to devalue and go to £1 = €.70 cents.

SkepticOne wrote:

Companies that depend on exporting to those countries will go out of business unless they can adjust quickly enough, and that adjustment is most likely to be in the form of redundancies rather than halving wages. Meanwhile the government won't be able to get public sector wages down so the tax burden on companies will be very high.

The answer is an appropriately valued currency for the economy in question.

Too high or too low is bad for the economy. What most people are doing on this thread is taking the "too low" side of the equation and using this to argue invalidly against an appropriately valued currency for Ireland.

Think you are under the perception we'll decide what we devalue at and nothing else will matter. All you are doing is substituting one set set of circumstances we don't control with loads of others.

You need to consider what could go wrong far more than what could go right.

Pete4779

veryangryman wrote: »

Got to tell ya, this sounds reasonable..

Leave the Euro (didnt hurt Sweden and the UK with European game), go back to the punt, and print money to stimulate spending.

Not without some pain, but much better than cutbacks and redundancies that are currently occurring. So why not do it, Mr Cowen? Best idea ive heard sofar to the crisis and an obvious alternative to the current blame game

Sweden and UK economies actual have economies and trade.

If we left the euro, we still have no actual nation income because the grand plan was everyone to buy and sell apartments from each other for the next 100 years. Convert to New Irish Pounds at any time, there is still NO MONEY COMING IN.

At the moment, we get favourable borrowing as we are an asset being part of the Eurozone. Outside it, we'd actually have to go through a few generations to even get to the state Sweden and the UK are in right now.

K-9

Pete4779 wrote: »

Sweden and UK economies actual have economies and trade.

If we left the euro, we still have no actual nation income because the grand plan was everyone to buy and sell apartments from each other for the next 100 years. Convert to New Irish Pounds at any time, there is still NO MONEY COMING IN.

At the moment, we get favourable borrowing as we are an asset being part of the Eurozone. Outside it, we'd actually have to go through a few generations to even get to the state Sweden and the UK are in right now.

And that is the biggest waste of the bubble years. While some blame the ECB for the low interest rates, we and we alone, chose to p*ss it against the wall on property.

We could have used it to invest in start up companies and develop the Euro market, but we didn't. Too busy putting the fingers up at the ECB.

The Euro provided a new market for us. Multinationals seized on it, we didn't.

imme

Rb wrote: »

This "idea" sounds like something he heard from an elderly drunk at his local and felt he needed something to pad out the book a little.

I'd be interested to hear his reasoning on it though.

being McWilliams he'd have to give the lady a name, 'lady banker' no that's not McWilliams enough, what about 'wise old lady of threadneelde street'/'old lady of termonfeckin', nah they're no good either. I guess that's McWilliams' forte, giving monickers.

SkepticOne

K-9 wrote: »

Think you are under the perception we'll decide what we devalue at and nothing else will matter. All you are doing is substituting one set set of circumstances we don't control with loads of others.

Actually no. What I'm arguing for is that the markets should decide the overall level of the currency. The central bank's main concern should be control of inflation. I would expect that there would be some devaluation but the exact level would be determined by the market.

K-9

SkepticOne wrote: »

Actually no. What I'm arguing for is that the markets should decide the overall level of the currency. The central bank's main concern should be control of inflation. I would expect that there would be some devaluation but the exact level would be determined by the market.

And what will the markets make of this new Punt?

They'll speculate on its collapse, why wouldn't they? Its a sure bet.

After all we left a strong, stable currency and went on our own. You reap what you sow.

I'd say the IMF is far more likely than some brave, new dawn.