Transcript Slide 1
The Crisis of Globalization: Safe Havens and Fatal Shores SACRS, May 13, 2009 The springtime mood • “You know, it’s been a whirlwind of activity these first hundred days. We’ve enacted a major economic recovery package, we passed a budget … Just last week, Car and Driver named me auto executive of the year. … I believe that my next hundred days will be so successful I will be able to complete them in 72 days. (Laughter.) And on the 73rd day, I will rest.” (White House correspondents’ dinner, May 9, 2009) It’s a rally! 33% But • 11 bear rallies between September 1929 and March 1934 • 15% of trading days saw DJIA rise by 2% or more So is it this? Real GDP growth: Budget forecasts 5 4.6 4.2 4 4 3.2 3 2 1.3 1 0 2008 2009 -1 -1.2 -2 2010 2011 2012 2013 Or this? Real GDP growth, 1929-34 15 10.8 10 6.8 5 0 1929 1930 1931 1932 -5 -6.4 -10 -8.6 -13.0 -15 1933 -1.4 1934 Another possibility Real GDP growth in 3 Great Depressions 15 10 5 0 t0 -5 -10 -15 t1 t2 t3 t4 t5 1873-78 1929-34 2007-12 Another “Slight Depression” The S&P 500 in 3 Great Depressions, 1872-, 1929- and 2007- (5 1/2 years after market peak) 100 90 80 70 60 May 1872 Aug-29 Oct-07 50 40 30 20 10 0 t0 t1 t2 t3 t4 t5 Why this isn’t over Anatomy of a recession, 2007-I to 2009-I 6 4 2 0 Government consumption expenditures and gross investment Net exports of goods and services 1 -2 +0.9 -0.2 -4 +2.8 Gross private domestic investment -0.5 Personal consumption expenditures -6 -8 -6.3 -10 -6.1 -12 Figures show percentage Why this isn’t over • 21.8% of all homeowners were underwater as of March 31, c/w 14.3% 6 months ago • Foreclosure filings surged 9%, to 803,489 properties, in 2009-I • 7% of homeowners with mortgages were at least 30 days late on their loans in February • Commercial real estate is next shoe to drop • Defaults on corporate bonds expected to reach Depression levels • U.S. industrial production for March declined 12.8% YoY, biggest since 1945 • April was 6th month where c.600K or more jobs were lost Last year household wealth fell by 18%, or by $11 trillion The assets keep on plunging … … while the debt burden rises The banking crisis (contd.) • 19 banks are being kept alive by Fed, FDIC and Treasury • Chargeoffs/writedowns to date: $466bn • Still to come: $535bn over 2 years (“stress test”) c/w $363bn earnings • Net capital needed $75bn • BUT Doesn’t include the $199bn of TARP they should repay • NB 34 banks have failed this year so far • Total government exposure in loans, investments and guarantees is ~$22trn • Likely losses to taxpayers ~$1trn+ Spreads have come in But new credit creation is negligible Salvaging the banks (24% of total financial sector credit) doesn’t guarantee the revival of securitization We avoided the 1930s … ... but with hyper-monetarism … and hyper-Keynesianism Gross federal debt as a percentage of GDP under two scenarios, 20082019 160% 150% 140% 130% 120% Debt as % GDP (Budget projections) Debt as % GDP (1% growth) 110% 100% 90% 80% 70% 60% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Red ink like it was 1942 • Budget 09: $1.841trn of borrowing (deficit = ~45% of spending, 12.9% of GDP) FY10: $1.258trn (8.5%) • Even if U.S. personal savings rate as % GDP returns to long-run 1947-2007 average, still only 5% (c/w 12.3% deficit) So why has the dollar rallied? … along with U.S. Treasuries? Answer: A crisis of globalization And that hits others harder • It’s an unfair world: The American crisis hurts others more than it hurts America • Because the U.S. retains “safe haven” status, despite its fiscal problems • Which is because of its relative political stability in an increasingly unstable world • Which gives it maximum fiscal and monetary room for maneuver Who’s hurting more? • • • • U.S. -2.8 Eurozone -4.2 Germany -5.6 Japan -6.2 (Figures are from April IMF WEO) • EM Europe and Central Asia -2.0% • Latin America -0.6% • Middle East/N Africa 0.3% • South Asia 3.7% • China 6.5% (World Bank) Asia’s heart attack: Year to Feb 09 Taiwan South Korea Singapore Japan Exports GDP -42% -33% -21% -49% -32% -21% -17% -31%* * Industrial production The centrifugal Eurozone • Average bank leverage much higher in most European countries than in U.S. – Germany 52:1, Belgium 33, Switzerland 29, France 28, Denmark 28, Sweden 26, UK 24 • IMF says European banks have 75% as much exposure to U.S. toxic assets as American banks – Yet write-downs have been $738bn in the U.S., just $294bn in Europe • 70-90% of East European borrowing and 54% of Asian EMs can be traced to West European banks A new “axis of upheaval”? Governments fallen • Latvia • Hungary • Czech Republic Riots and demos • Moldova • Georgia • Thailand High-stakes elections • India • South Africa Biggest political risks • Afghanistan/Pakistan • Israel/Iran Can China buck the trend? • Growth down to 6.1% in 2009-I c/w 10.6% in 2008-I • CPI -1.2% WPI -4.5% • Exports down -22.6% YoY in April • BUT fixed investment +33.9% in April • $4trn yuan ($585bn) stimulus package—more infrastructure spending plus aid to poor farmers, cuts in export taxes and overhaul of healthcare • That’s ~12% of China’s GDP, and 1% of world GDP • Net imports of iron ore +33% oil +13.7% in April The China effect: Commodities rally Source: http://www.metalprices.com/ Commodity currencies too And so do BRIC stocks So what can China do for us • “Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion-$2 trillion … we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” (Luo Ping, a director-general at the China Banking Regulatory Commission, Feb. 11) How much can China buy? • Roughly two-thirds of Chinese central bank’s $1.95trn in foreign reserves are already in American securities • China’s foreign reserves grew $7.7bn in the first quarter of this year c/w $153.9bn in 2008-I – Fell $32.6bn in January and another $1.4bn in February before rising $41.7bn in March • Deutsche Bank predicts reserves will rise only $100bn this year c/w $418bn 2008 The bond glut to come Total new issuance by U.S., UK, Japan, Euroland, Canada, Aus. economies will be ~$4.2trn this year Might there be a US policy conflict? So far, the Fed has bought just $44bn of U.S. debt … Lessons of the 1870s • The crisis isn’t over, despite springtime green shoots • The U.S. benefits from the asymmetric impact of this crisis • ... which is worse for the E.U. as well as Japan and other E Asians • But it’s not clear that combining Friedman and Keynes can restore rapid growth in the U.S. • The lesson of the 1870s is that you can have a protracted depression without a collapse of growth • But this time around China plays the part of the U.S.; the U.S. gets to be the UK • The real challenge for the U.S. lies in financing its deficit without pushing up long rates