the outlook for the u.s. and global economies dan north euler hermes chief economist, north america...
TRANSCRIPT
The Outlook for the U.S.
and Global EconomiesDan NorthEuler Hermes Chief Economist, North America
MAY 2012MAY 2012
2 2012 | © Copyright Euler Hermes
The Outlook May, 2012The Outlook May, 2012
• Overall Cautious OptimismOverall Cautious Optimism• RisksRisks
• Debt uncertainty in Europe/U.S.Debt uncertainty in Europe/U.S.• A positive, but weak U.S. economyA positive, but weak U.S. economy
• Forces and measuresForces and measures• Government responsesGovernment responses
• ConclusionsConclusions
ntshlntshl
3 2012 | © Copyright Euler Hermes
The Economic Outlook for 2012 in a nutshellThe Economic Outlook for 2012 in a nutshell
Eur dbtEur dbt
World growth should fall from 3.0% in 2011 to +2.7% for World growth should fall from 3.0% in 2011 to +2.7% for 2012, with emerging economies leading the way (Asia 2012, with emerging economies leading the way (Asia ex-Japan, China, India, Latin America). ex-Japan, China, India, Latin America).
In the US, growth should be around 2% for 2012. In the US, growth should be around 2% for 2012.
Recession in the Euro zone which will be severe for Recession in the Euro zone which will be severe for several economies. Risk of disorderly default or exit several economies. Risk of disorderly default or exit from the EMU is rising.from the EMU is rising.
4 2012 | © Copyright Euler Hermes
European Debt Crisis European Debt Crisis UncertaintyUncertainty
• This started over This started over 2 yrs2 yrs ago. Europe is burning while its leaders ago. Europe is burning while its leaders fiddle.fiddle.
• What happens whenWhat happens when Greece defaults again?Greece defaults again?• What happens ifWhat happens if Italy, Spain, France need bailouts?Italy, Spain, France need bailouts?• Latest plan: fiscal unity + ECB printing €’s. Had fiscal targets Latest plan: fiscal unity + ECB printing €’s. Had fiscal targets
before – ignored. before – ignored. • Will also need European Financial Stability Fund (EFSF) 500B €, Will also need European Financial Stability Fund (EFSF) 500B €,
IMF, EU. China? U.S. Fed / taxpayer? IMF, EU. China? U.S. Fed / taxpayer? • 7 changes in government7 changes in government• 9 downgrades9 downgrades• Dozens of meetingsDozens of meetings• 17 countries, heads of state, finance ministers, central banks, 17 countries, heads of state, finance ministers, central banks,
commercial banks, ECB/IMF/EU.commercial banks, ECB/IMF/EU.• It’s visibility goes up and downIt’s visibility goes up and down• Problem is UNCERTAINTY!Problem is UNCERTAINTY!
Afct usAfct us
5 2012 | © Copyright Euler Hermes
European Debt Crisis European Debt Crisis UncertaintyUncertaintyHow Does It Affect Us?How Does It Affect Us?
• Exports to EuropeExports to Europe<2% of our GDP<2% of our GDP
• Financial contagionFinancial contagionPossibility that our banks are exposed to losses Possibility that our banks are exposed to losses
in in Europe - all debt markets are eventually linkedEurope - all debt markets are eventually linked
• ConfidenceConfidenceFear slows consumersFear slows consumersFinancial markets weakenFinancial markets weaken
• None of the three by themselves that much, but all None of the three by themselves that much, but all three together could be a significant dragthree together could be a significant drag
US dbtUS dbt
6 2012 | © Copyright Euler Hermes
U.S. Debt UncertaintyU.S. Debt Uncertainty• U.S. debt problem is different. In contrast to U.S. debt problem is different. In contrast to
Europe, U.S. will never have to default because it Europe, U.S. will never have to default because it can do what no one else can – print U.S. dollars.can do what no one else can – print U.S. dollars.
• U.S. problem is government has no plan to U.S. problem is government has no plan to reduce debt that’s so high it hurts the economy.reduce debt that’s so high it hurts the economy.
• Deficits continue and debt/GDP at 100% for next Deficits continue and debt/GDP at 100% for next 10 years. No attempt to reform entitlements. 10 years. No attempt to reform entitlements.
• Congress is stuck…fiscal cliff, debt ceiling, 2012 Congress is stuck…fiscal cliff, debt ceiling, 2012 elections…uncertaintyelections…uncertainty
• Uncertainty over taxes, regulation hurting Uncertainty over taxes, regulation hurting growth.growth.
