Sunday, April 27, 2014

27/4/2014: Ukraine-Slovakia Agreement on Reversed Shipments of Gas

Per today's reports (see:, Ukraine reached an agreement with Slovakia for reverse-delivery of natural gas via Vojany-Uzhgorod pipeline. Shipments can start in October with maximum delivery of 3 billion cubic meters per annum, and from March 2015 the capacity can be raised to 10 billion cubic meters per annum.

As the article notes, from April 2, Russian President Vladimir Putin signed the decree annulling Kharkiv agreements that provided a discount on gas price for delivery to Ukraine of USD100 per 1,000 cubic meters, so starting from Q2 2014 Ukraine delivery is priced at USD385.5 per 1,000 cubic meters from USD268.5

Following this, on April 3, head of Gasprom Aleksey Miller said that taking into the account arrears on past gas deliveries, Ukraine gas deliveries will be priced at USD485 per 1,000 cubic meters.

Here is my earlier note on Ukrainian arrears relating to Russian gas deliveries and Ukrainian Government debt held by Russia:

Saturday, April 26, 2014

25/4/2014: A stretch of numbers here... a bond sale there... Greek Deficit in 2013

This week we had the data release by Eurostat showing the fiscal position of the euro area sovereigns for 2013, followed by the statement by the Troika (EU Commission, the ECB and the IMF) on Greece's fiscal position.

Based on data-driven Eurostat conclusions (see details here: Greek fiscal deficit was 12.7% of GDP in 2013. Based on the Troika conclusions, Greece has managed to generate a budget surplus of 0.8% of GDP in 2013. The two numbers are so widely apart that the case of 'thou shalt not spin too much' comes to mind.

In reality, to arrive at 0.8% surplus, the Troika had to do some pretty extreme dancing around the real figures: they took out non-recurring spending out of the Greek deficits (all banks measures and all interest paid on gargantuan 175.1% of GDP Government debt). Just how on earth can debt interest payments be non-recurring is anyone's guess. But even removing that (to arrive at normal definition of primary deficits), the official primary deficit for Greece at the end of 2013 stands at 8.7% of GDP. The swing of 9.5% of GDP bringing this to a surplus of 0.8% is 'banks measures'.

The problem is that with 12.7% of GDOP deficit and 8.7% primary deficit in 2013 and with debt of 175.1% of GDP, Greece is plain simply and undeniably an insolvent state. This is precisely why exactly at the time of the above data publication and at the time when the Troika was extolling the virtues of the fiscal surplus in Greece, the very same European authorities praising Greek Government were announcing that they have engaged in a new round of debt relief negotiations with Greece (

Meanwhile, bust, bankrupted and in new default talks, Greek Government is hell-bent on buying votes into the upcoming European elections. Per FT account linked above:

"About 70 per cent of the [bogus Greek] primary surplus has already been allocated for current expenses rather than for writing down existing debt, according to the finance ministry. The government has set aside €524m as a one-off payment to low-income families and pensioners ahead of next month’s European elections. Another €320m will cover a projected deficit this year at IKA, the main social security organisation, following a decision agreed with international lenders to cut employers’ contributions."

This is truly epic: European authorities praising national Government for bogus surpluses that are explicitly being used to fund giveaways to vulnerable voters groups at the time of elections. This is 'reformed Europe'?

This is precisely the circus that is driving up valuations of peripheral bonds ( and that has an exactly negative correlation with the underlying strength / structural health of some of the peripheral economies (see my comment on this here:

26/4/2014: After-tax Disposable Incomes Around the World

Here is a very revealing set of data on income based across percentiles around the advanced economies:

I encourage you to play with the chart - for example take a look at Germany vs US comparatives. Set aside Norway - a petro-dollars-fuelled minor economy by all possible metrics (I challenge you to find any serious Norwegian company in the modern economic sectors space - there will be barely any in sight). And keep in mind - the article fails to mention anything about the exchange rates effects on the comparable incomes across the world.

Look also at Ireland and Finland...

26/4/2014: How real was the property markets recovery in 2013?

I am updating the annual series for Residential Property Prices in Ireland and here are some of the summary charts showing Q4 averages (end-of-year smoothed prices, that remove some of the volatility):

Key takeaways:

  • Reports of major recovery in the property markets over 2013 are a bit overdone. Here are the reasons why.
  • The recovery in Dublin in 2013 took the prices above the levels of 2011 and closer to 2010. Dublin all properties index finished 2013 at Q4 average of 68.1 which is well above 59.3 trough recorded in Q4 2012 and ahead of 62.0 recorded in Q4 2011. We are still less than 1/2 way to 2010, but overall jumping tow years back is a rather strong recovery.
  • Dublin recovery was also broadly supported in both houses segment and apartments segment.
  • However, outside Dublin - aka in the rest of the country - there is no recovery. National ex-Dublin all properties prices have fallen again in 2013 as they did in all other years starting with 2008 on. 
  • As the result of the prices dynamics in the rest of the country, 2013 'recovery' nationwide was able to lift prices off their crisis period troughs, but not enough to reach above the 2011-2012 declines. Thus overall index of nationwide properties is at 69.7 in Q4 2013 against 70.1 in Q4 2011. 
Are prices rising? They seem to be. Are prices rising above inflation? Yes. And this is one sign of a robust recovery. But are prices rising to make meaningful recovery toward pre-crisis levels (something that is required in order to rebuild household finances)? No. See more on this here:

26/4/2014: It's a long... long... long... road to house prices recovery...

It is a virtually impossible task forecasting long-term price movements in property markets for small economies, like Ireland. The reason is that there are simply too many moving parts all with huge volatility built into the numbers. Take for example normally stable time series such as population. In the case of Ireland, wild swings in terms of net migration over the recent years saw 2006-2008 annual average net immigration of 80,300 per annum switching into a net annual emigration of 31,633 per annum in 2010-2012. While total change in 2007-2013 population in Ireland was 108,000, net migration swing was 111,930. You get the point: what we think the potential demand might be is not an exact science and in the case of Ireland it is not really much of any science whatsoever.

So setting aside actual economic models, what can we say about future property prices trends?

