2008 was an annus horribilis for Ireland, but 2009 will be much worse.
The past 12 months have seen a remarkable transformation and deterioration in the Irish economy. Recession, while predicted well in advance, started officially in summer 2008 on the back of an ever worsening housing crash.
That seems like a long time ago now, and predictions of a benign contraction of <1% of GDP are exposed as so patently untrue now as they were fallacious then. Ireland without its debt-fuelled construction industry is like an athlete without its leg. We are in the process of falling over and losing 20% of our economic mass.
Ireland at the close of 2008 finds itself wedded to its toxic banks. The extraordinary bank guarantee scheme threatens the entire state which, unable to jettison its doomed banks is forced to share their fate. The state has assumed a level of risk in bank guarantees and cost in bank recapitalization programmes that, while cautioned of from some quarters, would have been unthinkable to the majority a year ago.
The economy is deteriorating at its fastest rate in modern times, while the danger to the very existance of the state is greater now than at perhaps any time since the civil war. So what does the coming year hold for us? Might we anticipate an upturn, or should we expect more turmoil?
Ireland in 2009 will experience its first year of debt deflation. This near unprecedented event is uncommon not only in Ireland, but anywhere in the developed world in modern times. Debt-based fiat currencies like ours, you see, simply do not do deflation. They are designed to expand only, and do not accomodate contraction such as we are about to experience. When it does happen the process is painful beyond proportion.
The deflation will result from reduced bank lending. Money will be repayed to credit institutions faster than it is loaned out, leading to a contraction in the amount of money in circulation. There will be a couple of visible effects of this.
The price of goods will decline. Goods in general (not just the CPI) will be nominally cheaper next year. That doesn’t mean they will be easier to acquire, as we’ll have to compete harder for the money to buy them. But for those with cash, goods will be available at less expense.
Debt defaults will rise. When money growth falls below a certain threshold, insufficient funds exist to make debt repayments as they fall due. There simply won’t be enough money in the economy to pay off all the outstanding debt, and some of it will be defaulted on. All forms of debt will be affected, from unsecured credit card debt to home mortgages. But significantly higher levels of home foreclosures will be a noticeable outcome.
Banks will be threatened with insolvency. The debt defaults explained above will greatly exceed banks’ provisions for them, and will threaten the very solvency of the banks themselves. Huge amounts of debt will have to be written off, and banks with insufficient reserves will have to raise funds elsewhere or fold. Even the state’s €10 billion recapitalization programme, intended for exactly this purpose, will be hard-pressed to meet the losses incurred over the next number of years.
Unemployment will continue to rise. This is not directly a result of the coming deflation, but of the banks’ impotence. Our credit institutions will be so bowed by the weight of their property losses that they will be unable to continue effective lending for regular purposes. The broader economy, which relies on credit to exploit business opportunities, will suffer for this. Many otherwise healthy businesses will be forced to close when they cannot secure credit for ongoing business, and starting new business will be next to impossible owing to difficulties in raising venture capital.
2009 will be a very difficult year for Ireland. The economic quagmire of our own creation poses huge challenges, and is likely to deepen as we approach 2010. Relief from our prediciment will not be soon in coming, and this may be the beginning of a 10-15 year long deflationary depression. But painful as it will be, this correction is necessary. It won’t often feel like it in 2009, but the economy is fixing itself in the only painful way it can. We’re returning to competitiveness and proportionality, where a moderate wage can compete with a moderate wage in Europe and purchase a moderate house in Ireland. Fasten your seatbelts and get ready for one hell of a ride.
Tags: 2009, banks, crash, deflation, depression, economics, ireland, lending, predictions, property, recession
