The Bank of England issued a new-style £20 note on 13 March 2007. The note features Adam Smith, one of the fathers of modern economics.

In his 2007 book On the Wealth of Nations, Irish-American writer P.J. O'Rourke recounts a joke picked up from longtime chief economist of the New York Stock Exchange, William Freund: "An economist is a fellow who knows 101 ways to make love and doesn't have a girl."

A day after the turbulent opening for business in 2008, no economist back in 1980 would have bet that it would have taken 28 years to scale the record heights that were achieved by gold and oil in the early months of that fateful year (SEE: Oil price passes $100 a barrel for first time - close to 1980 all-time real dollar high; Price was at $10.72 in December 1998).

In Ireland, who would have thought even in those poorer times, that 28 years after the town of Naas, located 20 miles south-west of Dublin, was bypassed, that a 160-mile motorway link to the country's second city Cork, would not yet available?

Writing in today's Financial Times, European Editor John Thornhill says: The senior Chinese official did his best to be polite. When, at a recent conference on Europe and Asia, I asked him how the Chinese viewed Europe, he chewed thoughtfully on a canapé before replying: “Europe needs to rediscover its entrepreneurial spirit.”

Some of us Irish may believe that Ireland shouldn't be included in this categorisation but they would be mistaken. The property boom has helped camouflage realities that will become evident in coming years and the €50 billion that has been invested in commercial property since 2001, mainly overseas, compared with the €1 billion in venture capital that has gone to Irish business, speaks for itself.

Economic Outlook

Some of the dismal scientists are paid to sell a sunny scenario but the wishes of Dan McLaughlin of Bank of Ireland and Austin Hughes of IIB Bank that the European Central Bank will cut its benchmark rate, currently at 4.0%, twice in the first half of 2008, will not be met. A cut in March would have to be telegraphed to the markets, beginning  on Thursday, January 10th, when the Governing Council will meet. Such a sharp reversal on the current stance is not expected as the ECB is keen to keep control on inflation expectations. A gloomy economic outlook in the Eurozone later in the year would of course increase the likelihood of rate cuts.

Euribor inter-bank interest rates are expected to remain elevated in the coming months until at least the extent of bank exposure to subprime-related securities is known.

Joachim Fels of US investment bank Morgan Stanley, who is based in London, said last month that he expects the global macro environment in 2008 to be characterized by an unpleasant mix of relative economic stagnation in the developed countries and continuing global inflation pressures.  This stagflationary environment creates a dilemma for central banks.  If they play tough on inflation, stagnation may turn into a full-blown recession. If they decide to stimulate the economy, inflationary pressures may intensify.

Central bankers are acutely aware of this dilemma, which explains why many have been reluctant to ease monetary policy so far. However, more signs of economic slowdown or even recession in early 2008 are likely to swing the balance towards more aggressive monetary easing in the advanced economies. 

"Thus, I expect 2008 to mark the beginning of another global liquidity cycle that is likely to lift most boats again in the following years," Fels said.

Morgan Stanley's Gerard Minack, who is based in Sydney says that the US Fed always cuts aggressively in a recession. The real Fed funds rate over the past 50 years has fallen to zero or below in every recession. That suggests that the minimum target for the funds rate in this cycle is 3%. It is currently at 4.25%.

Minack says that earnings always get hit in a US recession, which Morgan Stanley expects to be mild. The median peak-to-trough decline in S&P 500 earnings in recession over the past 50 years has been 16% and over the long term, real S&P 500 earnings have fallen to below-trend levels in every recession in the past 50 years, except the brief 1980 downturn. Minack says that earnings are now 62% above trend. If history repeats, there is a huge earnings shock coming. To get real earnings to (the rising) trend by end-2008 would require a 38% decline.

Morgan Stanley's Stephen Jen, global head of FX, says that a recession always triggers a dollar rally.

Irish Public Sector Reform in 2008?

Whatever the uncertainties of ECB monetary policy in 2008, there is little likelihood that the Irish Government will show rare political courage and begin serious reform of the Irish public sector.

The Paris-based think-tank for 30 governments, the OECD, will present proposals on reform to the Irish Government soon and the best that can be expected is the establishment of an "Interdepartmental Committee" that will take years to consider the recommendations.

In a country of 4.2 million, we have 35 ministers and the majority have made-up jobs. 130 full-time staff work on the typical "messenger-boy" routine in their political constituencies - claiming credit for local authority house allocations; checking death notices for the issue of letters of sympathy and so much more dross.