We can do a couple of simple dynamic exercises. Suppose that we are getting back to pre-crisis ‘normal’. This can mean pre-2001 rates of growth in prices or it can mean Celtic Garfield rates of growth. Many would say ‘The Bubble days are over’. So they may be. But suppose they are not. Suppose the rates of growth that prevailed over 2004-2007 are to return. The logical question is: if the boom were to come back, how long will it take property prices to recover? This is obviously a wildly optimistic scenario. But let’s entertain it, shall we?

Below I provide a table of estimated years by which current (end of 2013) prices indices for Irish residential property are likely to recover their real (inflation-adjusted) peak values consistent with pre-crisis years. In other words, the table shows years by which we can expect the crisis effects to be finally erased.

Take 3 scenarios:

Scenario 1: assume that from now on, average annual growth rates for property prices run at their 2004-2007 averages and that inflation averages 1.5 percent per annum (CPI). Adjust the pre-crisis peak for inflation that accumulated between 2007 and present.

Scenario 2: assumes the same as Scenario 1, but adjusts inflation expectation forward to 2 percent instead of 1.5 percent.

Scenario 3: assumes the same as Scenario 1, except we also take into assume average rates the average for 2004-2007 and 2012-2013 to reflect the popular argument that 2012-2013 years growth rates reflect ‘recovery’ in the markets, aka a departure from the crisis.

The last line in the table shows the average duration of the period of recovery – averaged across 3 scenarios. This means that the average is ‘geared’ or ‘leans’ more heavily toward Scenarios 1 and 2 which are by far much more optimistic than Scenario 3.

Do note that all three scenarios are wildly out of line with what we should expect in the long run from the property prices – appreciation at inflation + 0.2-0.5 percentage points margin.

Click on the table to enlarge

Key takeaway:

You might think we are in a recovery, but be warned – even under very unrealistically optimistic price growth projections – the effects of this crisis are likely to prevail well beyond 2025 in Dublin and beyond 2030 nationwide. Now, enjoy the property supplements and financial ‘analysts’ op-eds telling you that everything is going on swimmingly in the markets…

Friday, April 25, 2014

25/4/2014: ECB, Denmark & Negative Rates, 'Peripherals' & Russia: today's links

Rumours mills been busy of late with all the talk about ECB doing 'whatever it takes' to get inflation going again. See this for example:

Here is the best take on Denmark's brief brush with ECB's (allegedly) favourite weapon: the negative deposit rates:

But while we are on topic of things monetary and fiscal, here is Euromoney take on what's been happening in the markets for 'peripheral' sovereign debt (note: my comment at the bottom): and alternative link:

To give you more context, here is the full comment I made:
The numbers cited are even better summarised in my earlier post on the subject here:

Meanwhile, here's what has been happening in the sovereign debt markets today - CDS spreads:

And finally, Russian credit downgrade:

25/4/2014: Wholesale Prices in Ireland: March 2014

Deflation at consumer prices level is a two-edged sword. Whilst it normally rises savings and delays consumption, it also helps households stuck in debt to deleverage faster and it beefs up surplus savings available for investment.

But deflation at producer prices level is a case of gained competitiveness at the expense of future growth as it reduces value added in production and lowers future investment. It also leads to reduced hiring and can lead to cuts to the workforce.

Behold Ireland's pain...

According to CSO ( we are now in full-blow deflationary spiral in terms of producer prices.

Drilling into specifics:

  1. Export prices down 3.6% y/y and domestic sales prices down 1.1% y/y. Yes, exports price changes can be down to FX volatility, but no - this means nothing much as lower prices still mean lower revenues.
  2. On upside: dairy products prices were up 12.6% y/y, wood and wood products prices up 10% y/y. Good news for least value-additive sectors of Irish economy. Other manufacturing prices were up 1.3%, beverages up 2.2%. And durable consumer goods industries prices up 1.3%.
  3. Beyond that, almost everything else is either flat or down. You can see the details in the last column in Table 2 linked above.
  4. One to watch: prices of energy products are down 17.2% y/y and petroleum fuels down 3.2%. Let's see if our heroes at state-controlled energy behemoths are going to pass any savings to consumers (hint: I doubt it).
So overall, not good news - sustained pressure on producer prices. Negative m/m inflation is now recorded in every months starting with October 2013 and on the annual basis, prices-signalled activities in the economy are running at the rates of growth consistent with late 2012-early 2013, not with a strong rebound. Of course, this is just a signal...

Thursday, April 24, 2014

24/4/2014: Where's that Fabled Property Boom in Ireland?..

Throughout 2013 and indeed starting from as far back as mid-2011, there has been a never-ending stream of 'good news' stories from the property markets. Many are real. Many are unverifiable. Some a complete nonsense.

Here is one forward-looking indicator for the health of the property market: planning permissions granted. And courtesy of CSO we can now update Q4 2013 data and thus compute full year 2013 results.

Here they are:

  1. Planning permissions granted for All Types of Construction fell 3.5% y/y in 2013 to an absolute historical minimum of 13,901 (data from 1992). Between 2011 and 2013 total number of planning permissions is down 13.1%. Compared to peak, these are now down 77.7%. There is no turnaround in sight judging by these numbers. In fact, 2013 was 6th consecutive year of y/y declines.
  2. Planning permissions granted for dwelling fell even more steeply: down 9% y/y in 2013 and down 23.6% since 2011. These too are now at historical low and in decline for seven years in a row. There is no turnaround here either.
  3. Other new construction (ex-dwellings) planning permissions posted a rise of 0.7% y/y in 2013 and are up 14.9% on 2011 levels. However, at 3,431 total, these are 4th lowest in history and below the levels recorded in any year between 1992 and 2009. Relative to peak these are down 82%, so steep increase since 2011 was (a) exhausted in 2013 (given weak 0.7% rise) and (b) appears to be based on sheer magnitude of the permissions collapse at the height of the crisis. Still, we might call this some evidence of something that might signal a turnaround.
  4. Planning permissions granted for extensions fell 3.6% y/y in 2013 and are down 12% on 2011 levels. These series hit absolute historical low in 2013 and mark 6 consecutive years of declines. 
  5. Planning permissions granted for alteration, conversion and renovation purposes rose 0.8% y/y in 2013, with series down 6.6% on 2011 levels. 2013 was the second lowest year on record. Again, this evidence is not consistent with a turnaround.
Two charts to illustrate:

In terms of floor area approved:
  1. 2013 saw increases of 4.4% y/y for all types of planning permissions granted. However, the increase was from the levels that were so low that even with 4.4% rise in 2013, 2013 levels are still 21.6% below those in 2011. 
  2. 2013 was the second lowest year on record for planning permissions (by floor area) granted for All Types of Properties, for dwellings, for other properties ex-dwellings.
  3. 2013 was the worst year on record for planning permissions granted on the basis of floor area for extensions.

