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