Dr. Catherine L. Mann Barbara ’54 and Richard M. Rosenberg Professor of Global Finance

International Business School, Brandeis University Visiting Scholar, Federal Reserve Bank of Boston

www.CLMann.com

Fourth Annual Rocky Mountain Economic Summit Jackson Hole, July 2012

Global Interdependence Center

Economic Growth and Risk Appetite: A Perspective from the US Accounts

Overview

•  Growth through the international trade lens

•  Risk appetite through the capital flows lens

•  US Treasury market focus

•  Implications

2

Trade and US Growth

3

Consumption weakening. Business E&S weakening. Exports—strong for how long?

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US Exports: A Lens on Slowing Global Growth

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Global demand for capital goods driving US Exports, but is faltering—to be revised?

Demand for OPS and consumer goods very soft

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Geography of Global Growth

Deterioration in EuroZone for some time, Rest-of-Europe unlikely to avoid contagion Europe slowing slows China, slows Brazil;

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US Imports: A Lens on Slowing U.S. Growth

Consumers buy cars, nothing else Weakening of services offshoring

BUT, capital goods looks good—will it be revised down?

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Net Capital Inflows: Lens on Risk Appetite

7

Collapse in demand for corporate asset (Europe); Private flight to UST, now official again;

Sloshing of interbank flows

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Gross Capital Flows: Lens on Risk Appetite

GSE play ABS play

US Treasury ‘Supply’ Side: Stock and Flow

Congressional Budget Office(Jan 2012) .

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Percentage of GDP Percentage of GDP

No UST Crisis in 2011; Not likely 2012; Prospects for 2013?

10

Total foreign: $4.5T 3/11, $5.1T 3/12 =>Δ$600 billion last yr. Debt held by public: 2010=$9T, 2011,$10.4T=> Δ $1.4T last yr.

Peak of foreign share (61%) was in 2008, currenntly 21% owned by China&Japan

UST ‘Demand’ -- Stock: Foreign Investors

UST ‘Demand’ -- Flow: Official Asia But, Europe official management is new

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UST ‘Demand’ -- Flow: Federal Reserve QE Fed QE&QE2 as large as ‘normal’ foreign demand for UST

12

Mortgage Backed Securities

online.wsj.com/.../SB10001424052748703709804575.., October 18, 2011

QE 1 QE 2 Twist

Fed ‘exit’ will involve selling UST as USG issues more With Twist, exit will depend especially on sales of LT

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UST Auction: New Supply Meets Demand

Foreign Official buyers: Their Bucks (did) have more Bang But Fed QE has disrupted relationships…. Implications for exit?

Fed Exit and Foreign Official They like what Fed has

14

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Final Remarks on Growth

Prospects poor

•  US export and business E&S engines slowing

•  Eurozone contagion hurts RO-Europe brightness

•  China hard landing, dependence on exports, can’t

pivot to domestic

•  Every where else buffeted by big-guy downdrafts

15

Final Remarks on UST

Prospects good

•  Portfolio headroom for all types of US assets

•  Low global risk appetite supports UST demand

•  Exchange rate intervention demand around the world

•  Foreign Official like what Fed has—so exit might work

16

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17 RMES 2011

Dollar Prospects?

Currency Market Stories Dollar? •  Depreciation: Fiscal deficit, monetary policy exit fails. •  Appreciation: Portfolio headroom, rebound from historical

lows, UST purchases for intervention by others Euro? •  Depreciation: to counter fiscal austerity, sovereign crisis •  Appreciation: if crisis resolved

RMB? •  Depreciation: dependence on export-led growth,

–  but against who? •  Appreciation: only when global growth resumes,

–  and against who? 18

Thank you!

Questions?

19