Key takeaway: Planning permissions granted data shows no signs of a turnaround in building & construction sector in Ireland in 2013 and no signal of such turnaround in early 2014 either.

24/4/2014: Value Added in Irish Economy, 2010 data

CSO published analysis of value added in main sectors of the Irish economy for 2010 (yes, it takes them THAT long)... And the winners (in terms of being least important to adding value) are:

  1. Construction 
  2. Agriculture
  3. Manufacturing of food, beverages & tobacco
Per CSO summary: "The main constituents of output at basic prices in 2010 were service industries at €219.5 billion (65% of the total), production industries at €98.7 billion (29.2%), construction at €13.2 billion (3.9%) and agriculture, forestry & fishing at €6.4 billion (1.9%)."

It is really that simple: want more value-added in the economy? Pursue development of traded opportunities in Education, Health, Arts, make other domestic sectors more human capital-intensive (aka more productive and innovative), put them out into exports markets... Do what you might, just don't appoint more ministers for Agriculture or Building Construction. Instead focus on making our agriculture more innovation and productivity-focused, allow and encourage consolidation of production, push forward with reforms removing CAP subsidies from farming, in other words, pursue greater focus on growing value added component of our agricultural sector.

Here is the breakdown:

And in more details:

Footnotes to the above chart:
(1) Includes Manufacture of coke& refined petroleum products;
(2) Includes technical, administrative and support service activities
(3) Includes food and beverage service activities
(4) Includes Manufacture of furniture; 
(5) Includes repair of motor vehicles and motorcycles
(6) Includes compulsory social security
(7) Includes recreation activities and other services
(8) Includes Social work activities

24/4/2014: Culture and Economics: The Opposites Attract

This is an unedited version of my column in the Village Magazine, April 2014

Back in the late 1970s, George Stigler and Gary S. Becker wrote a famous paper, titled "De Gustibus Non Est Disputandum" that mapped out the view of economics as a field that treats with suspicion the idea of preferences-based explanations for human choices and behaviour. Differences in individual preferences, they said, can “explain everything and therefore nothing”.

This position has informed much of the mainstream economics thinking for at least two decades, creating an erroneous perception outside the field that economists ‘do not do personal attributes’ of individual and collective behaviour. Thus, culture, aesthetics and ethics, should, according to popular beliefs, be automatically falling outside the scope of economic inquiry.

This perception is wrong for at least two basic reasons. Firstly, cultural, aesthetic and ethical foundations of our social interactions contain much more than a purely atomistic, individualised component. In fact, culture is more systematic in nature than atomistic, and as such can be studied using economic models and techniques. Secondly, economics as a field of inquiry has moved substantially from the 1970s worldview to embrace many aspects of individual-specific or idiosyncratic behaviour, including historical, psychological, neurological and cultural drivers of individual and collective choices.

From this point of view, it is worth looking at the ways in which economics and culture interact today in the mainstream economic research.

To start with, consider the basic building blocks of rational modeling of choice as applied to culture. Is there a systemic framework that can be used to think about culture and cultural issues on the bias of economic system of thinking, a system that is based on the concepts of marginal utility and constrained optimisation?

The answer to this question is an affirmative one. There is and more - it yields far-reaching and highly useful outcomes for the field of economics, while generating a feedback loop to enrich our ability to understand and model cultural aspects of our behaviour and choices.

As Luigi Guiso, Paola Sapienza and Luigi Zingales, in their paper "Does Culture Affect Economic Outcomes?" clearly state: "Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena."

The starting point for thinking about culture in economic terms is to posit a question as to what distinguishes cultural value from economic value.

In economics, value of an object, an action or a service is determined by referencing to the marginal utility derived from each additional unit of this object, action or service made accessible to the user or consumer. Under certain rather restrictive conditions, this can be translated or mapped into a pricing system, but the concept of price is more restricted and more restrictive than the concept of value.

Cultural value, as Guiso, Sapienza and Zingales note in the previous quote, is harder to define, at least in rational or mathematical terms and systems. It is usually thought of as a set of attributes, values, beliefs etc that can be grouped together on the basis of having some identifiable, but not necessarily quantifiable (in ordinal or cardinal terms) value to a specific group of people.

Imposing some constraints, just as with translation of marginal economic value into prices, we can think of cultural values as goods, actions and services that reflect intellectual, ethical and aesthetic aspects of humanity collectively or atomistic individuals. Thus, work of art has a cultural value and it can be mapped into a 'cultural price' but only under very restrictive conditions.

There is a clear difference between cultural and economic value systems. For example, a price-like system does not apply as well to measuring artistic achievement as it does to measuring the quality of oranges or cars. But this clear distinction does not mean that complex systems, like aesthetic or ethical values of a particular culture, cannot be partially modelled by references to well-definable preferences. Being humble about the scope of economic models application to such subjects as arts or sciences or folklore does not mean rejecting completely the idea that economics can provide useful tools for studying these phenomena.

Key concept of scarcity - driving the existence of defined preferences and prices in traditional economics - also applies to culture. Utility functions that value positively some desired scarce good and that change these valuation on the margin as quantity of good available to consumer changes also apply to works of art, religious beliefs, social rules. Concepts of time discounting and budget constraints that drive decision making in mainstream economics also shape cultural evolution, as well as guide emergence, propagation and survivorship in arts, cultural and social values and norms.

