Description
A crisis is any event that is, or is expected to lead to, an unstable and dangerous situation affecting an individual, group, community, or whole society.
The Financial & Economic Crisis
Origins of the crisis
?
Well before 2007, there were danger signals in US:
? ? ? ? ? ? ? ?
Real interest rates current account deficit
Until now, global investors have happily finance US deficits. The 2008 flight to quality paradoxically benefited the $,
? ?
even though the international financial crisis originated in the US. For now, US T Bills are still viewed as the most liquid & riskless. How long will foreigners keep adding to their $ holdings? The US can no longer necessarily rely on support of foreign central banks, either economically or politically.
41
?
Sustainable?
? ?
Simulation of central banks’ of reserve currency holdings
Scenario: accession countries join EMU in 2010. (UK stays out),
but 20% of London turnover counts toward Euro financial depth, and currencies depreciate at the average 20-year rates up to 2007.
From Chinn & Frankel (Int.Fin., 2008)
.8
Simulation predicts € may overtake $ as early as 2015
.7 .6 .5 .4 .3 DEM/EUR .2 .1 .0 1980 1990 2000 2010 2020 2030 USD forecast USD EUR forecast
Tipping point in updated simulation: 2015
42
42 2040
The 2001-2020 decline in international currency status for the $ would be only one small part of a loss of power on the part of the US. But:
?
A loss of $’s role as #1 reserve currency could in itself have geopolitical implications. Precedent: The Suez crisis of 1956 ? is often recalled as the occasion on which Britain was forced under US pressure to abandon its remaining imperial designs. ? But recall also the important role played by a simultaneous run on the £ and the American decision not to help the beleaguered currency.
Athttp://ksghome.harvard.edu/~jfrankel/SalvatoreDeficitsHegemonJan26Jul+.pdf .
?
Frankel, “Could the Twin Deficits Jeopardize US Hegemony,”
Journal of Policy Modeling, 28, no. 6, Sept. 2006. Also “The Flubbed Opportunity for the US to Exercise Global Economic Leadership”; in The International Economy, XVIII, no. 2, Spring 2004 athttp://ksghome.harvard.edu/~jfrankel/FlubJ23M2004-.pdf
43
43
Jeffrey Frankel
James W. Harpel Professor of Capital Formation & Growth Harvard Kennedy School
http://ksghome.harvard.edu/~jfrankel/index.htm
Blog:http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/
Appendix:
IMF forecasts, April 2009
45
Shock Waves from the Financial Crisis
Karim Pakravan DePaul University ITAG October 21, 2008
Massive wealth destruction
Major Market Losses 2008
60.0% 50.0% $35,000 $30,000
30.0% 20.0% 10.0% 0.0%
$20,000 $15,000 $10,000 $5,000 $0
US
China/HK Major Europe
Market Cap
T okyo
T otal
% Loss
Dec-Sep Losses
($ billion)
(percent)
40.0%
$25,000
Fear sets in…
US & UK STOCK MARKETS
7000 6000 5000 4000 3000 2000 1/2/12 2/1/12 3/2/12 4/1/12 5/1/12 5/31/12 6/30/12 7/30/12 8/29/12 9/28/12 14000 13000 12000 11000 10000 9000 8000
FTSE
FTSE DJI A
DJIA
10.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1/15/12 1/29/12 2/12/12 2/26/12 3/11/12 3/25/12 4/8/12 4/22/12 5/6/12 5/20/12 6/3/12 6/17/12 7/1/12 7/15/12 7/29/12 8/12/12 8/26/12 9/9/12 9/23/12 10/7/12
..feeding in market volatility
US &UK STOCK MARKET 14-DAY VOLATILTY
DJI A FTSE
As contagion spreads globally…
MSCI (3-yr performance)
1,600 1,400 1,200 1,000 800 600 400
9
0
8/ 10
8/ 10
8/ 10
8/ 11
8/ 11
8/ 11
1
8/ 12
8/ 12
0/ 18
0/ 18
0/ 18
/1
/1
/1
/1
/1
/1
/1
/1
1
4
7
1
4
7
1
4
1
1
G7 I NDEX Standard Core
1
EM
7
/1
8/ 12
/0
/1
/1
1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500
1/2/12 1/16/12 1/30/12 2/13/12 2/27/12 3/12/12 3/26/12 4/9/12 4/23/12 5/7/12
G7
…emerging
5/21/12 6/4/12 6/18/12 7/2/12 7/16/12 7/30/12 8/13/12 8/27/12 9/10/12 9/24/12 10/8/12
