DESIGNING A STRATEGY FOR ECONOMIC RECOVERY

Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie

TODAY.

Context.Today’s Budget.Looking (far) Ahead.

HELLO.

WE DID THIS TO OURSELVES BY

THINKING SHORT-TERM.

1/3.Context.

PHOENIX TO TIGER.Source: Maddisson, 2008.

Construction as % of national outputSource: CSO

Bubblicious.Source: GUI.

Ireland and Japan: Great Similarities.Source: Bloomberg

DEFLATION IS GOOD NEWS FOR SHOPPERS*

2006: 100 (income)/10(Price) = 10 Units of Good.

2007: 100 (income)/5 (Price) = 20 Units of Good.

*Who still have jobs.

BAD NEWS FOR THOSE IN

DEBT.

Deflation increases the value of debt.

A loan of 100 euros today may be worth 107 euros when it is repaid, decreasing the purchasing power of the debtor at the very time when the economy requires increased levels of consumption and investment.

TOTAL VALUE OF IRISH DEBT

HAS DOUBLED

€1.6 Trillion.

2002: 876 BN2008: 1,600 BN

Source: IMF

2002 2003 2004 2005 2006 2007 %∆

France

Finland

Germany

Greece

Hungary

Iceland

Ireland

22.5 24.1 26 28.8 32.9 34.9 55

21.5 24.7 27.3 30.9 32.4 34.3 59

43 43.4 43 42.9 42.3 47.7 10

14.7 16.9 19.6 23.7 26.8 30.2 105

0 7.7 9.4 10.2 11.9 12.4 61

88 86.3 88.8 102.1 - 121 37

34 39 50 58.8 63.4 75.3 121

Mortgage Debt as % of GDP, selected countries.

Downturn is Unprecedented.

Source: CSO

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Source: CSO, October 2009 HICP Figures.

ASSET PRICE DEFLATION

Source: Ronanlyons.com

5

seen declines of 9.4 per cent and 8.4 per cent respectively from their peaks in Q3 and Q2 2008.

These latter two sectors combined account for almost 50 per cent of all non-property related

business credit outstanding, and had witnessed the most significant growth rates in credit to

non-property sectors prior to mid-2008.

The pace of decline in lending to the property related business sectors (construction and real

estate activities combined) increased in Q3 2009, as year-on-year credit outstanding to these

sectors fell by 9 per cent, compared with a decline of 3.7 per cent in the year ending Q2 2009.

Credit advanced to these sectors declined during Q3. Both the annual and

quarterly developments in lending to the construction and real estate sectors are mostly due to

valuation effects such as increased levels of bad debt provisions and write-downs of loans.

Total property-related lending3 fell 4.1 billion in Q3 2009. This

1.9 billion in Q2 2009. Property related lending was 3.8 per cent

lower at end-Q3 2009 compared with end-Q3 2008. This is heavily influenced by the

increased levels of bad debt provisions and write-downs of loans to the real estate and

construction sectors in the past year.

3 Property-related lending in the context of Table 1 is defined as lending to real estate activities, construction and residential mortgages (including securitised mortgages). While it is acknowledged that a significant, but unquantified portion of lending to the construction sector is not property related (for example, construction work on infrastructural projects), it is usual to include this sector in property-related lending.

ANDHAS THERE BEEN A COLLAPSE IN PRIVATE SECTOR CREDIT?

Source: Central Bank, Sectoral Developments in Private Sector Credit, Sept. 2009.

Hell Yes.

We have seen this before.Japan.

COLLAPSE IN AGGREGATE DEMAND

Source: IMF Country Report.

SUMMARY OF PART 1.We arrive in 2010 at 2004 wealth levels, in need of ECB

support, with the fruits of the Tiger years largely lost.

2/3. THIS BUDGET.Only 1 of 4.

FISCAL CORRECTION

#BUDGET10Capital investment slashed

70 million for flood victims

Tax breaks for startups

Credit review for banks

Mortgage default moratorium~beware!

Carbon taxes

Pension reform mooted.

National Recovery Bonds

SUMMARY OF PART 2.Budget is 2nd of 4. More cuts to come, more pain to be

endured.

3/3. LOOKING FORWARDWe created the crisis. We can solve it.

INTERLOCKING CHALLENGES

Ireland’s population will have aged.

Pensions.

2006 2026 2056

# in work

# > 65

# in work/# > 65

2,000,100 2,268,000 2,125,000

464,000 844,000 1,532,000

4.3 2.7 1.4

Source: Irish Pensions Board

Pensions shouldn’t be risky.

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

5 Yea

rs Avg

10 Yea

rs Avg

-11.6%

13.5%

1.2%

47.0%

-4.2%

17.6%15.4%

34.2%

19.1% 19.9%

2.6%

-5.7%

-18.9%

12.3%

1.1%

8.2%

(Deliberately excluding 2007-2009 years)Source: Mercer Human Resource Consulting

SO. NEED A SAVINGS PRODUCT WHICH IS (ALMOST) RISKLESS.

Climate change will be a daily reality.

LeveesFlood protection

SO. NEED MASSIVE INFRASTRUCTURAL

INVESTMENT TO DEFRAY COSTS OF CLIMATE CHANGE

Pension Provision

Infrastructural Investment

Cash Strapped Business Unfriendly Local Authorities

INCREASE INFRASTRUCTURAL INVESTMENT

1.Why? What we have sucks.

2.We can’t compete on wages anymore.

3.We have lots of construction workers.

64thSource: Global Competitiveness Report

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HOW TO PAY FOR THIS?

MUNICIPAL BONDSDefinition. Debt instruments issued by local authorities to finance investment projects.

Municipal bonds can finance important local projects that won’t get funded otherwise.

An aging population requires increased pension provision. We need to compete on infrastructural excellence.

Municipal bonds are working now in the US and Europe: Build America just increased and re-issued their tax-efficient subsidised debt product to the tune of 56 billion

Local Authority

Issuer

UnderwriterAdvisor/Rating Agency

Bonds Markets Funds

Interest/Principal

Bank

Projects

Rev

enue

s

1. Increase infrastructural investment2. Encourage entrepreneurs~ Business friendly policies. Reduce rates.3. Remove tax structures 4. Reform local authorities

SUMMARY OF PART 3.Investment in infrastructure will be the way to compete in the

next 20 years. Long term focus is key.

“SMALL STATES MUST RELY HEAVILY ON THE QUALITY OF THEIR STRATEGIC THINKING TO COUNTER THEIR VULNERABILITY TO INTERNATIONAL INFLUENCES” ––JOE LEE

QUESTIONS?

DESIGNING A STRATEGY FOR ECONOMIC RECOVERY

Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie