Voices
To help focus minds before a recent call, I was asked to prepare a slide called ‘Medium-Term Economic Risks/Challenges for Ireland’.
As a strong advocate of the JK Galbraith maxim: ‘There are two types of forecasters: those who don’t know, and those who don’t know they don’t know’, I was reluctant to comply. But on reflection, the framework infamously outlined by the then US Defence Secretary, Donald Rumsfeld, in 2002 offered help:
‘There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.’
Clearly, there is nothing to say about the known knowns. And while the unarguable insights of the great Nassim Taleb prove that the unknown unknowns are usually what matter most, there is also nothing to say about them. This leaves the known unknowns: the things we know we do not know.
As ever, the list of known unknowns facing Ireland is long and daunting. From vaccine roll-out to corporate tax, and Brexit frictions to climate change, many of the things we know we do not know are significant, challenging and widely debated. As such, I thought it more helpful to highlight three which have generally received less attention.
Bonds
Over a decade and counting since the global financial crisis and emerging tentatively from the global pandemic, monetary policy normality remains a distant prospect. Consequently, the funding cost of fiscal deficits has never been as low.
‘I used to think if there was reincarnation, I wanted to come back as the president or the pope or as a 0.400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.’
James Carville, advisor to President Clinton, 1994
But as is clear from the famous quote from James Carville above, the bond market has not always been so compliant. Long before the eurozone crisis sent Irish government borrowing costs skyward and ushered in the Troika, the so-called bond market vigilantes were wreaking havoc with the expansionary fiscal plans of the first-term President Clinton.
For Ireland, the real cost of long-term funding is now substantially below zero. Remarkably, bond investors are paying for the privilege of loaning long-term money to the Irish government. The most recent example was the raising of €3.5 billion for 20 years at an annual nominal interest rate of 0.585%. Within the context of an ECB annual inflation target of 2%, this extraordinary funding is likely unsustainable: a known unknown worthy of wider attention.
Bubbles
Stock investors have enjoyed remarkable returns. From a low of 666 in March 2009, the widely followed S&P 500 Index of US stocks recently touched 4,200. Arguably more remarkably, the index is now up almost 80% from the pandemic panic low on the 23rd of March last year.
‘The long, long bull market since March 2009 has finally matured into a fully fledged bubble. I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.’ .
Jeremy Grantham, GMO, January 2021
While such a long positive cycle raises questions about longevity, there is no basis for believing that any cycle should necessarily ‘die of old age’. However, there is a growing chorus of sage voices concerned that bubble-like behaviour is evident across financial markets. For investors such as Jeremy Grantham of GMO quoted above, among other indications, the sharp rally in stock prices, the stretched absolute valuations, the recent proliferation of SPACS, the boom in cryptocurrencies and the advent of NFT’s, are all cause for increasing concern.
Of course, it is impossible to know if such concerns are misplaced or, if warranted, when the mood of the market might darken to reflect them. But we do know that when financial bubbles burst, investment, consumption, and the broader economy generally follows: a known unknown especially relevant to a small, open economy such as ours.
A Dangerous Woman
There is no antidote to the Brexit poison. The lethal sepsis spreading through the British body politic since June 2016 has no cure.
Worryingly for Ireland, the spectre of an amateur Tory clown, hated in Scotland, holding court in Downing Street is now a growing threat to the United Kingdom. Adding to the threat is the sharply contrasting competence and focus of the Scottish First Minister: Nicola Sturgeon.
‘Do I look like the most dangerous woman in Britain? Come on!’
Nicola Sturgeon, First Minister of Scotland, 2021
On an explicit platform of seeking a Scottish Independence Referendum, the Scottish National Party is likely to win the Scottish Parliamentary Election on May the 6th. While the UK Prime Minister has so far ruled it out, an SNP victory next month is increasingly likely to lead to a successful Independence Referendum soon.
In truth, whatever the coming weeks may bring, the prospect of constitutional upheaval in the UK is now real and rising. Notwithstanding the well-versed challenges on this Island, our bloody history tells us that such upheaval on our neighbouring Island has never been good and has often been catastrophic: a known unknown in need of urgent thought.
