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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 output
               Source: 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) ...
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 ...
TOTAL VALUE
OF IRISH DEBT
     HAS
 DOUBLED
2002: 876 BN
2008: 1,600 BN
   €1.6 Trillion.
       Source: IMF
2002       2003    2004    2005   2006   2007   %∆

France       22.5      24.1      26    28.8   32.9   34.9    55

Finla...
Downturn is Unprecedented.




          Source: CSO
!"#$%&'()*+,-#.)-,/#(0#1()+2',&#
                     3&*4,+#
)#
(#
'#
"#
$#
%#
&#
!%#   $&&%#   $&&$#   $&&"#    $&&'#   ...
ASSET PRICE DEFLATION




       Source: Ronanlyons.com
AND
HAS THERE BEEN
A COLLAPSE IN
PRIVATE SECTOR
CREDIT?
    Hell Yes.




         Source: Central Bank, Sectoral Developm...
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 la...
2/3. THIS BUDGET.
     Only 1 of 4.
FISCAL CORRECTION
#BUDGET10
Capital investment
                      Mortgage default
slashed
                      moratorium~beware!
70 mi...
SUMMARY OF PART 2.
Budget is 2nd of 4. More cuts to come, more pain to be
                       endured.
3/3. LOOKING FORWARD
  We created the crisis. We can solve it.
INTERLOCKING CHALLENGES
Pensions.




Ireland’s
population will
have aged.
2006                   2026       2056


             2,000,100          2,268,000      2,125,000
# in work


            ...
Pensions shouldn’t be risky.
                        47.0%




                                                        34....
SO. NEED A SAVINGS
PRODUCT WHICH IS
 (ALMOST) RISKLESS.
Climate change will
 be a daily reality.




     Levees
Flood protection
SO. NEED MASSIVE
   INFRASTRUCTURAL
 INVESTMENT TO DEFRAY
COSTS OF CLIMATE CHANGE
Cash Strapped
Pension Provision     Business Unfriendly
                       Local Authorities


          Infrastructur...
INCREASE INFRASTRUCTURAL
        INVESTMENT




                          64th
1.Why? What we have
  sucks.

2.We can’t co...
!"#$%&'()*&+*,(-.*/&&

$!




           !"
                #!!!"
                        $!!!"
                          ...
HOW TO PAY FOR THIS?
MUNICIPAL BONDS
Definition. Debt instruments issued by local authorities to
finance investment projects.

Municipal bonds ca...
Local Authority
Advisor/
 Rating              Underwriter
Agency




                                                     ...
1. Increase infrastructural investment
2. Encourage entrepreneurs~ Business
friendly policies. Reduce rates.
3. Remove tax...
SUMMARY OF PART 3.
Investment in infrastructure will be the way to compete in the
            next 20 years. Long term foc...
“SMALL STATES MUST RELY HEAVILY ON THE
QUALITY OF THEIR STRATEGIC THINKING TO
COUNTER THEIR VULNERABILITY TO
INTERNATIONAL...
QUESTIONS?
DESIGNING A STRATEGY FOR
    ECONOMIC RECOVERY
Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie
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Designing a Strategy for Economic Recovery

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A talk given on 11.12.09 to Mid West Chartered Accountants on Ireland and Municipal bonds.

Published in: Economy & Finance, Business
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Designing a Strategy for Economic Recovery