The core limitation - when it comes to applying economics models to arts and culture - arises from the mathematical problem of not being able to assign to cultural phenomena stable and well-deigned preferences.

Think of the determination of value in culture. Traditionally, we distinguish several methods for assigning cultural value to any particular object or act. These, normally, include analysis of the object content and context in relation to a specific group of people or time period or both. Tools used for such analysis are surveys of experts and/or users, and in more extreme cases also psychometric surveys and even measures of physiological or neurological responses. The problem, of course, is that there is little we can do to remove as much subjective valuation from such assessments as needed to deliver stable and rational (in mathematical terms) system of classification or rankings.

Thus, the perennial question in art valuations (cultural, not economic) is 'who the experts are?' In economic valuations of art, the answer is rather simple: an auction process or a direct sale sets the value. In cultural terms, a Rauschenberg is a masterpiece to some and a collection of refuse to others. Another simple question that undermines the idea that cultural value is perfectly measurable is the validity of surveys of users and, in even more specialist context, the validity of physiological responses being measured. These fail on the basis of the 'eye of the beholder' or 'the innocent eye' tests.

(Mark Tansey "An Innocent Eye Test")

One last measurement system - the system reliant on aggregation of individual valuations, or put more colloquially the 'repetition test' fails because it is open ended. No time horizon or sample size can be defined for such a metric and no value can be assigned on its basis. This applies to all collective bases for valuations, including cultural and social norms. In methodological terms, many of these issues have been known to economists for some time, as highlighted, for example, in a survey by Charles Manski, titled "Economic Analysis of Social Interactions" written over 15 years ago.

But some recent examples show just how far the field of economic modelling has evolved in developing capabilities to capture cultural and social phenomena in the econometric setting, allowing at least for applied evaluation and analysis.

A paper by Luigi Guiso, Paola Sapienza and Luigi Zingales, titled "People's Opium? Religion and Economic Attitudes" takes a debate about the effect of religious institutions on economic behaviour and attitudes - a debate that raged since the times of Max Weber - and applies modern econometric techniques to it. The result is analysis of dynamic evolutionary trends in the link between religion and economics. The conclusions are far from banal or anodyne. Using the World Values Surveys "to identify the relationship between intensity of religious beliefs and economic attitudes, controlling for country fixed effects", the authors "study several economic attitudes toward cooperation, the government, working women, legal rules, thriftiness, and the market economy". The study found that "on average, religious beliefs are associated with ‘good’ economic attitudes, where ‘good’ is defined as conducive to higher per capita income and growth. Yet religious people tend to be more racist and less favorable with respect to working women. These effects differ across religious denominations. Overall, we find that Christian religions are more positively associated with attitudes conducive to economic growth."

It is worth noting that such far-reaching systemic conclusions cannot be reached by a reference to tools traditionally employed by historians and cultural anthropologists, but must instead rely on econometrics and prior economic modelling.

This is hardly an example of economics research that 'ignores culture' or 'has difficulty modelling cultural inputs'. But it is also the type of research which shows that one cannot establish a hierarchical system defining the superiority of one system of valuations (economic or cultural) over the other (cultural or economic) – a pivotal issue that we will return to below.

Culture does present economists with interesting dilemmas that push out the boundaries of our way of thinking.

Take for example collective as opposed to individual valuation of a cultural object. In economics, traditionally, utility functions - the basis for defining value and transactions basis - are agent-specific and reflect the position of a representative agent (a sort of mathematical average). In this, the value of the object usually arises from individual valuation without regard for others and for their valuations. By virtue of all agents being ‘representative’ these valuations then apply to the entire group of people that form the economy.

In culture, of course, a work of art has both an individual value to the viewer and a collective value to the society or a group of people that individual references, plus to the broader groups that may not be referenced by the person who’s utility is being modeled. One source of value is intimately linked to the other, however. Even the most remote cultural connections between an individual and a group still exert impact, even if indirectly (via conditioning or framing, for example).

Alas, economics have recognised the limitation of the fully separable or individually objective utility function for some time now. Much of modern economics rests on the basis of preferences that incorporate references in valuation of an object to their valuation by others (for example 'keeping up with the Joneses' or benevolence motives), expectation about the value of the object to future generations (inter-generational bequests), transmission of value through time (referencing to past generations valuations, addiction, habit formation or path-dependency), and other forms of linkages between one's own satisfaction from consumption of a good or a service and satisfaction of or impact on the others.  More tenuous connections across the society, including cultural ones, are captured (if not always directly) via institutional and political systems.

Referencing to others' preferences can be commonly seen as an important component of exchange-linked interactions. And here, cultural factors can enter directly into economic models. For example, Luigi Guiso, Paola Sapienza and Luigi Zingales study, titled "Cultural Biases in Economic Exchange?" looked at how cultural biases affect economic exchanges. Using data on bilateral trust between European countries, the authors show that "trust is affected … by cultural aspects of the match between trusting country and trusted country, such as their history of conflicts and their religious, genetic, and somatic similarities.” Lower bilateral trust leads to less trade, less portfolio investment, and less direct investment between countries. Another study, by Paul Zak and Stephen Knack also found that trust has a direct causal link to economic growth via facilitating investment and trade.

Trust, as a cultural factor, enters determination of the effectiveness of large organisations operating in society, according to Rafael La Porta, Florencio Lopez-de-Silane, Andrei Shleifer and Robert W. Vishny. This applies to "government performance, participation in civic and professional societies, importance of large firms, and the performance of social institutions".

Luigi Guiso,  Paola Sapienza, and Luigi Zingales, cited previously, also looked at the issues of trust and culture in relation to households willingness to participate in stock markets. Their paper on this topic showed that cultural attitudes to trust are significant determinants of households’ choices to participate or not in the stock markets in a number of countries.

Similarly, time-linked referencing, among other matters, has been tackled already in economics, including in the context of modelling cultural systems inputs into economic systems and institutions. For example in his 1994 paper, Avner Greif models effects of cultural beliefs on the organisation of society across historical and ideological lines. The paper used game-theoretical and sociological frameworks to conduct a comparative historical analysis of the relations between culture and institutions, explicitly incorporating possible path-dependencies (historical referencing) in how culture impacts institutional evolution.