• But that’s just one aspect of the economy, let’s But that’s just one aspect of the economy, let’s look at the details…look at the details…
7 2012 | © Copyright Euler Hermes
The four forces which started and The four forces which started and ended the recession can help ended the recession can help forecast the outlook:forecast the outlook:
• OilOil• HousingHousing• Fed policiesFed policies• FearFear
(GDP: $15T, 3.3% ave. growth. It’s the “size” of the (GDP: $15T, 3.3% ave. growth. It’s the “size” of the economy. Use it to measure the “size” of other big economy. Use it to measure the “size” of other big numbers like budget deficit/debt)numbers like budget deficit/debt)
8 2012 | © Copyright Euler Hermes
-200%
-100%
0%
100%
200%
300%
400%19
72
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
-5%
0%
5%
10%Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
9 2012 | © Copyright Euler Hermes
-200%
-100%
0%
100%
200%
300%
400%19
72
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
-5%
0%
5%
10%Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
28%
32%
10 2012 | © Copyright Euler Hermes
Recent oilRecent oil
-200%
-100%
0%
100%
200%
300%
400%19
72
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
-5%
0%
5%
10%Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
28%
32%
8%
11 2012 | © Copyright Euler Hermes
gasgas
30
40
50
60
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90
100
110
120
130
140
150
May
-200
7
Au
g-2
007
No
v-20
07
Feb
-200
8
May
-200
8
Au
g-2
008
No
v-20
08
Feb
-200
9
May
-200
9
Au
g-2
009
No
v-20
09
Feb
-201
0
May
-201
0
Au
g-2
010
No
v-20
10
Feb
-201
1
May
-201
1
Au
g-2
011
No
v-20
11
Feb
-201
2
May
-201
2
Brent
WTI
$90
$107
Oil Prices, $/bbl: an extended $10 rise in oil cuts 0.2% - 0.3% off U.S. GDP growth:
source: World Bank
Brent Crude, $/bblYear Average Change GDP loss2007 $732008 $98 $25 -0.50%2009 $62 -$36 0.72%2010 $80 $18 -0.36%2011 $111 $31 -0.63%
below the peaks,and falling...slowing global economy, easing fears
12 2012 | © Copyright Euler Hermes
Gasoline prices more closely related Gasoline prices more closely related to Brent – not enough pipeline to get to Brent – not enough pipeline to get glut of WTI to refineries fast enoughglut of WTI to refineries fast enough
gasgas
30
40
50
60
70
80
90
100
110
120
130
140
150
May
-200
7
Au
g-2
007
No
v-20
07
Feb
-200
8
May
-200
8
Au
g-2
008
No
v-20
08
Feb
-200
9
May
-200
9
Au
g-2
009
No
v-20
09
Feb
-201
0
May
-201
0
Au
g-2
010
No
v-20
10
Feb
-201
1
May
-201
1
Au
g-2
011
No
v-20
11
Feb
-201
2
May
-201
2
Brent
WTI
$90
$107
Oil Prices, $/bbl: an extended $10 rise in oil cuts 0.2% - 0.3% off U.S. GDP growth:
source: World Bank
Brent Crude, $/bblYear Average Change GDP loss2007 $732008 $98 $25 -0.50%2009 $62 -$36 0.72%2010 $80 $18 -0.36%2011 $111 $31 -0.63%
below the peaks,and falling...slowing global economy, easing fears
13 2012 | © Copyright Euler Hermes
hsnghsng
1.5
2.0
2.5
3.0
3.5
4.0
4.5U.S. Regular Gasoline Prices,$/gallon
source: EIA
4/2/12: 3.94
5/14/12: 3.71
$0.23 drop is great, but it's <6%...
7/7/08: 4.11
good: below the peaks, and falling
14 2012 | © Copyright Euler Hermes
HousingHousing
fndmntlfndmntl
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
M / M
Y / Y
Case - Shiller Home Price Index, % Change
S&P/Case-Shiller
16%? How about 6%
15 2012 | © Copyright Euler Hermes
HousingHousing
Yld crvYld crv
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
0
500
1,000
1,500
2,000
2,500A
pr-
02
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
U.S. Housing MarketFundamental Measures, Seasonally Adjusted Annualized Rates
sources: National Association of Realtors, Census
Existing 1-Family Home Sales(right scale), -35%
Starts, -68%
Permits, -68%
New 1-Family Home Sales, -75%
16 2012 | © Copyright Euler Hermes
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%1
Q7
2
1Q
74
1Q
76
1Q
78
1Q
80
1Q
82
1Q
84
1Q
86
1Q
88
1Q
90
1Q
92
1Q
94
1Q
96
1Q
98
1Q
00
1Q
02
1Q
04
1Q
06
1Q
08
1Q
10
1Q
12
-300
-200
-100
0
100
200
300
400
500Yield Curve:
10yr-3 mo Treasuries (bps)
Source: Census Bureau, Federal Reserve
The Treasury Yield Curve vs. GDP
Yld crvYld crv
17 2012 | © Copyright Euler Hermes
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%1
Q7
2
1Q
74
1Q
76
1Q
78
1Q
80
1Q
82
1Q
84
1Q
86
1Q
88
1Q
90
1Q
92
1Q
94
1Q
96
1Q
98
1Q
00
1Q
02
1Q
04
1Q
06
1Q
08
1Q
10
1Q
12
-300
-200
-100
0
100
200
300
400
500Yield Curve:
10yr-3 mo Treasuries (bps)
Real GDP Growth,Y/Y % Change
Source: Census Bureau, Federal Reserve
The Treasury Yield Curve vs. GDP
Yld crvYld crv
18 2012 | © Copyright Euler Hermes
150
200
250
300
350
400
1/10
3/10
5/10
8/10
10/1
012
/10
3/11
5/11
7/11
10/1
112
/11
2/12
5/12
Yield Curve Steepness: 10 yr-3 mo. yield (bps), still positive, but has fallen
Source: Federal Reserve
sovereign debt worries
weak economic data
Jck Hole
Nov mtg go QE2!
