Monthly Archives: August 2011

Down from the Ivory Tower

Over last couple of days there’s been an interesting debate, primarily on ( see original post here and a response here) and to a lesser extent on the twitter machine, about the role of academics, in particular academic economists, in media. This debate emerged from an exchange which I had with Richard Tol on twitter.

Richard, for those that arent known, is an extraordinarily talented economist, Dutch by origin, research professor at the economic and social research Institute, a world expert on the economics of energy, climate change, carbon and other such . While rankings and ratings are a game that anybody can play, and while there is always a rating or ranking that will suit you, by any metric he is world class.

Richard’s premise, expressed in his original post, seems to be in essence that “the cobbler should stick to his last”. In an economic context this, as I read it, implies that one should stick to commentating strictly on matters where one has a demonstrated expertise. Demonstrated expertise in Richard’s perspective comes primarily, if not exclusively, from publishing articles in scholarly journals that are subject to rigorous peer review. His concern is primarily that if economists speak about areas outside of their “demonstrated expertise” as defined above then people may well be misled. Indeed they might, perhaps as commentating is a market for lemons, be misled by charlatans and snake oil merchants. Sticking Prof under somebody’s byline, in his view, might give people the impression that the person speaking is actually an expert in the area on which he (and it usually is a he) speaks. Its a reasonable fear. However, I think its overblown.

Richard is Dutch. Although he has lived here some considerable time it strikes me he’s missed out on crucial Irish characteristic . A very famous writer once said “the Irish are very fair people, they never speak well of each other”. The “I knew him when he hadn’t and arse to his trousers” approach to taking people down a peg or 12 can be extremely painful. It does however serve to anchor one. Just as no man is a hero to his valet, very few Irish people are heroes to the vast majority of the Irish population. As a nation were all too well aware that God has not only feet of clay but probably has a brain of mud. Richard does have a very good point in that if people make an egregious error and if those errors are taken as being actual or potential policy then the granting by people of an authority to the speaker purely by he or she being a professor in an learned institution can be dangerous.

For me however this misses the crucial act : economics is ultimately a social science. In fact Im not sure that im even happy any more calling a science. It’s a branch of applied philosophy. There are very very few right answers in economics. There are many many more wrong answers, but in dealing with the real-time complex evolving politicized debate that is the modern Irish economic crisis I suggest we should ask the following question: are we better served by having people from academia speaking on our media or should we leave it to the “usual suspects” of bankers and politicians and lawyers and trade unionists? Taken to the extreme the arguments that we should only have economists speaking from the area of research publication would have deprived the Irish debate of many useful voices.

Prior to his series of opinion pieces in the Irish Times, to my knowledge, Morgan Kelly had not published a scholarly journal article on house price crashes. Karl Whelan has been extremely prominent in advancing a cool calculating rational debates in relation to central banking. Although he has worked in central banks over many years he doesn’t have a particular research stream in those areas. Seamus Coffey from University College Cork has emerged in the last couple of months as one of the new voices, taking a very data orientated approach to looking at what exactly is the problem and how might we get out of it. Yet his area of research expertise is according to the UCC website is health economics. Does this make his comments on mortgage debt less valuable? Stephen Kinsella in UL has published many books and articles on the Irish economy but his voice on european economic issues is one of sense and knowledge. Ronan Lyons is busy completing a doctorate in real estate economics in Oxford, has published as far as I can tell not much on same in peer reviewed journals but this doesn’t invalidate either his work on this or on many other areas of economics. And on the flip side, not having published doesn’t make one not an expert. Colm McCarthy has not many peer reviewed papers on the irish economy but would one consider him lacking in expertise? One could go on..This leaves aside the fact that for the most part irish academics are state (that is to say taxpayer) funded and as as such have perhaps a duty to use the academic freedom they have to challenge consensuses

I think we need more academics, and more and different economists on the media. Most of the issues that are on the media are, or should be, amenable to most persons with university level economics training. We have a small pool of people who appear time and again (including yrs truly even though in common with every other academic I turn down a multiple of offers to talk compared to the times I do accept). Why do we have this? We have exceptional labour economists, who have studied and yes published widely on the area. Why do we not hear their voices on the Irish employment and labour catastrophe? We have economists working at the frontiers of knowledge in relation to the effectiveness of education policy-their views would be tremendously interesting to the average person in relation to university fees, school policies, and educational/economic alignment. We have economists studying global business supply chains, but they are never evident when we have discussion on FDI. Again, one could go on.