Much of the thinking about culture and its contribution to economic and financial interactions between people, firms, countries and regions enters economics from analysis of the impact of arts and public or shared goods and services on economic behaviour. In other words, culture enriches economics.

But economic models, techniques and concepts also contribute to our understanding of culture.

One example is the rapidly evolving field of analysis relating to cultural capital. In general, capital is an asset - a form of foregone or saved consumption - that stores value. Cultural capital, therefore, is a form of storage, and transmission over time, of cultural values. In so far as such value is embedded into physical objects, experiences, actions and knowledge, these objects or subjects of culture (e.g. paintings or sculpture or a garden), actions, experiences and knowledge are embodiments of cultural capital. They can be passed on to the future generations, or destroyed, enhanced by adding to their stock and quality, undermined or devalued by reducing their stocks or quality and so on.

In economics, all capital either directly serves as an input into production and/or can be used to transform other inputs (for example, via labour-capital complementarity). And so is with cultural capital. Current generations of artists rely on past stock of artistic and cultural capital to create their works. Today's music draws on folklore of the past, today’s architecture references past landscapes and cityscapes, tomorrow’s poetry will reflect today’s ethos or events shaped by it, and so forth.

Again, the idea of cultural capital – an economic concept to begin with – also poses an interesting challenge for economics. Physical capital, such as buildings, machinery, equipment, exists separably from us, households and workers, who use it. As a result, modelling production process using ‘labour’ and physical capital is conveniently easy from mathematics perspective, although such separation is by no means accurate or even accepted any longer in modern economics. But cultural capital exists simultaneously within us and outside of us. In mathematical terms - it contains parts that are simultaneously separable and parts that are inseparable from human beings, or 'labour'.

This problem, however daunting technically, is not unique to cultural capital. Other forms of capital, such as human capital, social capital and some forms of technological capital, are also non-separable (at least not perfectly) from 'labour'. More interestingly, in contemporary economics, we are starting to recognise that even physical capital can no longer be perfectly detached from us. Aesthetic and ethical aspects of our physical environment (aesthetic and, increasingly also ethical, aspects and attributes of buildings, settings, equipment we use) also interact with our human capital and are directly influenced by cultural capital.

These forces shape the modern workplace, an issue touched upon, for example, in Andrea Ichino and Giovanni Maggi paper on work environment and individual employees’ background.  Another good example of these processes is the recognition we accord today to the role of ergonomics and design in general in our workplace. There is a truly massive body of academic literature linking quality of design of the working environment to productivity, innovativeness and creativity of the workers. As far back as in 1999,  Adrian Leaman and Bill Bordass in their paper “Productivity in Buildings: the ‘killer’ variables” argued that “losses or gains of up to 15% of turnover in a typical office organization might be attributable to the design, management and use of the indoor environment. There is growing evidence to show that associations between perceived productivity and clusters of factors such as comfort, health and satisfaction of staff.” In other words, things like energy efficiency may act via cultural triggers to improve workers’ outlook and satisfaction, thus increasing productivity.

Importantly, social, human and cultural forms of capital are increasingly entering economic analysis both at microeconomic level (decisions of households and individual firms) and at macroeconomic (economic systems, national economies, global economy) levels. For example, economists are fully aware (even though we still have great difficulty valuing or measuring it and more pertinently, we have a great difficulty finding suitable econometric instruments to capture many types of cultural and ethical values) of the effects that cultural values and systems have on political and economic institutions, their shapes, evolutionary dynamics and key traits.

In one paper, Edward L. Glaeser, David Laibson  and Bruce Sacerdote, developed a complete economic model of social capital that can also be extended to capturing some traits of cultural capital.

These effects can be transmitted via demographics (cultural aspects relating to family formation, beliefs structures and collective ethics), political systems (nature and extent of democratic institutions, efficiency of specific forms of political and economic governance), judiciary and military (role of independent judiciary or power of military in a society), and so on.

Alessandra Fogli and Raquel Fernandez paper "Culture: An Empirical Investigation of Beliefs, Work, and Fertility" found that cultural attributes, based on woman's country of ancestry have strong explanatory power in determining family decisions relating to the work and fertility behavior of second-generation American women, even after we control for other, economic and social, drivers. And in another study, the same authors, together with Claudia Olivetti, argued that cultural drivers are also important to work and fertility behaviour of the American women in general.

These are just some examples of the ways in which economics and culture interact, productively and constructively. Of course, none of these imply existence of the dominance relationship between the two domains. Instead, the domains ‘collaborate’, causally, in both directions.

Rachel McCleary and Robert Barro, in their "Religion and Political Economy in an International Panel" argued that "Economic and political developments affect religiosity, and the extent of religious participation and beliefs influence economic performance and political institutions." The study found that "Church attendance and religious beliefs are positively related to education (thereby conflicting with theories in which religion reflects non-scientific thinking) and negatively related to urbanization. …On the other side, we find that economic growth responds positively to the extent of some religious beliefs [notably those in hell and heaven] but negatively to church attendance.” In other words, belief, not belonging to church, drives growth. These results, according to authors “accord with a perspective in which religious beliefs influence individual traits that enhance economic performance. The beliefs are, in turn, the principal output of the religion sector, and church attendance measures the inputs to this sector. Hence, for given beliefs, more church attendance signifies more resources used up by the religion sector."

Likewise, institutional arrangements in specific sectors of economy, e.g. finance, can be traced at least in part to cultural drivers or factors. Rene Stulz, and Roha Williamson looked at cultural differences (in particular religious values variations) as a driver for determination of shareholder and creditor rights. To the chagrin of the ‘culture-first, economics-last’ proponents, they found that "the origin of a country's legal system is more important than its religion and language in explaining shareholder rights." To the chagrin of economics-first supporters, a country's principal religion still proves useful in predicting the cross-sectional variation in creditor rights… [and that] …religion and language are also important predictors of how countries enforce rights."

Amir Licht, Chanan Goldschmidt and Shalom Schwartz show that culture underpins the foundations of the rule of law and other basic/fundamental norms of governance, thus directly influencing evolution of social and institutional capital.