Sep hint
Yld crvYld crv
19 2012 | © Copyright Euler Hermes
lendnglendng
150
200
250
300
350
400
1/10
3/10
5/10
8/10
10/1
012
/10
3/11
5/11
7/11
10/1
112
/11
2/12
5/12
Yield Curve Steepness: 10 yr-3 mo. yield (bps), still positive, but has fallen
Source: Federal Reserve
sovereign debt worries
weak economic data
Jck Hole
Nov mtg go QE2!
Sep hint
Arab Spring
Japan
euro/US worries
euro worries
oil prices
weak economic
data
20 2012 | © Copyright Euler Hermes
Banks are lending, fear recedingBanks are lending, fear receding
recaprecap
-30%
-20%
-10%
0%
10%
20%
30%
40%6-
74
6-76
6-78
6-80
6-82
6-84
6-86
6-88
5-90
5-92
5-94
5-96
5-98
5-00
5-02
5-04
5-06
5-08
5-10
5-12
Commercial and Industrial Loansquarterly annualized % change
source: Federal Reserve
Finally! Lending is resuming.
one reason this recovery has taken so long compared to others
21 2012 | © Copyright Euler Hermes
RecapRecap
• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag, now improving has been a drag, now improving• HousingHousing flat flat• Yield curveYield curve positive but falling positive but falling• LendingLending good good
• So what do the measures of the So what do the measures of the economy say?economy say?
22 2012 | © Copyright Euler Hermes
GDP recoveringGDP recovering
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Q1-19
74
Q1-19
76
Q1-19
78
Q1-19
80
Q1-19
82
Q1-19
84
Q1-19
86
Q1-19
88
Q1-19
90
Q1-19
92
Q1-19
94
Q1-19
96
Q1-19
98
Q1-20
00
Q1-20
02
Q1-20
04
Q1-20
06
Q1-20
08
Q1-20
10
Q1-20
12
Real Gross Domestic Product (GDP)annualized quarterly growth rate
source: BEA
Whew!
(but still < ave)
23 2012 | © Copyright Euler Hermes
Consumption: income fuels spendingConsumption: income fuels spending
-10%
-5%
0%
5%
10%
Mar
-07
Sep-0
7
Mar
-08
Sep-0
8
Mar
-09
Sep-0
9
Mar
-10
Sep-1
0
Mar
-11
Sep-1
1
Mar
-12
Real PCE
Real DPI
source: BEA
Personal Consumption Expenditures (PCE) & Disposable Personal Income (DPI)
real % growth rate, 3 mos. annualized
consumption OK, income not
mfrmfr
24 2012 | © Copyright Euler Hermes
Manufacturing strongManufacturing strong
20
30
40
50
60
70A
pr-
07
Ap
r-08
Ap
r-09
Ap
r-10
Ap
r-11
Ap
r-12
Manufacturing
Mfr new orders
source: ISM
Institute of Supply Management Manufacturing Indices>50 means expansion
Monthly survey asks if conditions are same, better, or worse for: new orders, production, employment, supplier deliveries, inventories, customer inventories, prices, backlogs, new export orders, imports.
