Sunday, March 8, 2009

How big is our Capital Stimulus - NDP and Public Policy Waste

In the US, according to Bloomberg, $1.6 trillion has been erased from equities values since January 20, implying that approximately $800bn of this is attributable to "the market's reaction to the stimulus plan". Furthermore, since "a standard assumption is that the marginal propensity to consume out of wealth is 5 percent. That would mean $40 billion less in spending. Then there is the effect on investment of the drop in Tobin's q (the ratio of the market value of capital, reflected in stock prices, to the cost of capital goods). These effects kick in immediately, while much of the [Obama] stimulus will not kick in until next year. So is the multiplier for the stimulus positive or negative?"

A good question to ask in the context of Irish Government policies as well. So let us do the maths. Per Table below,
overall Irish Stock Exchange market capitalization (measured by ISEQ Overall Index Cap) lost €4.1bn since January 1, 2009 and €54.3bn since the arrival of this Government. Thus, losses in consumption out of wealth alone over the latter period can be estimated at more than €2.7bn. For Tobin-q induced losses, the figure is a whooping €39.7bn.

In my analysis of Anglo-Irish shares (here), I showed that the regulatory risk premium on the bank implied a 69% downward revision in the share price from fundamentals-determined values. Let us, for the sake of an argument, assume that a similar process of downgrades applies to the Irish market as a whole.

As picture below shows, current market differential between ISEQ and its US peers is in the region of -53% for ISEQ. This is the total risk premium differential on the Irish shares. Suppose that ca 40-50% of this is due to the Government policies in the markets and on economy. Recall that in the Anglo case it was 69%, while in Bloomberg estimate for the US - a country where the Government and Monetary Authorities were much quicker and proactive in policy formation and implementation than our 'Don't Panic' Brians&Mary. Thus, my 40-50% assumption is a conservative one.

What do we have?

Since June 1, 2008 – the time of the new Cabinet take over – a cumulative wealth-destruction effect of the deficient public policies (imputed on ISE losses alone) has contributed to the consumer demand contraction of roughly €1.1-1.4bn, plus a Tobin effect of €6.4-7.9bn. The grand total losses attributable to our Government's policies failures for June 2008-present comes to €7.5-9.3bn.

Now, recall that the Government has promised repeatedly that we are going to have a significant economic stimulus via an NDP-driven capital expenditure program which was aiming to provide €10.3bn in net capital expenditure (per January DofF estimates) in 2009. Together with 2008, total capital investment for 2008-2009 was to be €21.2bn, or roughly €15.8bn between June 1, 2008 and December 31, 2009.

Even assuming this figure holds through the mini-Blood-Letting-Budget of March 2009, Government's failure to present a strong policy front to the market has already cancelled out some 47-59% of the entire 'stimulus'... And we are only 2 months into 2009!

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