Guido Tabellini's important study, "Culture and Institutions: Economic Development in the Regions of Europe" looked at whether culture has a causal effect on economic development. Tabellini concluded that it does: "Culture is measured by indicators of individual values and beliefs, such as trust and respect for others, and confidence in individual self-determination… The exogenous component of culture due to history is strongly correlated with current regional economic development, after controlling for contemporaneous education, urbanization rates around 1850 and national effects."

On the opposing side of research spectrum, economic models and techniques can be used to study changes in underlying social and cultural traits.

Alberto Bisin and Thierry Verdier paper "Beyond The Melting Pot: Cultural Transmission, Marriage, And The Evolution Of Ethnic And Religious Traits" developed an economic analysis of "the intergenerational transmission of ethnic and religious traits through family socialization and marital segregation decisions". Econometric methods and techniques have been deployed by Paola Giuliano to explain a largely cultural phenomenon of varied family living arrangements found across European countries.

An applied World Bank policy research paper by Karla Hoff and Priyanka Pandey used experimental economics to explain the relationship between cultures and caste discrimination in India.

In their "Belief in a Just World and Redistributive Politics", Roland Benabou and Jean Tirole cross-link culture, political institutions, social ethnographies, ideological beliefs and use economics to explain variations in ethical systems across a number of countries.

And in their 2004 paper Fabian Bornhorst, and co-authors use experimental economics to capture significant differences in culturally-based trust between southern and northern Europeans.

The above are just a handful of examples where culture and economics are productively cross-linked in social and ethnographic, economic and demographic, as well as anthropological research.

Only a naive mind can suggest some hierarchical structure that would rank one over the other – culture over economics or vice-versa – either as a tool for any social inquiry, or as a source of value in the social setting. In the real world, each requires the other to sustain itself. And in the real world, illusory theoretical perfections of economics can be challenged by the messiness of arts and cultural factors, while the intangibles of ethic values can be partially systemised and made part of the broader analysis of our society by economics. Economics is not detached from culture and culture is not divorced from economics.

Wednesday, April 23, 2014

23/4/2014: Some scary reading from the Eurostat...

Eurostat published full comparatives on key fiscal performance indicators across the EU and euro area for 2013. Here are three summary tables comparing euro 'periphery' states against each other and the EU18. You can click on images to enlarge:

First data summary:

Second: Ireland's share of the mess:

Third: Ireland's position within the 'periphery':

And key takeaways are:

  1. In 2013, after years of austerity and pain, Irish Government deficit (7.2% of GDP) was the second worst in the euro 'periphery' group.
  2. By relative comparative to EA18 (33% and 50% over EA18 levels), Ireland ranks worse than Italy, Cyprus and Portugal, and Spain (we have more 'red'/'green' cells).
  3. In cumulative terms, 2010-2013 years were brutal to Ireland: we posted worst cumulated Government Deficits over this period and 2nd worst increases in Government debt.

Note: data is taken from

Tuesday, April 22, 2014

22/4/2014: On Irish Taxes, Quangos, Trade and other recent links

Some interesting links from recent media reports:

  1. Apparently, completely unpredictably, unexpectedly, shockingly abruptly etc etc etc... but Ireland-based MNCs are allegedly concerned with the OECD (aka G7-G20 prompted, EU-supported) efforts to reforms international tax systems to close off the more egregious loopholes in corporate taxation: Now, with the IBEC, DofF, and everyone else in irish Officialdom repeatedly declaring that our tax regime is above the water and thus not in the firing line, one must wonder just why are these companies concerned with the OECD moves?
  2. On a related note, I just posted a new paper I wrote for the Cayman Financial Review on the above topic - see link here:
  3. Unrelated to taxation issues, but related to fiscal policies of the Irish state, a note from the Irish Times on Government's heroic struggle with one electoral objective they set before 2011 GE: the objective of rationalising the massive spread of quangoes in Irish public policy ecosystem: Core facts pointed out in the article are: The Government promised to abolish 100-145 quangoes right before it came to power in Q1 2011. Three years later, 45 have been either abolished or planned for abolition, of which only 20 are likely to be completely shut by the next GE in Q1 2016 net of new created. To-date, only 28 bodies have been abolished, 17 more are set to be culled in the remaining tenure. And 33 new agencies have been created or planned for creation. Net impact: of 732 quangoes in existence in mid-2012, we are likely to have 720 quangoes in existence in mid-2016. 
  4. Now, recall that we are being repeatedly told that life outside the Euro for Ireland means kissing good bye our wonderful exporting capabilities. Here is a chart showing current account balance for Ireland and Germany (two star performers in the euro area in terms of trade) as contrasted by Denmark (a non-euro country that should be suffering from the trade deprivation due to its absence from the euro club). It turns out Denmark consistently outperforms Ireland in terms of current account surplus... So next time one of the Government parties' candidates start talking about Ireland's alleged benefits from the euro membership, do suggest they should take a trip to Denmark...
  5. An absolutely brilliant short summary of Economics as a field of inquiry in 297 words by Professor Thomas Sargent It is superb.
  6. On artsy side of things, a stunning and powerfully original statement from China for Milan Expo 2015: 
  7. A set of excellent, insightful essays and articles on Ukrainian crisis or more significantly - on Russia's position vis-a-vis the West: and and

Saturday, April 19, 2014

19/4/2014: FT coverage of Anglo verdicts

Here's FT article covering Anglo Irish Bank trial verdicts with comments from myself, Stephen Kinsella and Michael Clifford:

19/4/2014: Everything is Awesome When You Part of the (Fed) Team

Fed's Balancesheet then and now:


And "Everything is Awesome!"

19/4/2014: If Only Forecasts Were Falling Ripe from Trees...

Here we go, folks… ESRI's latest thoughts on Irish economy... and they are earth-shattering.

Let's take a few pointers from the wise:

1) "Ireland could face a debilitating period of stagnation – characterised by high unemployment, falling prices and low growth – if recovery in Europe falters".