good: new orders tend
to lead
cntnrscntnrs
25 2012 | © Copyright Euler Hermes
Two last measures, BankruptciesTwo last measures, Bankruptcies
brptbrpt
0
5,000
10,000
15,000
20,000
25,000
30,000
Q4
-19
80
Q4
-19
82
Q4
-19
84
Q4
-19
86
Q4
-19
88
Q4
-19
90
Q4
-19
92
Q4
-19
94
Q4
-19
96
Q4
-19
98
Q4
-20
00
Q4
-20
02
Q4
-20
04
Q4
-20
06
Q4
-20
08
Q4
-20
10
Q4
-20
12
U.S. Business Bankruptcy Filings, quarterly
40-50% annual growth rates from 2008 - 2009
f'cast 2012 = -10%
down 11 consec Q's, 1st time ever
source: Administrative Office of the U.S. Courts, Euler Hermes
26 2012 | © Copyright Euler Hermes
But But perceptionperception of risk still very high: of risk still very high:
0
20
40
60
80
100
120
140
160
180
200
220
240
260
280
4/9
2
4/9
3
4/9
4
4/9
5
4/9
6
4/9
7
4/9
8
4/9
9
4/0
0
4/0
1
4/0
2
4/0
3
4/0
4
4/0
5
4/0
6
4/0
7
4/0
8
4/0
9
4/1
0
4/1
1
4/1
2
Default Risk: Corporate Bond Spread Over TreasuriesMoody's seasoned Aaa - 10 year Treasury Note
average since 1953 is 76 bps
Source: Moody's, Federal Reserve
subprime begins
Lehman fails
sovereign debt pt.1
Japan, Arabia,
Europe, US, oil
still far above
average
emplyemply
27 2012 | © Copyright Euler Hermes
-1,000
-800
-600
-400
-200
0
200
400
600
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
3%
4%
5%
6%
7%
8%
9%
10%Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created and the Unemployment Rate
source: Labor Department
UnemploymentRate (right axis)
28 2012 | © Copyright Euler Hermes
-1,000
-800
-600
-400
-200
0
200
400
600
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
3%
4%
5%
6%
7%
8%
9%
10%Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created and the Unemployment Rate
source: Labor Department
UnemploymentRate (right axis)
4 yrs later, less than half
recovered
recprecp
29 2012 | © Copyright Euler Hermes
RecapRecap
• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag but improving has been a drag but improving• HousingHousing flat flat• Yield curveYield curve positive but falling positive but falling• LendingLending good good• GDP, consumer weak, manufacturing GDP, consumer weak, manufacturing
goodgood• Employment alarmingEmployment alarming• To fix it, the government is causing two To fix it, the government is causing two
big problems:big problems:Debt & Potential InflationDebt & Potential Inflation
fiscfisc
30 2012 | © Copyright Euler Hermes
FISCAL POLICYFISCAL POLICY
Congress, AdministrationCongress, AdministrationSpending, taxing, borrowingSpending, taxing, borrowing
deficits/debt, budgets…deficits/debt, budgets…
mathmath
31 2012 | © Copyright Euler Hermes
• Year 1: spent $80Year 1: spent $80• Original budget for year 2: spend $110Original budget for year 2: spend $110• Final budget for year 2: spend $90Final budget for year 2: spend $90
• In Washington, even though they’re In Washington, even though they’re spending $10 more in year 2,spending $10 more in year 2, this is what this is what they call a $20 “cut”.they call a $20 “cut”.
• Both sides do thisBoth sides do this
Budget Math in WashingtonBudget Math in Washington
defsdefs
32 2012 | © Copyright Euler Hermes
Spending, Deficits and DebtSpending, Deficits and Debt
Gov’t spendsGov’t spends $10 $10
Gov’t gets tax revenue Gov’t gets tax revenue $6$6
DeficitDeficit $4$4
Treas. gets loan, issues $4 notes/bondsTreas. gets loan, issues $4 notes/bonds
How big is $4T? Don’t know - measure How big is $4T? Don’t know - measure against size of the economy - GDPagainst size of the economy - GDP
debtdebt
33 2012 | © Copyright Euler Hermes
1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%19
6119
6319
6519
6719
6919
7119
7319
7519
7719
7919
8119
8319
8519
8719
8919
9119
9319
9519
9719
9920
0120
0320
0520
0720
0920
1120
1320
1520
1720
1920
21
Federal Debt as a % of GDP (OMB)Accumulated deficits become debt…Accumulated deficits become debt…
34 2012 | © Copyright Euler Hermes
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%19
6119
6319
6519
6719
6919
7119
7319
7519
7719
7919
8119
8319
8519
8719
8919
9119
9319
9519
9719
9920
0120
0320
0520
0720
0920
1120
1320
1520
1720
1920
21
Federal Debt as a % of GDP (OMB)
1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
Debt>90% = -1% GDPDebt>90% = -1% GDP
Accumulated deficits become debt…Accumulated deficits become debt…
Def red comDef red com
35 2012 | © Copyright Euler Hermes
The Simpson - Bowles Deficit Reduction The Simpson - Bowles Deficit Reduction Commission finally said it out loud:Commission finally said it out loud:
We must touchWe must touch the “third rails” of the “third rails” of • Social SecuritySocial Security• MedicareMedicare
If we don’t we will never be able to balance If we don’t we will never be able to balance the budget - entitlements will become the the budget - entitlements will become the entireentire budget budget
The rest is whistling past the graveyard…The rest is whistling past the graveyard…
36 2012 | © Copyright Euler Hermes
Discretionary, 11%
Defense, 21%
Interest, 5%
Income Security, 19%
Social Security, 21%
Health, 24%
Outlays, 2010 Budget, $3.5TOutlays, 2010 Budget, $3.5T
37 2012 | © Copyright Euler Hermes
Outlays, 2010 Budget, $3.5TOutlays, 2010 Budget, $3.5T
Discretionary, 11%
Defense, 21%
Interest, 5%
Income Security, 19%
Social Security, 21%
Health, 24%
entltmntsentltmnts
38 2012 | © Copyright Euler Hermes
EntitlementsEntitlementsEntitlement spending, particularly Medicare or Entitlement spending, particularly Medicare or some other form of national healthcare, will be one some other form of national healthcare, will be one of the two most contentious and important social, of the two most contentious and important social, political and economic issue for several political and economic issue for several generations, the other being energy (ex war). generations, the other being energy (ex war).
