Fiscal Flows In Ireland Are Supporting The Stock Market

Includes: EIRL
by: Alan Longbon

Fiscal flows from the external sector are strong and fueling the private sector stock market.

The economy has been trimmed and optimized for export industries.

An artificially low currency helps provide a wide moat for exporters and enables them to make "super profits".

This report was produced using a balance of national accounts assessment of Ireland. The purpose of the report is to assess whether Ireland is a good place to invest money via an ETF. ETFs are a good way of accessing foreign markets that might not otherwise be available to an investor not resident in the country where the stock market is located.

One can summarize the national accounts in the following formulas:

Private Sector [P] = Government Sector [G] + External Sector [X]


GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

These are accounting entities. See the methodology section below for more detail on this formula.

The interplay of the three sector flows can be seen in the following chart.

The chart shows the symmetry of butterfly wings between the government and non-government financial sector flows.

The private sector is where the stock market is, and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks.

  2. Externally from overseas commerce.

  3. Government spending.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative. The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks.

We will look at each inflow in turn and start with the private sector.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks at interest.

The chart shows that private credit creation collapsed in 2009 and is still in decline. This is not a strong chart and shows private debt being paid back by consumers to banks. Money is in effect being "unprinted" and deleted from the macro balance sheet. The good news is that it might have bottomed and now be on the way back up.

The chart below shows the stock market:

The chart shows the stock market is still below the level reached at the peak of the GFC boom-bust in 2007. There would be investors still underwater on stocks bought ten years ago who sell when the old buy level is reached. Overhead resistance. Since the market bottom in 2009 the stock market has moved steadily upwards.

The chart below shows GDP:

The chart shows that GDP has been largely flat since the 2007 GFC boom-bust. It is however about to enter all time new highs.

The following chart shows the M3 money supply. The money supply is still below the peak reached in 2007, bottomed in 2014 and now appears to be rising again to former highs.

The chart below shows inflation:

One can see from the chart that since the 1980's inflation has moved in a tight range of five to minus five percent. Mostly inflation has been very low most of the time.

In any private sector, one would like to see the customer base expanding and ever more transactions, and for that, you need people and lots of them. The chart below shows population:

The chart indicates that the population has steadily grown, and there are over 4.5 million people in the economy. One must highlight here how small the population is and that an investor would not want a large exposure to such a small country. There are cities in other countries with more people in that the whole of Ireland.

One must also have jobs for this population so they can earn an income, produce things and make sales to. The chart below shows total employed persons:

The chart reveals that the number of employed persons has not recovered from the peak made at the top of the GFC boom-bust in 2007. It is not the case that these people chose leisure over work, more the case that they were working in 2007 and would work now if there were enough jobs. The good news is that the trend is now back up again.

The flip side of employed persons is unemployed persons and shown in the chart below:

The chart shows that historically Ireland has suffered from quite high unemployment. At present unemployment is steadily declining but still relatively high at over six percent.

Current neo-liberal economic principles dictate that inflation rate control is more important than the level of employment and that a stock of unemployed people can be used to both set a low price for labor and keep inflation down by reducing aggregate demand. The unemployment level could, therefore, be intentional public policy.

The government could have employed this idle labor force, which the private industry had no use for, and set them to work improving the public realm. It chose not to, and if full employment is the government's policy, it has failed its people for decades.

House prices in Ireland are rising from the low set at the bottom of the GFC boom-bust reached in 2013. The all-time peak was set in 2008 and as yet to recover past this point. The chart below shows this.

There would be many home owners and housing investors that are still underwater of on real estate investments made in 2008. The good news for them is that prices are steadily rising again.

Building permits too are rising, from a very low level, as the chart below shows:

The home ownership rate is rising again after bottoming in 2015 and is relatively high at seventy percent.

In most "advanced" western countries with market driven housing rents, it is not uncommon for over half the household disposal income to be allocated to accommodation costs, Ireland is no different. One has a large mortgage or pays a large rental.

