A chance conversation this week with a builder friend who specializes in high-end home renovations got me thinking about the months to come.

He told me that many construction works in his area are cancelled. As the price of labor and materials soar, only those who absolutely must build continue to plow. The others are delaying the work. Customers balk at costs.

Take, for example, a renovation of a reasonably expensive house where the client could have calculated a budget of €700,000 last year to cover all the work. This year, €700,000 will only cover part of the work and so rather than chasing the market up, clients are postponing until the value resurfaces. However, the ripple effect in trade is enormous: each canceled job leads to another as news spreads.

Many small contractors are in the renovation business. They talk to each other, and now they’re battening down the hatches.

The economic cycle is nothing more than an expression of human nature. People get dizzy together and depressed together. The economy is social. It is driven as much by the mood of the moment as by fundamental factors. Fundamental factors, such as rising interest rates, can change moods, but the process of amplification is rooted in the age-old way humans influence each other through gossip and general buzz.

Humans are a kind of crowd. We both love a crowd and love being part of a crowd. We try to convince ourselves that we are independent, but that’s only half true. Humanist philosophy tries to paint us as sovereign creatures driven by free will. Mainstream economics endorses this view, claiming that humans are scientific and rational beings, free from bias or prejudice, driven by rationality. But that’s not how the world works: we are a social animal deeply affected by the opinions of others.

The economic cycle reflects this process. When we are confident, our confidence infects those around us, prompting us to take risks that we otherwise might not be able to take. Driven by FOMO (“Fear Of Missing Out”), we abandon caution and imagine a rosy future, placing our bets today, guaranteed to reap profits tomorrow. This is what we call a boom.

Mood swings are contagious, and pretty quickly a robust economy can look fragile. The promises made in the vertiginous phase seem unreachable

A slump works the same way but in the opposite direction. Joy of life and optimism are tempered by anxiety and fear. Ideas that seemed sensible yesterday now appear foolhardy. People gossip about money lost rather than profits made, and the crowd shifts from advance mode to retreat mode. Mood swings are contagious, and pretty quickly a robust economy can look fragile. The promises made in the vertiginous phase seem unrealizable and there is a great reset. Apparently the actual changes on the ground may be imperceptible, but once the mood changes, the reality changes.


In reality, inflation has changed the game. Many believe that the price increases will reverse. Indeed, the cancellation of construction jobs until prices fall reflects this expectation. If people thought inflation was here to stay, they would bring construction work forward because the deal would come up today, rather than waiting until tomorrow when the costs would be even higher.

The problem with waiting for prices to drop is that they can take a while. During this period, activity may reverse rapidly. This is what we might face. As interest rates rise, albeit slightly, people’s perceptions change rapidly. The economy could collapse.

The reality is that commodity prices are already falling, as are oil prices and shipping prices; Meanwhile, in financial markets, leading indicators point to lower inflation in the months ahead, but that may not matter too much. If people’s incomes are being sapped by rising food and energy prices and these price increases shift from one commodity to another as crowd dynamics take hold, then we will have a slowdown before prices fall.

This process is known as a recession, and it could be imminent.

For many of us in this country, the word recession conjures up dramatic images of the last great. Fear not, this inflation-related crash won’t be half as dramatic as the post-2008 fiasco, and the reason for that is household debt. Ireland rushed into the 2008 crisis with a national balance sheet tied to the housing market via the failing banking system.

As I said publicly at the Bank Inquiry and have repeated over and over in the years leading up to the crisis, ‘the Irish economy was doomed’. It was inevitable.

Worse still, the ensuing recession was of the most debilitating type: known in economics as a “balance sheet” recession, it leads to the destruction of the country’s balance sheet. The asset side of the balance sheet (housing) is collapsing, but the liability side (outstanding borrowings) is worsening, causing a dramatic squeeze in income across the board. When asset prices fall, only those with money can buy bargains, and when the country is bankrupt, those cash-rich investors are usually foreign investors, leading not only to a local recession, but also the massive transfer of national wealth to foreign funds, aggravating poverty with ignominy.

It is unlikely to happen this time.

Blown foam

This time the recession or downturn will likely be less debilitating and certainly less profound. Froth will be blown out of the economy and prices will fall as demand recedes and savings rise as people wait for value to reappear.

Since most businesses work on a fixed-margin model, the only way to maintain margins if costs rise is to raise prices, which erodes customer value. If the customer refuses to buy, as is currently the case in the construction sector, the economy will be put on hold, waiting for costs to come down.

For the next few weeks, keep your ears to the ground, listen to the gossip, leave nothing out, and realize the herd is on the move.

Just as there was every reason to panic in 2008, there is no need to panic right now. We see normal crowd dynamics taking hold. Critical metrics aren’t that out of whack. The debt/income ratios are correct; the same goes for debt relative to asset prices; the national treasury is reasonably dynamic; and, systemically, the global financial system, while stressed, is not near breaking point as it was in 2008. The recent stock and technology market crashes are a welcome development.

However, when the crowd turns, long-term forecasts are no longer relevant. From there, the rule is to be vigilant. For the next few weeks, keep your ears glued to the ground, listen to the gossip, don’t overlook anything, and realize that the herd is on the move. In terms of opinions, what was common yesterday is redundant today; what was radical yesterday is the central case today. In terms of politics, it would be wise to be patient, to let events take their course and not to panic.