One generation will not be getting the benefits One generation will not be getting the benefits they think are owed them and another generation they think are owed them and another generation will be taxed to exhaustion to try to provide them.will be taxed to exhaustion to try to provide them.
But it is not hopeless nor doomsday because the But it is not hopeless nor doomsday because the math is simple, but right now politicians seem to math is simple, but right now politicians seem to be incapable of mustering the political will to fix it.be incapable of mustering the political will to fix it.
isunceisunce
39 2012 | © Copyright Euler Hermes
-100
-50
0
50
100
150
200
250
300A
pr-
19
98
Ap
r-1
99
9
Ap
r-2
00
0
Ap
r-2
00
1
Ap
r-2
00
2
Ap
r-2
00
3
Ap
r-2
00
4
Ap
r-2
00
5
Ap
r-2
00
6
Ap
r-2
00
7
Ap
r-2
00
8
Ap
r-2
00
9
Ap
r-2
01
0
Ap
r-2
01
1
Ap
r-2
01
2
-60
-30
0
30
60
90
120
150
180
monthly (left axis)
6 month ave. (right)
Net Issuance of U.S. Treasury Securities, $B
source: Bureau of Public Debt
isunceisunce
40 2012 | © Copyright Euler Hermes
-100
-50
0
50
100
150
200
250
300A
pr-
19
98
Ap
r-1
99
9
Ap
r-2
00
0
Ap
r-2
00
1
Ap
r-2
00
2
Ap
r-2
00
3
Ap
r-2
00
4
Ap
r-2
00
5
Ap
r-2
00
6
Ap
r-2
00
7
Ap
r-2
00
8
Ap
r-2
00
9
Ap
r-2
01
0
Ap
r-2
01
1
Ap
r-2
01
2
-60
-30
0
30
60
90
120
150
180
monthly (left axis)
6 month ave. (right)
Net Issuance of U.S. Treasury Securities, $B
source: Bureau of Public Debt
FYI, this week alone, the Treasury FYI, this week alone, the Treasury is indebting you and your kids for:is indebting you and your kids for:$30B 4 wk. bills$30B 4 wk. bills$30B 3 mo. bills$30B 3 mo. bills$27B 6 mo. bills$27B 6 mo. bills$35B 2 yr. notes$35B 2 yr. notes$35B 5 yr. notes$35B 5 yr. notes$29B 7 yr. notes$29B 7 yr. notes
Fisc revFisc rev
41 2012 | © Copyright Euler Hermes
Fiscal Policy ReviewFiscal Policy Review
We need CLARITY, CERTAINTY, a plan, instead we We need CLARITY, CERTAINTY, a plan, instead we have:have:• No 2011 budget, no 2012 budgetNo 2011 budget, no 2012 budget• 2013 Admin. budget DOA – more debt and deficit2013 Admin. budget DOA – more debt and deficit• 2013 Republican budget DOA2013 Republican budget DOA• Budget Control Act of 2011 (BCA) and its Super Budget Control Act of 2011 (BCA) and its Super Committee did nothing to reduce debt, did nothing Committee did nothing to reduce debt, did nothing to reform Medicare and Social Securityto reform Medicare and Social Security• Four administration deficit reduction plans 2011Four administration deficit reduction plans 2011• Many others from Congress, Commissions, Many others from Congress, Commissions, candidatescandidates• Borrowing more every day…Borrowing more every day…
stuckstuck
42 2012 | © Copyright Euler Hermes
FISCAL POLICY REVIEWFISCAL POLICY REVIEWCongress stuck - What now?Congress stuck - What now?
Things could change at:Things could change at:
• 2012 Fiscal cliff (expiration of Bush and 2012 Fiscal cliff (expiration of Bush and payroll tax cuts, some jobless benefits, payroll tax cuts, some jobless benefits, sequestration, ceiling?)sequestration, ceiling?)