Households have critical levels of debt, as the table below shows:

Domestic credit to private sector (% of GDP World Bank 2015)

54.3 %


55.5 %


153.01 %

Household debt Total, % of net disposable income, 2015 (OECD)

177.7 %

(Sources: World Bank, OECD, Trading Economics as marked)

The private household sector has relatively high debt in common with other advanced western nations. Ireland is very vulnerable to a shock such as a dot-com or GFC boom-bust. Professor Steve Keen posits that private debt levels of 150% are the critical point regarding household debt to income. Ireland exceeded this limit despite years of private sector deleveraging should in the chart above for private credit creation.

High private debt levels also produce a phenomenon identified by economist Professor Micheal Hudson known as "debt deflation." Debt deflation is the deflation of aggregate demand due to loan service costs on high debt. The concept is that so much aggregate demand is funneled to debt service, mainly to afford a place to live, that there is little money left to buy real goods and services offered for sale in the private sector. Less demand leads to fewer sales, less income, fewer jobs and less investment.

The bottom line is the private sector is in fair condition. On the plus side there is growing GDP, population and employed persons, low inflation and a stock market trending upwards. On the negative side we have high private debt and high unemployment.

External Sector

The external sector is trade and commerce with other countries and is best captured by the current account. The current account is exports minus imports, and it also includes capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance:

The chart shows that the current account is positive and adding money to the private sector.

Important for the external sector is the currency exchange rate. Currencies tend to gain strength when their asset backing improves. Rising GDP and employment is asset backing and rising levels normally give the currency strength and vice versa.

Ireland is not a currency sovereign; it is a user of the euro, and the chart below shows how the euro has been trading. Ireland has next to no influence over how its adopted currency trades but is strongly influenced by it. The euro has been trending downwards ever since the 2007 GFC boom-bust, and this is helping Irish exports be more competitive on the world stage.

The Irish economy is trimmed for exports following standard neo-liberal economic principles as follows:

  1. The overriding concept is that the external sector is positive and adds to the economy. This is achieved via large export businesses selling their products overseas to achieve an overall current account surplus.

  2. The currency must be low so that the countries' products are cheap for foreigners to buy. For this to occur, the demand for imports must be suppressed so that the demand for the euro is kept low. The weaker members of the EU help keep the currency even lower than Ireland would normally have; this generates super profits and is a form of economic moat worthy of Warren Buffet.

  3. To keep imports down and the currency low, the following internal public policies are followed:

  • Wages are kept as low as possible using a stock of unemployed people.

  • Earnings are taxed as much as possible so that there is little aggregate demand in the domestic economy that might manifest itself in demand for imported goods that might drive up the value of the currency.

  • The internal economy is made as expensive as possible through privatization so that public goods such as education, health, infrastructure, power, water, roads, ports, railways, etc. that were once produced at close to cost price are now produced with a debt interest and profit charge built in. This further dampens internal aggregate demand for imports that might drive up the currency. One could say the public realm is being cannibalized and funneled into private sector profits at the same time as helping dampen aggregate demand. This is because some of the added cost to use the privatized public asset is paid out to shareholders as capital gains and dividends that did not exist when the infrastructure was publicly operated at close to cost or lower.

  • Exporting firms are taxed as little as possible or not at all. A typical example is a low corporate tax rate and a value added tax that only applies internally and not levied on exported goods. See the tax section later in this report.

  • The country's economic rent is then channeled to a few large export-oriented businesses, at the cost of the rest of the population. Business profits are maximized and expressed as capital growth in share prices and large dividend payouts. Lavish remuneration of business executives working for the large export-oriented companies is also a key feature. To share in this surplus, one has to be an owner of such a company. One can do this by being a shareholder. Dividends and capital gains are taxed at a lower rate than personal income.

  • The business model is helped in a strategic sense by the euro. The weaker members of the EU cause the euro to be lower. If Ireland had its own currency, it would be higher to reflect its economic strength. By using the euro, Ireland enjoys the benefits of an artificially lower currency than would be possible domestically with a freely floating sovereign currency.

This may not be a sustainable economic model for the long term; it is not fair or just, however, for the moment, it is working for the stock market and export businesses if for few others.

Government Sector

The government budget is shown in the chart below:

The chart shows that the government is now draining money out of the private sector. 2014 was the first net drain after a declining net add since the peak in 2009. Notice how the dot-com recession of 2000 and GFC recession of 2007 were preceded by government budgets that drained money out of the economy. The next recession cannot be more than one or two years away if past patterns are any guide.