"Could"?! 2013 marked a year of contracting GDP and total demand. We now have six consecutive years of falling total demand (sum of domestic investment and spending by consumers and government). Unemployment is already sky-high, long term unemployment is a hinge problem. Prices are not quite falling, but growing at near-zero rate, and stripping out State controlled sectors, goods and services (something ESRI misses on every occasion, like a clock)we have deflation. So all of this "could" happen?

2) "…Prof Fitzgerald said deleveraging by households could continue for “some considerable time” if recovery stalled in the rest of the EU, resulting in a return to stagnation in Ireland."

Can someone explain to me why would deleveraging of the households (repayment of massive debts accumulated during the Celtic Garfield years) suddenly end if "the rest of the EU" were to post robust growth? Is it possible that growth in Germany will start paying Irish mortgages down? Or consumer demand in France picking up can moderate the size of our credit cards bills? How?

Irish exporting sectors employ a small fraction of our households. Irish exports are geared not toward wages payments, but MNCs profits. Pick up in our exports is unlikely to drive household earnings up (easing debt/income ratios or repayment funds available to households - two conditions necessary for new credit creation) in short or medium term.

3) But wait, according to the ESRI, the core threats to the economy are not debt, but the EU growth and housing markets (more specifically: excess demand in the property markets in Dublin and Cork that are at a risk of not being satisfied in poor credit conditions). So in the nutshell, ESRI thinks that if we start building more houses and Germans start buying more BMWs, our economic growth will take off like a rocket.

Confusing symptoms for causes, ESRI is worried about the Japanese scenario for Ireland. But let's take a look at plausibility of the ESRI logic:

  • Japan is a fully sovereign economy with own monetary and fiscal policies (both of which Ireland lacks)
  • Large population and domestic demand (which Ireland lacks)
  • Indigenous (as opposed to tax-maximising MNCs) exports 
  • Set smack in the middle of the most dynamic growth cluster in the world (Asia Pacific) as opposed to the growth-shy Europe (remember, a pick up in growth in the euro area implies annual growth of 2-2.2 percent; a pick up of growth in Asia Pacific means annual growth of 5-7 percent). 
The real problem with Japan's economy is actually pretty similar to that of Ireland's:

  • pre-1960s Japan's growth was driven by a period of post-WW2 rebuilding, 
  • between 1960s and 1980 it was driven by the rapid catching up with the advanced economies, 
  • thereafter until 1990s - by a massive property and credit bubble. 
  • So stagnation, property crash and low inflation/deflation were not the causes of the malaise in Japan, but its symptoms. The real malaise for Japan is identical to the one we have in Ireland - lack of catalyst for future growth. 
  • In Japan this problem is exacerbated by adverse demographics. In Ireland - by lack of monetary and fiscal policies room. Ireland is 2 decades behind Japan in household and corporate and banking deleveraging. 

So go figure: can growth in the EU and housing supply improvements in Ireland do enough for Dublin?

Ok, take it from a different angle: 1991-2007 marked massive growth around the world. Japan stagnated. 1991-2007 marked massive monetary and fiscal expansion in Japan. Japan stagnated. 1991-2007 marked significant deleveraging of Japanese economy. Japan stagnated. That is 18 years of stagnation and deflation under the global conditions more favourable than Ireland faces today, with full economic policies kit available to Japan, not available to Ireland, and with indigenous exporting engine much mightier than that of Ireland.

Is ESRI having a clue? Of course it does. It can clearly see that once things get really good, things will be really good: "Conversely, Prof FitzGerald believes if the euro zone recovery picks up pace this year and in 2015, and is accompanied by an increase in domestic demand, Ireland could see a more rapid reduction in the numbers unemployed and a return of the public finances to a small surplus over the period 2017-2019."

Ah, now we talking. And if we discover a pot of gold and a chest of diamonds at the end of that proverbial rainbow, just to the North of the fabled riches of oil, gas, uranium, rare earth metals, and Bord Bia certified caviar... then we can afford pensions for the ESRI boffins too. 

Friday, April 18, 2014

18/4/2014: Ukraine's Trade Flows in One Inforgraphic

Via Bloomberg - a neat summary of Ukraine's external bilateral trade flows:

Which, of course, shows just how feeble are all the claims about the 'replaceability' of Russian markets for Ukrainian economy. When you take out the Customs Union's total flows of USD 15.71 billion, the entire EU trade flows (for top 20 countries) amount to USD 10.99 billion and these include revenues earned from transit of Russian gas and resales of Russian gas, oil and petrochemical products too. So yes, yes, y.e.s... folks - Russia is obviously a problem for Ukraine's economy and Brussels is obviously a solution... unless you dust out a calculator and tally things up...

Thursday, April 17, 2014

17/4/2014: Gabriel Garcí­a Márquez, in his own words...

We have lost one of the greatest writers of all times, Gabriel Garcí­a Márquez. Here are the quotes from his books... the ones never to be exceeded in their genius anymore...

“He was still too young to know that the heart's memory eliminates the bad and magnifies the good, and that thanks to this artifice we manage to endure the burden of the past.”
Love in the Time of Cholera

“Before reaching the final line, however, he had already understood that he would never leave that room, for it was foreseen that the city of mirrors (or mirages) would be wiped out by the wind and exiled from the memory of men at the precise moment when Aureliano Babilonia would finish deciphering the parchments, and that everything written on them was unrepeatable since time immemorial and forever more, because races condemned to one hundred years of solitude did not have a second opportunity on earth.”
One Hundred Years of Solitude

“Just as real events are forgotten, some that never were can be in our memories as if they happened.”
Memories of My Melancholy Whores

“This was when she asked him whether it was true that love conquered all, as the songs said. 'It is true', he replied, 'but you would do well not to believe it.”
Of Love and Other Demons

“But he could not renounce his infinite capacity for illusion at the very moment he needed it most... he saw fireflies where there were none.”
The General in His Labyrinth