• 2012 elections2012 elections• 2024 Medicare goes insolvent2024 Medicare goes insolvent• 2050 Social Security goes insolvent2050 Social Security goes insolvent• Do note that this is the current situation – Do note that this is the current situation –
it can changeit can change
monmon
43 2012 | © Copyright Euler Hermes
MONETARY POLICYMONETARY POLICY
The Federal Reserve Bank,The Federal Reserve Bank,Ben BernankeBen Bernanke
44 2012 | © Copyright Euler Hermes
0
2
4
6
8
10
12
14
16
18
20
Mar
-197
2
Mar
-197
4
Mar
-197
6
Mar
-197
8
Mar
-198
0
Mar
-198
2
Mar
-198
4
Mar
-198
6
Mar
-198
8
Mar
-199
0
Mar
-199
2
Mar
-199
4
Mar
-199
6
Mar
-199
8
Mar
-200
0
Mar
-200
2
Mar
-200
4
Mar
-200
6
Mar
-200
8
Mar
-201
0
Mar
-201
2
Fed Funds
Mortgages
10-yr
Interest Rates
source: Federal Reserve
Yld crvYld crv
45 2012 | © Copyright Euler Hermes
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%1
Q7
2
1Q
74
1Q
76
1Q
78
1Q
80
1Q
82
1Q
84
1Q
86
1Q
88
1Q
90
1Q
92
1Q
94
1Q
96
1Q
98
1Q
00
1Q
02
1Q
04
1Q
06
1Q
08
1Q
10
1Q
12
-300
-200
-100
0
100
200
300
400
500Yield Curve:
10yr-3 mo Treasuries (bps)
Real GDP Growth,Y/Y % Change
Source: Census Bureau, Federal Reserve
The Treasury Yield Curve vs. GDP
txttxt
46 2012 | © Copyright Euler Hermes
MONETARY POLICYMONETARY POLICY• Lowering the Lowering the short termshort term Fed Funds interest rate Fed Funds interest rate
usually worksusually works
47 2012 | © Copyright Euler Hermes
MONETARY POLICYMONETARY POLICY• Lowering the Lowering the short termshort term Fed Funds interest rate Fed Funds interest rate
usually worksusually works• But this time needed an extra boost, lowering But this time needed an extra boost, lowering
long termlong term interest rates. interest rates.• Quantitative easing:Quantitative easing:• Fed prints new $ billsFed prints new $ bills• Buys Treasury bonds in open marketBuys Treasury bonds in open market• Raises bond prices, lowering interest rates Raises bond prices, lowering interest rates
(they move in opposite directions)(they move in opposite directions)• Puts $ into financial systemPuts $ into financial system• And creates inflationary pressures… QE3?And creates inflationary pressures… QE3?
Bal shtBal sht
48 2012 | © Copyright Euler Hermes
Quantitative Easing (QE)Quantitative Easing (QE)
10 yr work10 yr work
0
500
1,000
1,500
2,000
2,500
3,000
5-89
5-90
5-91
5-92
5-93
5-94
5-95
5-96
5-97
5-98
5-99
5-00
5-01
5-02
5-03
5-04
5-05
5-06
5-07
5-08
5-09
5-10
5-11
5-12
Federal Reserve Balance Sheet, $B
source: Federal Reserve
QE2, 2010-11
QE1, 2008
Huge easing,unprecedented increase
(3x) in liquidity
QE3?
49 2012 | © Copyright Euler Hermes
Did QE2 work?Did QE2 work?Yield on 10 year Treasury Note
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4
/30
/10
6/3
0/1
0
8/3
0/1
0
10
/30
/10
12
/30
/10
3/1
/11
5/1
/11
7/1
/11
8/3
1/1
1
10
/31
/11
12
/31
/11
3/1
/12
5/1
/12
source: Federal Reserve
hoped for this:
Jackson Hole
QE2
Sep hint
50 2012 | © Copyright Euler Hermes
Did QE2 work?Did QE2 work?Yield on 10 year Treasury Note
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4
/30
/10
6/3
0/1
0
8/3
0/1
0
10
/30
/10
12
/30
/10
3/1
/11
5/1
/11
7/1
/11
8/3
1/1
1
10
/31
/11
12
/31
/11
3/1
/12
5/1
/12
source: Federal Reserve
but got this:record rate of increase, inflationary expectations
Jackson Hole
QE2
Sep hint
51 2012 | © Copyright Euler Hermes
Did QE2 work?Did QE2 work?Yield on 10 year Treasury Note
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4
/30
/10
6/3
0/1
0
8/3
0/1
0
10
/30
/10
12
/30
/10
3/1
/11
5/1
/11
7/1
/11
8/3
1/1
1
10
/31
/11
12
/31
/11
3/1
/12
5/1
/12
source: Federal Reserve
but got this:record rate of increase, inflationary expectations
Jackson Hole
QE2
Sep hint
Arab Spring
Japaneuro
worries
risk aversion
oil prices, weak data, US worries
euro, US worries
work?work?