Ireland, while a sovereign nation, is not a currency sovereign and is fiscally constrained in the same way as if it were a household or business; it can run out of money. Ireland must always manage its economy with an eye on currency reserves and bond market discipline.

As a member of the European Union, Ireland has agreed to the Fiscal Compact that specifies that government debt to GDP shall not be more than 60% and fiscal deficits shall not be more than 3% of GDP.

Fortunately, for Ireland, it is one of the few countries that benefit from the Euro membership in that it has a current account surplus run against the other members of the Union and the rest of the world. The current account deficit of countries such as France, Spain, and Italy is the surplus for countries like Ireland. At some stage, the current account surplus members of the EU will own the current account deficit members of the EU. This is happening now with Greece.

Given that each EU country is not a currency sovereign and can run out of money, we are watching a slow moving game of monopoly being played out over decades.

When a player is bankrupt, we have seen how the player is cashed out of the game. Greece and Cyprus are the first members to drop out of the game. We see daily how Greece has now to make austerity cuts in return for more loans at interest with which to pay the interest on previous loans. We see how public infrastructure is sold off to foreign buyers to pay foreign creditors. We see how the Greek government is told what to do by the ECB, IMF and World Bank, and is not working for the public purpose of the population.

The table below shows taxes. Taxes drain money out of the private sector and destroy financial assets. Taxes "unprint" money in the same way that repaying a loan does.

(Source: Trading Economics)

The tax rates are breathtakingly high. Ireland is not a currency sovereign and does need to tax and/or borrow money from the private and external sectors to fund itself. It has no organic sovereign currency creation powers.

Household aggregate demand is reduced by 62.75% for top income earners; tax plus social security. Social security is a tax as it is money that cannot be spent right now. 14.75% of gross income is deducted as pension, aged care and healthcare insurance by the employer and remitted to the relevant authority.

On top of this is a value added tax of 23% on all they buy. If the cost of accommodation were not so high taxes would be higher in order to drain off household aggregate demand that might otherwise manifest itself as demand for imported goods and so drive the exchange rate higher. This would disturb the export based market model.

The public realm is also being made more expensive to use via privatization that add a debt and profit charge onto such things as roads, healthcare, and public transport. This too drains off household aggregate demand and has the benefit of keeping the money in the private sector as income to private companies running the privatized portions of the public realm.

Companies, on the other hand, pay a fairly light 12.5% tax, enjoy lots of deductions and no value added tax on exports. Who would have thought?

With tax collection regimes like this, one sees very clearly for whom and by whom the government is running the economy: big business. This is good for investors as it channels the income into the stock market and other financial assets such as real estate. One just has to be an owner of income producing assets to take advantage of the system that has been constructed. Taxation on dividend and capital gains income has been set up to favor rent seeking and is less than the general income tax rate. An excellent environment for business owners and investors.

Sectoral Analysis Methodology

Each nation state is comprised of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it only needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

Ireland is not a currency sovereign and operates on a very fiscally constrained gold standard equivalent. It does not enjoy the currency creation and wide fiscal policy space that currency sovereignty provides.

The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector


GDP = Private Sector + Government Sector + External Sector

These are accounting entities.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards.

Applying the Numbers, Summary, and Conclusion.

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation


External Sector


Government Sector





0 %

4.9 %

0.6 %

5.5 %

(Source: Trading Economics and Author calculations based on same)

At present, the overall fiscal flows into the private sector are positive and relatively strong at 5.5%. Clearly, the external sector stands almost alone in supporting the private sector. Both other sectors are in contraction and reducing the overall flow amount. Both the fiscally constrained government and the population are using their portion of the external surplus to retire debt. The government takes from both the other sectors to reduce its debt.

Irish companies working hand in hand, or indeed running the government, are enjoying "super profits" from the artificially low euro and the privatization of the public realm to their maximum advantage. To share in this bonanza one needs to be an owner of these companies and share in the capital gains and dividends being created. One can do this using the following ETF:

iShares MSCI Ireland Capped ETF (NYSEARCA:EIRL)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.