One minister was both brave and honest in saying that the lack of reform in the public service, "is a joke."  But, no worthwhile change will happen.

Climate Change

Inconvenient truths for a minister who finds platitudes more palatable than producing a credible plan.

A Government publicity campaign was launched in November but don't expect hard decisions from an Irish politician. Like so much progress in Ireland, decisions made by the big European countries will provide the cover.

Monday's example of the litany of platitudes from the Custom House:

Kyoto Protocol comes into effect - "a historic moment" says Gormley

Commenting today (31 Dec 07) on the eve of the commencement of the five-year commitment period under the Kyoto Protocol, Minister for the Environment, Heritage and Local Government, Mr. John Gormley, T.D., described it as "a historic moment for the world - a hugely significant first step in the global response to climate change.

Ireland will contribute to the success of the Kyoto Protocol by meeting our greenhouse gas target over the 2008-2012 commitment period " he said "and by supporting more stringent global emission reduction targets in the period to 2020 and beyond".

Under the Protocol, the industrialised countries of the world (other than the United States) have agreed to reduce their aggregate greenhouse gas emissions by at least 5% below 1990 levels in the commitment period 2008-2012. Ireland"s contribution to this objective is to limit average national greenhouse gas emissions over the five years to no more than 13% above 1990 levels.

Welcoming the start of the commitment period under the Protocol, Minister Gormley pointed out that "this is an important step, but it has taken almost 16 years of intensive international effort to get this far and much more needs to be done if the world is to avoid the worst effects of climate change. Recent scientific advice from the Intergovernmental Panel on Climate Change leaves no doubt about the fact that the earth"s climate system is warming, that the temperature increase is widespread across the world and that the underlying cause is human activity. A more comprehensive global response is needed in order to stabilise greenhouse gas concentrations in the atmosphere at a safe level. That is the ultimate objective of the Convention and that is what we must achieve" he said "it is not an option and there can be no compromise on achieving it."

Referring to the recent agreement by the Parties to the UN Framework Convention on Climate Change to start negotiations on a successor to the Kyoto Protocol, Minister Gormley said "the international agenda is now firmly focused on negotiating a new post-2012 agreement by the end of 2009. A key element of the negotiations" he pointed out "will be the development of a shared vision for long-term cooperative action, including a long-term global goal for emission reductions. For me that means not allowing global surface temperature to exceed 2"C above pre-industrial levels. Beyond that, the threat to people and the environment becomes unacceptable, with the possibility of severe and potentially irreversible damage due, for example, to projected increases in droughts, heatwaves and floods. That prospect is not acceptable and must not be allowed to happen."

"We have a very short window of opportunity in which to get the global response right" the Minister said, explaining that "if the worst impacts of climate change are to be avoided, global greenhouse gas emissions must peak within the next 10 to 15 years, followed by a progressive reduction to less than half of 1990 levels by 2050. That is a major challenge" the Minister concluded "but the time to act is now - delay will only increase both the difficulty and the cost of tackling climate change."

Time to act is now?

not acceptable?

So what is Ireland proposing for itself, the EU and the world??

Setting targets is the easy part.

Irish Housing

For those who now publicly welcome the return to a "sustainable" housing market but who secretly pine for the days of raging boom, the following words on the impact of housing on an economy, are taken from Scottish philosopher-economist Adam Smith's Wealth of Nations, which was published in 1776:

"A dwellinghouse, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it."

Another non-financial service economist talking down the economy!!

A boost to housing of course can have a short-run economic impact and it's akin to what the renowned British economist John Maynard Keynes had in mind in its seminal 1936 book, The General Theory of Employment, Interest and Money, when he wrote, in tongue-in-cheek mode:

"If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up with town rubbish, and leave them to private enterprise on the well-tried principles of laissez faire to dig them up again… there need be no more unemployment and, with the help of the repercussions, the real income of the community and its capital wealth also would probably become a great deal greater than it actually is…"

What is the short-run and the long-run is a pertinent question? In Ireland, the long-run is a strange notion to politicians and policymakers and Keynes famously said that "In the long-run we are all dead." His theory was that the government should actively intervene in the economy in the short-run to manage the level of demand. That of course did not mean that policy should be just tied to an election cycle.

The late  American monetarist economist Milton Friedman, who gained renown when Keynesian economics was seen to have run its course, with the political ascendancy of Ronald Reagan and Margaret Thatcher, popularised the expression: "There's no such thing as a free lunch."

It's good to keep in mind during the good times, that the free lunch has yet to be invented.

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