52 2012 | © Copyright Euler Hermes
Did QE2 work?Did QE2 work?Yield on 10 year Treasury Note
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4
/30
/10
6/3
0/1
0
8/3
0/1
0
10
/30
/10
12
/30
/10
3/1
/11
5/1
/11
7/1
/11
8/3
1/1
1
10
/31
/11
12
/31
/11
3/1
/12
5/1
/12
source: Federal Reserve
Jackson Hole
QE2
Sep hint
Arab Spring
Japaneuro
worries
risk aversion
oil prices, weak data, US worries
QE2 ends...did it work?
euro, US worries
All sameAll same
53 2012 | © Copyright Euler Hermes
QE2/3 = Printing money = Inflation = Dollar devaluationQE2/3 = Printing money = Inflation = Dollar devaluationThey are all the same thing.They are all the same thing.
54 2012 | © Copyright Euler Hermes
QE2/3 = Printing money = Inflation = Dollar devaluationQE2/3 = Printing money = Inflation = Dollar devaluationThey are all the same thing.They are all the same thing.
Example; suppose today there is Example; suppose today there is • one loaf of bread priced at $1, up for auctionone loaf of bread priced at $1, up for auction• two hungry people, each with a printing presstwo hungry people, each with a printing press• to out-bid the other, each runs his press as fast as to out-bid the other, each runs his press as fast as possible until one breakspossible until one breaks• by then, the price of the bread is $1Mby then, the price of the bread is $1M
55 2012 | © Copyright Euler Hermes
QE2/3 = Printing money = Inflation = Dollar devaluationQE2/3 = Printing money = Inflation = Dollar devaluationThey are all the same thing.They are all the same thing.
Example; suppose today there is Example; suppose today there is • one loaf of bread priced at $1, up for auctionone loaf of bread priced at $1, up for auction• two hungry people, each with a printing presstwo hungry people, each with a printing press• to out-bid the other, each runs his press as fast as to out-bid the other, each runs his press as fast as possible until one breakspossible until one breaks• by then, the price of the bread is $1Mby then, the price of the bread is $1M• printing money printing money created created inflation;inflation; price from $1 to $1M price from $1 to $1M• printing moneyprinting money devalueddevalued each $1 bill; each $1 bill each $1 bill; each $1 bill used to be worth one loaf of bread, but now is worth 1 used to be worth one loaf of bread, but now is worth 1 millionth of a loaf of breadmillionth of a loaf of bread
• Money was printed (QE)Money was printed (QE)• Inflation was createdInflation was created• The dollar was devaluedThe dollar was devalued
$ fall$ fall
56 2012 | © Copyright Euler Hermes
$ devalued, QE at work$ devalued, QE at work
whywhy
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%J
un
-10
Ju
l-1
0
Se
p-1
0
No
v-1
0
Ja
n-1
1
Fe
b-1
1
Ap
r-1
1
Ju
n-1
1
Au
g-1
1
Se
p-1
1
No
v-1
1
Ja
n-1
2
Ma
r-1
2
Ma
y-1
2
$C -3%
C¥ -7%£ -7%
¥ -13%
$A -15%
€ -4%
SF-18%
source: Federal Reserve Bank of New York
$US weakening
Value of the USD from June 1, 2010
57 2012 | © Copyright Euler Hermes
So, remind me, why are we doing that again?So, remind me, why are we doing that again?
QE = Printing money = Dollar devaluation = inflation QE = Printing money = Dollar devaluation = inflation meant to stimulate the economy by lowering meant to stimulate the economy by lowering interest ratesinterest rates
But dollar devaluation can also: But dollar devaluation can also: • Raise commodity prices – oil, metalsRaise commodity prices – oil, metals • Devalue the $14T in debt U.S. owesDevalue the $14T in debt U.S. owes• Boost exportsBoost exports• Create asset bubbles - real estateCreate asset bubbles - real estate
commodscommods
58 2012 | © Copyright Euler Hermes
$ deval = higher commodities prices$ deval = higher commodities prices
-4%
-1%
2%
5%
8%
11%
14%
17%
20%J
un
-10
Au
g-1
0
No
v-1
0
Fe
b-1
1
Ma
y-1
1
Ju
l-1
1
Oc
t-1
1
Ja
n-1
2
Ap
r-1
2
-10%
0%
10%
20%
30%
40%
50%
60%
70%S&P GS Commodity IndexTrade Wgtd $ (left scale)S&P GS Commodity IndexCrude Oil, WTI
Commodity & Oil Prices vs. $
$ weakening (left scale)
Debt dvlDebt dvl
59 2012 | © Copyright Euler Hermes
Debt DevaluationDebt DevaluationSimple exampleSimple exampleToday: Lend $1 @10%. Loaf of Bread costs $1Today: Lend $1 @10%. Loaf of Bread costs $1Inflation goes to 20%Inflation goes to 20%
A Year later:A Year later:Creditor gets $1.10 back.Creditor gets $1.10 back.But now loaf of bread costs $1.20.But now loaf of bread costs $1.20.
