Transcript Slide 1

Is Global Liquidity Excessive?
AFGAP and ALMA International Conference
June 15th, 2007
Liquidity….
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….is a many-faceted concept
Liquidity can be defined in many ways*.
 Market liquidity: the ease with which an asset can be sold, particularly
whether this can be done in large volume without depressing the price.
 Institutional liquidity: an institution is liquid if its balance sheet has a
high proportion of assets whose value can be quickly realized to meet
debts.
 Monetary liquidity: originally liquidity referred to base money. More
loosely, it had come to be used as a general reflection of the stance of
policy and monetary conditions. In this loose meaning, it can either be a
price (an interest rate) or a quantity (one of the monetary aggregates or
credit).
(*) Stephen Grenville, The Lowy Institute for International Policy
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A commonly held view is that
“global liquidity” is excessive
Policy rates
(%)
It is often argued that past
excessive monetary liquidity
has
led
to
excessive
institutional liquidity hence an
increase in many asset prices
and…
… ,possibly, tomorrow an
increase
in
goods
and
services’ prices.
7
6
United States
5
4
3
2
Euro area
1
Japan
0
99
00
01
02
03
04
05
06 07
Source: Thomson Datastream
7/7/2015
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How appropriate is this view?
1. Japan, the last place were interest rates remain close to
zero, seems to affect global liquidity only marginally.
2. In the emerging world, institutional liquidity is high, will
decrease only slowly and could impact some asset
prices.
3. In the US and the euro area, despite high past growth in
monetary aggregates, only firms may be more liquid than
in the past
4. This rather reassuring view seems corroborated by a
quick look at the present level of prices for the biggest
asset classes (bonds, real estate and stocks)
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1. Since the beginning of 2006,
Japan has given up it’s quantitative easing policy
Monetary policy targeting
(Trillion yen)
35
30
25
20
15
10
5
0
98
99
00
01
02
Current deposits at the Bank
03
04
05
06
Required reserves
Source: Thomson Datastream
7/7/2015
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Carry trade is the main lever of the central bank:
the liquidity “injected” in the ROW is relatively small...
Japanese balance of payments
(100 billions of Yen, 12 months moving average, annual rate)
Short term loans
Portfolio investment
250
200
150
150
100
50
50
-50
0
-150
-50
-100
-250
-150
-350
-200
-450
92 94
96 98 00
02 04
06
-250
00
01
02
03
04
05
06
07
Equity Securities
Short term loans
[ (-) = capital outflow]
Debt securities
Change in reserves
[ (-) = increase in reserves]
Source: Bank of Japan
7/7/2015
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… but monetary policy clearly affects
the foreign exchange market
Exchange rates and short term rates differentials
Yen to one euro
Yen to one dollar
166
3.6
3.4
160
3.2
123
4.2
122
4.0
120
3.8
3.0
154
148
2.8
O
N D
J
F M A
2006
2007
Yen to one euro
M
3.6
118
2.6
116
2.4
115
Short term rates differential
at June 08 (Euro minus Japan) [R.H.S.]
3.4
O
N D
J
F M A
2006
2007
Yen to one dollar
M
3.2
Short term rates differential
at June 08 (US minus Japan) [R.H.S.]
Source: Thomson Datastream
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2.Today’s international payments imbalances are partly
explained by high saving rates in emerging countries
Saving and investment
in the saving-surplus regions
1984-2005
Counterparts of
the US current account deficit
1 200
(billion dollars)
(% of the region’s GDP)
45
1 000
Middle East
33
25
28
15
600
5
400
23
84 88 92 96 00 04
18
Developing Asia
43
38
38
0
33
33
2000 2001 2002 2003 2004 2005 2006
28
28
Euro area
23
23
Rest of the world
18
Middle East + Russia
Asia ex Japan
Japan
84 88 92 96 00 04
Saving
84 88 92 96 00 04
Japan
43
200
Asian NICs
38
35
800
43
18
.
84 88 92 96 00 04
Investment
Source: IMF
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This goes with an accumulation of liquid
assets by private agents in Asia…
Household financial assets
structures in 2005
Deposits as a % total financial assets
(% of total)
Korea
Japan
Euro 6
US
0%
20% 40%
Cash and deposits
Pension funds
and insurance
Mutual funds
60% 80%
Bonds
100%
70
Deposits as a percent of
household financial assets
and wealth distribution
R²= 0.52
Korea
60
Japan
50
40
30
20
10
US
0
20
30
40
50
60
Wealth share of the lowest 90%
70
Shares and other equity
Miscellaneous
Sources: National central banks, Davies et al. ( 2006)
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…but also by public authorities
in many emerging countries
Memo:
Forex reserves do
underestimate the
amount of external
assets accumulated by
