Japan intervenes again whilst the Euro zone slows down and Ireland is the first to double-dip

After the improved numbers we had seen recently for initial jobless claims in the United States we got a more disappointing set of numbers yesterday. After a couple of weeks at around the 450,000 level we got a figure of 465,000 and to add to the gloom the previous weeks figures were revised up by 3,000 to 453,000. If one remembers that even at the 450k level which was considered to be an improvement that unemployment was likely to be rising, so the new number is a further concern for US unemployment figures going forwards. The US existing home sales figures were a 7.6% improvement on July’s figures but they were also some 19% lower than August 2009.So it might be better to express them as an improvement on a dire set of numbers for July but still below 2009 and not good enough to do much about the inventory of unsold homes which stands at some 11.6 months worth according to the National Association of Realtors.

After such figures it was probably not a surprise that the Dow Jones Industrial Average fell 76 points to 10662. Perhaps it was wondering about a jobless recovery or to be more precise a possible recovery which also has rising unemployment. If we add another potential concern that of rising commodity prices then we see that the CRB spot index has broken the 480 level and closed at 480.81 with metals prices being the strongest component. Rising unemployment combined with rising commodity prices does not make for much of an economic brew.

The Bank of Japan intervenes again overnight

As I have pointed out in recent articles the Yen exchange rate had been drifting higher after the opening salvo of intervention from the Bank of Japan posing a question for those who had rushed to call it a success. This morning the rally became too much for the Bank of Japan and it looks like it intervened again at an exchange rate of 84.5 Yen to the US dollar. The good news for it is that it very quickly drove the Yen to 85.4, but the bad news is that as I type this the rate is now 84.7. So very quickly it is nearly back to where it started. Should we stay there today then as we are already due to timezone differences heading for the weekend in Japan it would not surprise me if foreign exchange traders chose this time to give matters a little push. If I was in charge of the Bank of Japan then I would be expecting a late night and would make arrangements for this. Of course something else may happen which takes the markets focus but it may not.


This saga may go on for quite some time. Unless there is a fundamental change of events we see that the market is likely to test the Bank of Japan’s resolve from time to time. If we just look at the consequences for Japan there is a possible stimulatory effect for her economy. This is because to weaken the Yen she has to sell it and to sell it the Bank of Japan has to create Yen as by definition there is a shortage of Yen which is driving up the price. So a side-effect of the intervention is a possible boost to the money supply. I say possible because the Bank of Japan could try to drain the money out of the system, however it does not appear to have done so at this point in time. Some consider the intervention to be in reality another form of monetary stimulus by the Bank of Japan and there is an element of truth in this. Personally I see it as adding to my theme that central banks are getting involved in more and more markets leading to risks of moral hazard and indeed of a type of insider trading where investors ignore reality and instead try to “front-run” the actions of the world’s central banks.

There is another danger and I wrote about this yesterday as we are in danger of seeing a race to the bottom as everybody tries to devalue at once and the horrible spectre of “competitive devaluations.” I feel very strongly about this as a danger and accordingly would like to repeat this sentence about devaluations and export-led growth.

Individually there may be gains but for the world as a whole this is a zero-sum game and for every winner there is a loser.

Just as a final point the Bank of Japan is being very inscrutable about whether it intervened or not but remember just checking the prices is a form of intervention as after last week markets will respond. And to my mind checking the prices is very dangerous as the boy who cried wolf immediately comes to mind. If you look at the chart something clearly happened and central banks can be inscrutable if they choose.

Economic slowdown in the Euro zone

Some slightly troubling figures emerged yesterday from the locomotive of euro zone growth. The Purchasing Managers Index for Germany came in as follows the manufacturing PMI was 55.3  after 58.2 previously, whilst the services PMI declined to 54.6 after 57.2. The ‘new orders’ and ‘new business’ sub indices reported a similar decline as the headline figures. And just to rub it in then export expectations declined to the lowest level since September last year at 51.9 compared with 54.3 previously.

Now as 50 is the benchmark for these figures we see that Germany is still growing but more slowly than before. Now this number is a survey and so should be approached with a little caution but it is also true that it has often been an accurate signal in the past. At least after the high rate of growth recorded in the second quarter of this year things are cooling from a high base level. The troubling part is that currently quite a few economies are showing signs of cooling.

Ireland’s economic decline

Whilst Germany’s figures showed a slowdown Ireland’s were much more worrying. Not only were they very poor they come on top of Ireland’s recent problems and leave her looking exposed. If we look at the figures from her Central Statistical Office we see the following.

They show seasonally adjusted Gross Domestic Product declining 1.2% quarter over quarter and seasonally adjusted Gross National Product down 0.3%. Year over year, real GDP is down 1.8 percent and GNP is down 4.1 percent. Nominal GDP is down 3.6 percent year over year while nominal GNP is down 6.2 percent over the same period.

There were also revisions to the figures previously released for the first quarter of 2010. Seasonally adjusted quarter on quarter growth in GDP was revised down from 2.7 percent to 2.2 percent, while the decline in GNP was revised from 0.5 percent to 1.2 percent.

You do not often discuss Gross National Product why are you doing so here?

This is explained by the Central Statistics Office

Gross Domestic Product (GDP) and Gross National Product (GNP) are closely related measures. GDP measures the total output of the economy in a period i.e. the value of work done by employees, companies and self-employed persons. This work generates incomes but not all of the incomes earned in the economy remain the property of residents (and residents may earn some income abroad). The total income remaining with Irish residents is the GNP and it differs from GDP by the net amount of incomes sent to or received from abroad.

In Ireland’s case, for many years past, the amount belonging to persons abroad has exceeded the amount received from abroad, due mainly to the profits of foreign-owned companies, and our GNP is, therefore, less than our GDP.