There is a pool of talent, even if we take the restricted tol perspective, on almost every area of economic and business endeavor under the sun, in irish universities and they are not being heard. I might go further and note that for me one of the most disappointing elements of how the Irish media has dealt with this crisis has been the lack of a breath of vision in relation to drawing upon academia and other areas where alternative thinking might be found. Where the voices on Irish media of the political scientists? Would not be interesting to see the views of sociologists more regularly expressed? Philosophers have published articles and books about the Irish crisis but rarely if ever appear on national news or on the pages of newspapers bringing their prospective. It is 100% certain that people working in the schools of religion around the country have interesting theological or ethical perspective yet they are also muted. Where are the voices in the media of academic psychologists and how the economic and financial crisis might impact? There is a narrow pool, and it therefore must be in danger of growing stagnant. Much of this is because journalists work under terrible time pressure. Over the last number of years I have grown to have an enormous respect for the skills of journalists. I most often violently disagree with what they say but in general journalists work under pressure from quick deadlines to produce copy that is at the very least readable and broadly correct. Therefore when they ring somebody or when they need to check something they will ring someone whom they know will give a rapid, reasonably coherent, and preferably ‘down to earth’ perspective. Having found someone they will then use them again and again, or at least try. Journalists need to take a little time and ask their contacts ; whom else should we be talking to. They need to contact the university and institutes press and communication offices and ask the same question, or go to the heads of schools and faculties.

But academics also need to reach out. We all have stories to tell, and sometimes these need to be pushed. We cannot fall trap into waiting in the upper reaches of the ivory tower. The people who fund said edifice have a need and a desire for analytical input and are not stupid. Push your perspective, take some media courses, reach out and speak. Its not demeaning, its not degrading, its just communicating.

Gold : investors should keep both eyes open

This is an extended version of an opinion piece published in the Irish Examiner

The old market adage of “be greedy when others are fearful and fearful and others are greedy” goes to the heart of the fact that not all assets move in the same way. In fact, were all to move up or down more or less together then there would be really very little scope for diversification. Diversification is a process whereby instead of putting all your eggs in one basket one spreads the eggs, across different baskets. One of the assets that has shown the most remarkable growth in value over the last number of years is gold. from approximately US$300 per ounce in 2000 Gold has shown a steady increase in value, reaching US$600 per ounce in 2007 and subsequently having moved close to US$2000 per ounce. When one considers the performance of stock markets in particular over the last four years this simultaneously inspires greed and fear. The greed element comes from the natural human desire to be in on a winning thing, and the fear is that this is yet another asset bubble.

One of the interesting aspects of gold was that it is not simply, nor even mainly in historical terms a financial asset. Gold really has at least four main uses: is of course very familiar to all of us as adornment through jewellery, it has historically been used as a currency, it has significant industrial usage, and it is of course a well-recognised store of value. In fact, of these uses it is jewellery which is the largest, accounting for between 50 and 60% of world gold demand. Traditionally gold as an investment was held by central banks, sovereign wealth funds, and very large investors in the form of physical bars, the “Fort Knox” approach. With increasing financial sophistication and in the face of growing demand, over recent years there has been an increase in the ways in which other investors can hold gold, such as via certificates of holding, through gold funds, or through more exotic gold backed investments.

this situation, where demand leads to innovation which leads to demand which leads to price appreciation which leads to demand, is often seen by some as being a key characteristics of a bubble. However it is not all clear that gold is a bubble. Just because something has risen a lot does not a bubble make. A bubble is where an asset has a persistent a valuation over its fundamental value, which cannot in the longterm continue. And, its not clear what is the fundamental value of gold, other than what the market suggests. This does not mean its value is zero, merely that absent any yield from holding gold its valuation is more complex than say that of an equity or bond. Although the nominal price is now heading towards US$2000 per ounce, in real terms gold is not at or near an all-time high. If we adjust for US inflation, which on the surface seems reasonable given that gold is priced in US dollars, it would have to rise to US$2500 per ounce to achieve a new real gold high.