some emerging
countries
Foreign exchange reserves
($ billions)
2500
Developing Asia
2000
1500
1000
500
98
00
02
800
Eastern Europe
600
Western
Hemisphere
400
06
1500
China
1000
500
200
0
04
Africa
Middle East
98
00
02
Russia
Korea
04
06
0
98
00
02
04
The Middle East had $240 billions of
Forex reserves in 2006, but more than
$1500 billions in foreign assets.
06
Source: Thomson Datastream
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3. In the United States, it is difficult to say
that households are “excessively liquid”
Households liquid assets
(deposits and credit market)
120
(% of disposable income)
110
100
90
80
52
40
62
(% of financial assets)
72
82
92
02
(% of total assets)
25
35
20
30
25
15
20
15
52
62
72
82
92
02
10
52
62
72
82
92
02
Source: Thomson Datastream
7/7/2015
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But, compared to the recent past,
the liquidity of firms has increased somewhat
Non financial corporations liquid assets
250
(% of internal funds)
200
150
100
50
52
50
62
(% of financial assets)
40
82
92
10
02
(% of total assets)
8
30
6
20
4
10
0
52
72
62
72
82
92
02
2
52
62
72
82
92
02
Source: Thomson Datastream
7/7/2015
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In the euro area, the sharp rise in monetary aggregates
has been driven more by firms than by households
M3 deposits by agent
(1999 = 100)
190
170
M3
(1999 = 100)
190
Amount
170
150
130
36
Other Financial Intermediaries
(as a share of GDP)
90
34
Households
32
Non FinancialCorportations
(as a share of gross operating surplus)
30
28
97
110
150
Currency and deposits as a
share of total financial assets in
the euro area* (%)
Houhesholds
99
03
05
14
Non financial
corporations
(as a share of disposable income)
99 00 01 02 03 04 05 06 07
01
12
130
M3 deposits by agent
(as a share of M3)
110
as a % of nominal GDP
90
99 00 01 02 03 04 05 06 07
10
60
8
97
40
20
0
HHD
NFC
OFIs
99
01
03
05
(*) Euro area has been here
approximated by aggregating the
following
economies:
Germany,
France, Italy, Spain, Netherlands and
Belgium.
Sources: Thomson Datastream, ECB, National central banks
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4. In many developed economies,
house prices seem to have increased exaggeratedly
House prices dynamic
simulation since 1999
Nominal house prices
(1996=100)
450
330
OFHEO index
400
280
+15%
350
300
230
Estimated
250
180
200
150
130
100
80
96 97 98 99 00 01 02 03 04 05 06 07
92 94 96 98 00 02 04 06 08
United States
Spain
France
Sources: Thomson Datastream, Dexia-AM
7/7/2015
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But the same cannot be said of bond prices…
Long term reference level for 10-year interest rates
Euro area
United States
16
16
14
14
Reference level
12
12
10
%
8
10
%
8
6
6
4
Observed 10-year rate
4.1
2
0
0
75
80
85
90
95
00
05
5.0
Reference level
4
2
70
Observed 10-year rate
70
75
80
85
90
95
00
05
Source: Dexia-AM
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And recently, long term interest rates have been fluctuating
mainly with revisions of monetary policy expectations
Interest rates
(%)
United States
Euro area
4.5
4.6
4.4
4.4
4.3
4.2
5.4
4.1
5.2
3.9
3.8
3.8
3.7
3.6
3.6
3.5
3.5
M A M J J A S O N D J F M A M
2007
2006
5.2
5.6
4.2
4.0
4.0
5.3
5.8
5.1
5.0
4.9
4.8
5.0
4.7
4.8
4.6
4.6
4.4
4.5
M A M J J A S O N D J F M A M
2006
4.4
2007
3-month euribor – December 2008
3-month eurodollar - December 2008
10-year interest rate (Germany)
10-year interest rate [R.H.S.]
[R.H.S.]
Source: Thomson Datastream
7/7/2015
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Finally, despite their recent rise to record
levels…
Stock market indices
In dollars
400
300
In local currencies
MSCI EMU
(1980 = 100)
S&P
1600
200
100
0
Emerging countries
95
97
99
01
03
SP500
1200
05 07
800
600
400
In local currencies
Shanghai A share
250
Eastern Europe
200
DAX 30
Latin
America
Global
Nasdaq 100
97 98 99 00 01 02 03 04 05 06 07
100
50
400
0
150
200
0
In dollars
300
Middle East
TOPIX
80
84
88
92
96
00
04
Asia
2005
2006
2007
Source: Thomson Datastream
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… developed countries’ stock markets are not overvalued
SP 500
MSCI EMU
300
Reference
250
1600
SP500
1200
200
100
MSCI EMU
50
0
73
Long term
reference level
800
150
77
81
85
89
93
97
01
05
Reference
400
0
65 69 73 77 81 85 89 93 97 01 05
100
100
80
80
60
60
40
40
% 20
% 20
0
0
-20
-20
-40
-40
-60
73
77 81
85 89
93 97
01
05
-60
Observed gap
65 69 73 77 81 85 89 93 97 01 05
Source: Dexia-AM
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To conclude:

There is no « global » excess liquidity.

There is no reason to expect a brutal change in
global liquidity.

Some pockets of over-liquidity exist and this may
affect some specific asset classes (emerging
markets, private equity).
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