So when one is looking at debt levels and an economy’s ability to support these levels it is logical to look at its tax base. This leads usually to GDP but if Ireland tried to tax the multinational which came to her they would presumably leave and so this leads to thoughts that GNP is the better measure. I remember trips to Ireland when the tax-free international centre in Dublin was built and began to operate. In some ways it symbolised the “Celtic Tiger” but going forwards in a time of trouble it is much less help. The consequences of try to tax international companies who are where they are due to tax concessions are plain to see.

One can put this into context as follows. If we look at the Euro zone as a whole the impact of the recession was a reduction in economic output was 4.4% and the recession ended a year ago. If we look at Ireland’s GDP it  fell by  11.8% and is  declining again. If we look at nominal GNP then we see a fall of 24%. I quote this figure because it is something Ireland can tax and add the nominal component  because Ireland has another unusual situation in that her prices are falling and not rising.Usually nominal figures for economic output are above the real figures and by such factors as fiscal drag this leads to higher tax collections and accordingly is the Chancellors/politicians/bureaucrats friend but in Ireland we are currently seeing the reverse.

Market Response to the news

The Irish government bond market took the news badly and ironically it had just issued some short-dated paper at marginally lower yields than previously. After all short-dated paper is one area where the ECB can help and indeed has. However the day ended with Irish ten-year bond yields rising to 6.53% leaving the spread to Germany’s equivalent bunds at 4.23%. Just to add to the pressure the cost to insure Irish debt jumped to $461,000 for $10m of debt for a five year term.

The situation here was not helped by rumours that Anglo-Irish Bank was considering a debt restructuring for its subordinated debt.

Does this mean that you were wrong to praise Ireland’s austerity programme?

An example of the criticism going round is that from say Paul Krugman the American economist who feels that Ireland should have responded to her problems with more fiscal stimulus rather than austerity and quotes the current situation as supporting his views. I do not feel that this is correct for several reasons.

1. The real change in events that is hurting Ireland is the deterioration in her banking sector and in particular at Anglo-Irish Bank. I feel that there is real culpability here as to put it politely the wool has been pulled over people’s eyes.

2. As more information has been released about matters such as the Croke Park Agreement where in effect Irish public servants were promised that austerity would be temporary one has to now question as to how austere Ireland’s plans actually are.

Now imagine a scenario where Ireland had imposed a fiscal stimulus with all the consequences for debt and budget levels and discovered the black holes in her banking sector. We could be looking to my mind at an even worse scenario. Ironically the case to my mind remains unproven as the main changes have come elsewhere.

It has turned out that the real problem for Ireland started with her banking sector becoming nearly as large as 400% of her GDP. Combining this largely domestically focused banking sector with a property boom which turned to bust left her in trouble. The real villain of the piece is her guaranteeing of bank assets which has combined bank and sovereign debt together and left her struggling for a way out. In a nutshell she tried to kick the can down the road hoping for an economic recovery which so far has not emerged.

So I feel that the debate between for austerity and stimulus goes on as neither can declare victory just yet.

Wind Farm debate

Thank you for the comments on this subject and the debate which I have been enjoying.


4 thoughts on “Japan intervenes again whilst the Euro zone slows down and Ireland is the first to double-dip

  1. Thanks again Shaun for keeping us all up to date with your excellent commentary

    Re >It has turned out that the real problem for Ireland started with her banking sector becoming as large as 400% of her GDP
    By saying as large, does that mean that it was the banks turnover, profit, or worth was 4X GDP?

    How did others compare? I’m particularly thinking of Iceland (as it appeared to be another large bank with a small country in tow) & the UK ‘cos that’s where I live & where my bank (& savings) are.

    • Hi Keith
      Welcome to my blog and thank you for the compliment.

      The measure used was bank liabilities and was a concept established by Willem Buiter in a paper on Iceland as it happens. I follow his work partly because he has some interesting thoughts and partly because he was my tutor for a year at the LSE. I have stared hard at the chart again and I was a little harsh on Ireland and I have changed the article to say nearly 400%. However she has two surprising countries with similar levels and they are Belgium and the Netherlands. Actually there are a few issues with Belgium but as essentially a one Shaun operation it has never made its way to the front of the list. Anyway at just over 400% we then get Switzerland. I hope that you are sitting comfortably as the UK on this scale is at around 440/450%. Then we get Iceland which is quoted in some places as 1100% but adding up the three main banks seems to come to 1200%,however at such levels the difference seems somehow not to matter from the point of view of her as a sovereign nation.

      For us in the UK we have gained some strength from the fact that some of our banks are strong overseas. In particular one thinks of Standard Chartered and HSBC which do a lot of their business in the so far much safer Far East and of course Barclays managed to get some Arab funding. However Lloyds and RBS in particular are to my mind still very exposed to our property market both commercial and residential and whilst I do not expect a dip like Ireland I do think that the full adjustment has yet to come. To quote one simple example a London landmark I often pass Battersea Power Station is Irish owned and 21 % of the assets in NAMA are in mainland UK and will eventually be sold.

      The figures are from approximately 2 years ago.

  2. At 1100% or so I suppose we mostly accept that Iceland will simply walk away from the bank obligations (included dutch and UK deposits in Icesave)and therefore obligations to their own integrity. It has a small population,Iceland in strategically important in a military sense and they have to historical support of their Viking homelands.

    Ireland however wants to live up to its obligations and be seen as a ‘good european’, whatever that is today. It is possible ,but only if real estate asset values can somehow be propped up. A fair minded person would like to see Ireland ultimately rewarded for facing up to the mess. I suspect Krugman is right but for the wrong reasons,you may as well apply stimulus to buy time,the ship is going down anyhow ,so use the remaining time to fix your roads and other infrastructure whilst you can.

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