Creditors lose with inflation.Creditors lose with inflation.Debtors, like the U.S. government, win.Debtors, like the U.S. government, win.The U.S. government The U.S. government is ok withis ok with inflation. inflation.The U.S. government The U.S. government is ok withis ok with a weaker dollar. a weaker dollar.May be only way out of $14T in debt.May be only way out of $14T in debt.
Mon rvwMon rvw
60 2012 | © Copyright Euler Hermes
MONETARY POLICY REVIEWMONETARY POLICY REVIEW
• Controls short term Fed Funds rateControls short term Fed Funds rate• But needed QE2, printed new money, pumped But needed QE2, printed new money, pumped
it into global financial systemit into global financial system• Meant to lower long-term interest ratesMeant to lower long-term interest rates• Also causes $ devaluationAlso causes $ devaluation• Raise commodities prices, devalue debt Raise commodities prices, devalue debt
(boost exports, asset bubbles)(boost exports, asset bubbles)• QE 3 possibleQE 3 possible• Other recent extraordinary measures: press Other recent extraordinary measures: press
conferences, inflation targets, forecasts, conferences, inflation targets, forecasts, blaming/asking Congressblaming/asking Congress
Fisc monFisc mon
61 2012 | © Copyright Euler Hermes
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%J
-07
A-0
7
J-0
7
O-0
7
J-0
8
A-0
8
J-0
8
O-0
8
J-0
9
A-0
9
J-0
9
O-0
9
J-1
0
A-1
0
J-1
0
O-1
0
J-1
1
A-1
1
J-1
1
O-1
1
J-1
2
A-1
2
Ind 45%
Chn 20%
Aus 15%
S.K. 30%
Eur 75%UK 80%US 100%
Jpn 200%
Chl 20%
source: central banks, national stat. off ices
line is central bank rate
# is debt/GDP
Monetary & Fiscal PolicyMonetary & Fiscal PolicyLess debt, faster recovery. Debt kills.Less debt, faster recovery. Debt kills.
Get itGet it
62 2012 | © Copyright Euler Hermes
Monetary & Fiscal PolicyMonetary & Fiscal PolicyLess debt, faster recovery. Debt kills.Less debt, faster recovery. Debt kills.
European politicians get it, but can’t fix it. U.S. politicians don’t even get it.European politicians get it, but can’t fix it. U.S. politicians don’t even get it.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%J
-07
A-0
7
J-0
7
O-0
7
J-0
8
A-0
8
J-0
8
O-0
8
J-0
9
A-0
9
J-0
9
O-0
9
J-1
0
A-1
0
J-1
0
O-1
0
J-1
1
A-1
1
J-1
1
O-1
1
J-1
2
A-1
2
Ind 45%
Chn 20%
Aus 15%
S.K. 30%
Eur 75%UK 80%US 100%
Jpn 200%
Chl 20%
source: central banks, national stat. off ices
line is central bank rate
# is debt/GDP
Glbl cnclGlbl cncl
63 2012 | © Copyright Euler Hermes
Conclusions, GlobalConclusions, Global
GDP growth 2012 GDP growth 2012 • 2.7% global 2.7% global • most coming from China, emerging mktsmost coming from China, emerging mkts• around 2% in the U.S. around 2% in the U.S. • Europe:Europe:
• recession, severe in some countriesrecession, severe in some countries• risk of exits or disorderly defaults risingrisk of exits or disorderly defaults rising• EMU probably holds, but will need:EMU probably holds, but will need:
• a lot of timea lot of time• fiscal unity, ECB, EFSF, IMF/othersfiscal unity, ECB, EFSF, IMF/others
US cnclUS cncl
64 2012 | © Copyright Euler Hermes
Conclusions, U.S.Conclusions, U.S.PositivesPositives
•Falling oil pricesFalling oil prices•Arab spring, Japan, weather, Arab spring, Japan, weather, oil, masked strengthoil, masked strength•Super stimulative monetary Super stimulative monetary policy will eventually helppolicy will eventually help•Yield curve positiveYield curve positive•Bank lendingBank lending•OK consumerOK consumer•Strong ManufacturingStrong Manufacturing•Bankruptcies fallingBankruptcies falling•Dollar fallingDollar falling•Global economy growingGlobal economy growing•2012 GDP growth anemic 2%2012 GDP growth anemic 2%
NegativesNegatives•Uncertainty from WDCUncertainty from WDC•Debt dragDebt drag•Uncertainty from Uncertainty from EuropeEurope•High oil pricesHigh oil prices•Personal Income weakPersonal Income weak•Housing market sickHousing market sick•Yield curve fallenYield curve fallen•High unemploymentHigh unemployment•Future InflationFuture Inflation
65 2012 | © Copyright Euler Hermes
Thank you for your attention