In addition one might wonder as to whether or not it is the US inflation that is important. If gold is truly a currency, as it has been in the past and that some are proposing for the future than it should have its own inflation rate. However as nothing is actually traded in terms of physical ounce of gold then we cannot observe its intrinsic inflation rate, and so it’s all “real real” price remains unknowable.

There has been an explosion of academic research on gold as an investment. The key findings of this research are threefold. First like any asset gold will show increases and decreases in price over the short and even the medium-term, and therefore the short-term dynamics in terms of people taking profits or buying dips will act in the gold market. No asset rises or falls continuously (well apart from Irish bank shares…). Secondly gold over long-term can play a valuable role in even small portfolios, with a suggested allocation from most research being in the area of between 5%-10% of total asset holdings for an investor focused on medium to long-term wealth preservation. Third, gold acts as a safe haven in times of stress in other asset markets, particularly equity and bond markets. In particular, when equities show large falls gold tends to be rising. Thus an investor who holds a portfolio consisting of both gold and equities has a degree of inbuilt shortterm wealth preservation.

Does this mean that gold is not in a bubble? So long as people wish to adorn themselves with gold, so long as in the short-term equity markets and bond markets suffer from the inability of politicians to effectively manage economies, for so long as people expect, as they have been doing for the last 10,000 years, that this rare and useful metal will continue to be seen as valuable by others than the long-term trend of gold would seem to be upwards. Of course, as Keynes said, in the long term we are dead, and markets can stay irrational longer than investors can stay solvent. Thus, investors in gold need to keep two eyes open – one focused on the long run, one on the short.

We cant go back so must go forward…

This post is a slightly expanded version of the OpEd published in the Irish Examiner

Why are Ireland, Spain, the United States, Italy, Portugal all facing financial crisis? All share one similar key characteristic. They all have too much government debt. The Irish debt situation is depressingly simple, with our ratio of government debt/GNP forecast to peak at perhaps 140%.  While most countries the appropriate measure of national wealth is GDN for Ireland, given the very large MNC sector GNP is usually ytaken as being the appropriate metric, and thus a very rough rule of thumb is to adjust ratios by 1/6 to 1/4 when using GNP.

Source : EU Forecasts

A very large proportion of this, perhaps as much as a third, is as a consequence of the government decision to underwrite the Irish banking system, with of course the remainder being the overspending that successive Irish governments have engaged in in order to by and large placate political interest groups. The Italian, French, Belgian, Portuguese, Greek and other debt problems all differ in their origins. .  What is certain however is that financial markets, after the 2007-2008 financial crisis are both significantly more averse to taking on risk and, having in the most part been spared the consequences of the foolish lending by governments pouring taxpayers money into backstopping their losses have a not unwarranted sense that they rather than governments are in the driving seat

There is no doubt that we have the Irish state requiring major fiscal surgery. This will be deep, painful, long lasting and  necessary. Even without any bank guarantee, even had we had the hoped for but in retrospect never likely soft landing from the credit boom we were on an unsustainable fiscal path and would have to undertake the treatment.  We are still spending far more than we take in as a state, and there are no quick fixes. We are only on track for a deficit of 3% by 2015, not an elimination of it never mind a primary surplus which would allow us to repay the outstanding debt

and we face a situation where 20-25% of all tax will be devoted to interest payments on the national debt.

Source for the above : Stability pact update

A large part of the problem here and in other countries is that in the aftermath of credit booms the deleveraging and debt repayments act as a drag on economic growth for perhaps decades to come. As a consequence, markets simply do not see it as credible that selected euro zone countries will be able to easily, if at all, repay the money that they have borrowed. As countries issue new bonds they find the cost of these rises. This of course exacerbates the problem of repayment, leading to nasty debt dynamics. Although there is no magic threshold, much research suggests that over about 90% debt/gap ratios countries can face a spiral whereby the cost of debt service rises at a level faster than the government can find free resources to service it. Note that although it is often stated as being about economic growth this is not quite the case. Even without growth, as we are, governments can find extra resources via increased taxes, greater efficiencies in usage of public funds, and reduced levels of spending. However, this itself is ultimately only a partial solution as this deflation will itself have to come to an end at some stage, if not through economic then more likely through political pressure.