“An old man with no destiny with our never knowing who he was, or what he was like, or even if he was only a figment of the imagination, a comic tyrant who never knew where the reverse side was and where the right of this life which we loved with an insatiable passion that you never dared even to imagine out of the fear of knowing what we knew only too well that it was arduous and ephemeral but there wasn't any other, general, because we knew who we were while he was left never knowing it forever with the soft whistle of his rupture of a dead old man cut off at the roots by the slash of death, flying through the dark sound of the last frozen leaves of his autumn toward the homeland of shadows of the truth of oblivion, clinging to his fear of the rotting cloth of death's hooded cassock and alien to the clamor of the frantic crowds who took to the streets singing hymns of joy at the jubilant news of his death and alien forevermore to the music of liberation and the rockets of jubilation and the bells of glory that announced to the world the good news that the uncountable time of eternity had come to an end.”
The Autumn of the Patriarch

“The mayor informed General Petronio San Roman of the episode, down to the last literal phrase, in an alarming telegram. General San Roman must have followed his son's wishes to the letter, because he didn't come for him, but sent his wife with their daughters and two other older women who seemed to be her sisters. They came on a cargo boat, locked in mourning up to their necks because of Bayardo San Roman's misfortunes, and with their hair hanging loose in grief. Before stepping onto land, they took off their shoes and went barefoot through the streets up to the hilltop in the burning dust of noon, pulling out strands of hair by the roots and wailing loudly with such high-pitched shrieks that they seemed to be shouts of joy. I watched them pass from Magdalena Oliver's balcony, and I remember thinking that distress like theirs could only be put on in order to hide other, greater shames.”
Chronicle of a Death Foretold

“Everyone will have gone then except us, because we're tied to this soil by a roomful of trunks where the household goods and clothing of grandparents are kept, and the canopies that my parenrs' horses used when they came to Macondo, fleeing from the war. We've been sown into this soil by the memory of the remote dead whose bones can no longer be found twenty fathoms under the earth. The trunks have been in the room ever since the last days of the war; and they'll be there this afternoon when we come back from the burial, if that final wind hasn't passed, the one that will sweep away Macondo, its bedrooms full of lizards and its silent people devastated by memories.”
Leaf Storm and Other Stories

"The men opened Maruja’s door and another two opened Beatriz’s. The fifth shot the driver in the head through the glass, and the silencer made it sound no louder than a sigh. Then he opened the door, pulled him out, and shot him three more times as he lay on the ground. It was another man’s destiny: Angel Maria Roa had been Maruja’s driver for only three days, and for the first time he was displaying his new dignity with the dark suit, starched shirt, and black tie worn by the chauffeurs who drove government ministers. His predecessor, who had retired the week before, had been the government agency’s regular driver for ten years."
News Of A Kidnapping

"Life is not what one lived, but what one remembers and how one remembers it in order to recount it."
Living To Tell The Tale

“A lost bird appeared in the court and was half an hour jumping around between the spikenard. It sang a progressive note, rising an octave at a time, until it became so acute that it was necessary to imagine it.”
In Evil Hour

"He who awaits much can expect little."
No One Writes to the Colonel

And for the parting one:

“He really had been through death, but he had returned because he could not bear the solitude.”
One Hundred Years of Solitude

And for the starting one:

"Many years later, as he faced the firing squad, General Aureliano Buendia was to remember that distant afternoon when his father took him to discover ice."
One Hundred Years of Solitude

RIP, Gabriel Garcia Marquez

17/4/2014: Toothless Shark? EU's Banking Union

EU has been pushing hard on the road toward the Banking Union (BU) with recent weeks seeing completion of the agreement and vote in the EU Parliament on SRM and other aspects of the BU (see: But beyond the facade of all this activity, there is a nagging question of the BU's structural effectiveness. This question is yet to penetrate the thick sculls of investors seemingly obsessed with new issuance of debt and equity by the European banks.

The latest BU shape is much improved on the previous versions: gone are national discretions and in is a new streamlined process with ECB and EU Commission in the driving seat. SRM got an efficiency push with new deadline for completion of funding pushed to 8 years from previous 10 years. The fund will be 60 percent mutualised by the end of year two of its operations. Which further reduces potential for national authorities picking at it while bickering with the EU regulators and supervisors. The SRF will have access to ESM while the funds are being accumulated. And the new version cuts the time required to deploy the Single Resolution Mechanism and the Single Resolution Fund, should the banks run into systemic tight spot. All good.

The bad bits are, however, still there.

  1. The SRF is still only EUR55 billion at maximum capacity. Which is peanuts for a systemic crisis, give euro area banking system has EUR30.5 trillion worth of assets (which means that SRF can cover just 0.18 percent of the euro area assets).
  2. There is no defined mechanism by which banks will be contributing to SRF. Will banks be liable on the basis of their deposits base? If so, the BU will be a de facto mechanism for rewarding less deposits-rich banks and penalising banks that are funded using greater share of deposits. Not a good idea, since alternative to deposits is… err… interbank markets. And a bad idea, because deposits-rich banks are in the euro area's core and in particular - Germany. Alternatively, contributions to SRF can be based on assets. In which case, French, Spanish and peripheral banks are crunched. 
  3. There is little in terms of SRF / SRM promise of breaking the contingent liabilities spilling from the systemic crisis in banking sector onto sovereigns. The only way of doing so is to reduce the rate of crisis spread and probability of crisis becoming systemic. 

The break between taxpayers and banks can only be achieved by creating a highly competitive system of diversified, smaller and better capitalised banks (see:

Step one would be to hike minimum leverage ratio (core capital to total assets) to the US standard. Currently we have 3% standard in the EU ( and in the US the ratio is set at minimum 5% for eight biggest bank-holding companies and 6% for the rest of the banking system ( Given weakness of euro area SRF (pre-funded and capped) compared to FDIC (pre-funded and backed by a stand by loan from the Treasury of USD30 billion, plus a further US Government guarantee to cover any excess obligations) and the heavier reliance of the European system on bank lending, this means leverage ratios of close to 6.5-7% or more than double current minimum.

Step two would be to test the banking system to identify larger banks that will require splitting up and smaller banks that will require capital raising. This will have to be facilitated by forcing new deleveraging targets and supporting equity issuance and forcing mergers in some cases.

Step three will be removing implicit and explicit barriers to new banks entry into European markets and actively promoting emergence and development of alternative banking institutions.