  1. 1. DESIGNING A STRATEGY FOR ECONOMIC RECOVERY Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie
  2. 2. TODAY. Context. Today’s Budget. Looking (far) Ahead.
  3. 3. HELLO.
  4. 4. WE DID THIS TO OURSELVES BY THINKING SHORT-TERM.
  5. 5. 1/3. Context.
  6. 6. PHOENIX TO TIGER. Source: Maddisson, 2008.
  7. 7. Construction as % of national output Source: CSO
  8. 8. Bubblicious. Source: GUI.
  9. 9. Ireland and Japan: Great Similarities. Source: Bloomberg
  10. 10. 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.
  11. 11. BAD NEWS FOR THOSE IN DEBT.
  12. 12. 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.
  13. 13. TOTAL VALUE OF IRISH DEBT HAS DOUBLED 2002: 876 BN 2008: 1,600 BN €1.6 Trillion. Source: IMF
  14. 14. 2002 2003 2004 2005 2006 2007 %∆ France 22.5 24.1 26 28.8 32.9 34.9 55 Finland 21.5 24.7 27.3 30.9 32.4 34.3 59 German 43 43.4 43 42.9 42.3 47.7 10 y Greece 14.7 16.9 19.6 23.7 26.8 30.2 105 Hungar 0 7.7 9.4 10.2 11.9 12.4 61 y Iceland 88 86.3 88.8 102.1 - 121 37 Ireland 34 39 50 58.8 63.4 75.3 121 Mortgage Debt as % of GDP, selected countries.
  15. 15. Downturn is Unprecedented. Source: CSO
  16. 16. !"#$%&'()*+,-#.)-,/#(0#1()+2',&# 3&*4,+# )# (# '# "# $# %# &# !%# $&&%# $&&$# $&&"# $&&'# $&&(# $&&)# $&&*# $&&+# $&&,# !$# !"# Source: CSO, October 2009 HICP Figures.
  17. 17. ASSET PRICE DEFLATION Source: Ronanlyons.com
  18. 18. AND HAS THERE BEEN A COLLAPSE IN PRIVATE SECTOR CREDIT? Hell Yes. Source: Central Bank, Sectoral Developments in Private Sector Credit, Sept. 2009.
  19. 19. We have seen this before. Japan.
  20. 20. COLLAPSE IN AGGREGATE DEMAND Source: IMF Country Report.
  21. 21. 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.
  22. 22. 2/3. THIS BUDGET. Only 1 of 4.
  23. 23. FISCAL CORRECTION
  24. 24. #BUDGET10 Capital investment Mortgage default slashed moratorium~beware! 70 million for flood Carbon taxes victims Pension reform Tax breaks for mooted. startups National Recovery Credit review for Bonds banks
  25. 25. SUMMARY OF PART 2. Budget is 2nd of 4. More cuts to come, more pain to be endured.
  26. 26. 3/3. LOOKING FORWARD We created the crisis. We can solve it.
  27. 27. INTERLOCKING CHALLENGES
  28. 28. Pensions. Ireland’s population will have aged.
  29. 29. 2006 2026 2056 2,000,100 2,268,000 2,125,000 # in work 464,000 844,000 1,532,000 # > 65 4.3 2.7 1.4 # in work/ # > 65 Source: Irish Pensions Board
  30. 30. Pensions shouldn’t be risky. 47.0% 34.2% 19.1% 19.9% 17.6% 15.4% 13.5% 12.3% 8.2% 2.6% 1.2% 1.1% -4.2% -5.7% -11.6% -18.9% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 g g Av Av 19 19 19 19 19 19 19 19 19 19 20 20 20 20 rs rs a a Ye Ye 5 10 (Deliberately excluding 2007-2009 years) Source: Mercer Human Resource Consulting
  31. 31. SO. NEED A SAVINGS PRODUCT WHICH IS (ALMOST) RISKLESS.
  32. 32. Climate change will be a daily reality. Levees Flood protection
  33. 33. SO. NEED MASSIVE INFRASTRUCTURAL INVESTMENT TO DEFRAY COSTS OF CLIMATE CHANGE
  34. 34. Cash Strapped Pension Provision Business Unfriendly Local Authorities Infrastructural Investment
  35. 35. INCREASE INFRASTRUCTURAL INVESTMENT 64th 1.Why? What we have sucks. 2.We can’t compete on wages anymore. 3.We have lots of construction workers. Source: Global Competitiveness Report
  36. 36. !"#$%&'()*&+*,(-.*/&& $! !" #!!!" $!!!" %!!!" &!!!" '!!!" (!!!" !) $! *! !) #" $! *! !) $" $! *! !) %" $! *! !) &" $! *! !) '" $! *! !) (" $! *! !) +" $! *! !) )" $! *! !) ," $! *# !) !" $! *# !) #" $! *# !, $" '()*&+*,(-.*/=& $! *! !, #" $! *! !, $" $! *! !, %" $! *! !, &" $! *! !, '" $! *! !, (" $! *! !, +" 012*-&345*/&67&(4&.8*&'(9*/(:;&+*,(<4&<4&.8*& $! *! !, )" * !, "
  37. 37. HOW TO PAY FOR THIS?
  38. 38. MUNICIPAL BONDS Definition. 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
  39. 39. Local Authority Advisor/ Rating Underwriter Agency Revenues Issuer Projects Bank Bonds Markets Funds Interest/Principal
  40. 40. 1. Increase infrastructural investment 2. Encourage entrepreneurs~ Business friendly policies. Reduce rates. 3. Remove tax structures 4. Reform local authorities
  41. 41. SUMMARY OF PART 3. Investment in infrastructure will be the way to compete in the next 20 years. Long term focus is key.
  42. 42. “SMALL STATES MUST RELY HEAVILY ON THE QUALITY OF THEIR STRATEGIC THINKING TO COUNTER THEIR VULNERABILITY TO INTERNATIONAL INFLUENCES” ––JOE LEE
  43. 43. QUESTIONS?
  44. 44. DESIGNING A STRATEGY FOR ECONOMIC RECOVERY Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie

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