All of this puts huge strain on the Euro, as were a country to be unable to finance itself it would default and/or face massive and rapid economic collapse, which would in turn cast doubt not only on the euro currency but as a consequence of any precipitate collapse, especially in a state such as Italy, on the entire European experiment.

What then can be done? First, we must realize that there is no practical way to reverse the introduction of the euro. We can and should improve its consequences and its operations but the omelet cannot be unscrambled. Those that sell simplistic solutions along this line know that this is so. The merest hint that a government would consider this would result in the flight of all money capable of moving out of every deposit and savings institution. As such a leaving of the euro would only be achievable were the state to in effect leave the European economic area, confiscate for rebranding all cash, introduce electronic and physical barriers to movement of people and money, and cast itself into economic oblivion. There is also the not inconsiderable fact that the Euro, and indeed the entire European experiment, is political, and political between France and Germany. There are literally decades of political capital invested in these countries in the euro and such capital is not lightly discarded.

If we do not have a breakup then what will we see? The polar opposite of a breakup is a fiscal union, where in effect countries become (fiscal) subunits of a larger union, much as leitrim is to Ireland or wales to the UK. Funds including taxes would be raised and spending decisions made at the center, with the recipients being able to at most have some influence on how they were spent at the margin. This, to many countries, is almost as politically toxic as the breakup scenario.

There are intermediate steps. Under the present arrangements the external, non-tax, funding of Ireland, Portugal and Greece is from the center. We retain some (diminishing) power on how we spend it but it is clear that the government here is very much operational rather than strategic in fiscal terms. The European approach dealing with Ireland/Greece/Portugal is not large enough to take on both Spain and Italy. If these countries find themselves unable to raise funds on the financial markets at a reasonable and sustainable interest rate a longer-term solution will have to be found as these, Italy in particular, are real countries.

The present solution is one whereby the European Central Bank will purchase the bonds of these countries on the open market, driving up the price of these bonds and driving the interest rate down. This however is not sufficient in my view, as its treats the issue they face as being a liquidity crisis when in effect it is a solvency crisis. We in Ireland know the consequences of this, as we spent 18 valuable months dealing with the banks as though it was merely a funding not a solvency issue. The ECB approach does nothing to relieve the burden of interest on Italy or Spain, nor does it do anything much to make these countries grow more rapidly, beyond the implicit threat (much more effective to a small insignificant country such as us than to Italy or Spain) to get ones house in order or face even this facility being cut off.

There is also a democratic issue as the ECB is a monetary not a fiscal institution, has neither a political nor economic mandate to dictate to governments, and is both opaque and unaccountable. Some move towards the center taking more responsibility for raising funds with consequent greater control over how these funds are spent is going to have to come, even though this “eurobond” approach is itself not at all popular in Germany.  At a euro aggregated level the ratio of debt to GDP is a large but manageable 80% or so, and as such the euro zone as a whole can in theory borrow much more cheaply than Ireland or Italy. However, that rate would be more than Germany or Estonia can borrow at. Therefore, any move along the axis towards centralization of fund raising will has a cost of greater oversight and control. And that may not be a bad thing given our history. While I dont think the mortgage situation will be as bad as Morgan Kelly thought in 2010, his conclusion there that we will be dependent on “the kindness of strangers” is very apt.

My new column with the Irish Examiner

Im going to be writing a (initially fortnightly) column in the Irish Examiner from next Saturday, as tweeted by Conor Keane ( I’m going to be concentrating on economic and financial issues. I’d be delighted to take suggestions as to topics to focus on.

I’m happy to be taking this next step, but of course am not going to be giving up the day job! Also , any remuneration is not going to me, is instead going to be lodged to a TCD research account, to assist research in international finance and business, so this is ‘de paper’ doing its bit to support university research in these fiscally straightened times

Looking forward to it…