MSCI (Y TD Performance)
markets feel the heat
EM
Led by the G-3…
GDP Growth 2008-2009
4.0% 2.0%
(%, y/y)
0.0% 1Q08 -2.0% -4.0% US EU Japan 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
..the global economy slides into recession
Global GDP Growth 2008-09
8.0% 6.0%
(%, y/y)
4.0% 2.0% 0.0% 1Q08 -2.0% Global Developed Emerging 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
1 /1
70
75
80
85
90
95
/0 9 /0 9 /0 9
4 /1 /1
7
1 0/ 1/ 0 9 /1 /1 0 /1 0 /1 0 /1 /1
1
4
7
1 0/ 1/ 1 0 /1 /1 1 /1 1 /1 1 /1 /1
1
DOLLAR INDEX
4
7
1
Dollar slump
0/ 1/ 1 1 /1 4 /1 7 /1 1
1 /1 2 /1 2 /1 2 0/ 1/ 1
2
Weak dollar..
US Trade Deficit (rolling 12-mos)
$800
$700
$600
$500
$400
$300 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
..helps narrow the external gap
US Trade Deficit Monthly
80
60
($ billion)
40 20
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
US & EU Sep/Oct rescue packages ($ billion)
800 700 600 500 400 300 200 100 0
USA Germany France Spain Other EU
History repeats itself
?
?
“Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks, which become so many mints to coin words into cash; and as the supply of words is inexhaustible, it may readily be supposed what a vast amount of promissory capital is soon in circulation. Every one now talks in thousands; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital, and falls back in amazement at the amount of public wealth, the "unexampled state of public prosperity. Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them madding after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; every one helps with his breath to swell the windy superstructure, and admires and wonders at the magnitude of the inflation he has contributed to produce. Speculation is the romance of trade, and casts contempt upon all its sober realities. It renders the stock-jobber a magician, and the exchange a region of enchantment. It elevates the merchant into a kind of knight-errant…. The slow but sure gains of snug percentage become despicable in his eyes; no "operation" is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune….” Washington Irving on the Panic of 1819
?
?
doc_278175408.ppt
A crisis is any event that is, or is expected to lead to, an unstable and dangerous situation affecting an individual, group, community, or whole society.
The Financial & Economic Crisis
Origins of the crisis
?
Well before 2007, there were danger signals in US:
? ? ? ? ? ? ? ?
Real interest rates current account deficit
Until now, global investors have happily finance US deficits. The 2008 flight to quality paradoxically benefited the $,
? ?
even though the international financial crisis originated in the US. For now, US T Bills are still viewed as the most liquid & riskless. How long will foreigners keep adding to their $ holdings? The US can no longer necessarily rely on support of foreign central banks, either economically or politically.
41
?
Sustainable?
? ?
Simulation of central banks’ of reserve currency holdings
Scenario: accession countries join EMU in 2010. (UK stays out),
but 20% of London turnover counts toward Euro financial depth, and currencies depreciate at the average 20-year rates up to 2007.
From Chinn & Frankel (Int.Fin., 2008)
.8
Simulation predicts € may overtake $ as early as 2015
.7 .6 .5 .4 .3 DEM/EUR .2 .1 .0 1980 1990 2000 2010 2020 2030 USD forecast USD EUR forecast
Tipping point in updated simulation: 2015
42
42 2040
The 2001-2020 decline in international currency status for the $ would be only one small part of a loss of power on the part of the US. But:
?
A loss of $’s role as #1 reserve currency could in itself have geopolitical implications. Precedent: The Suez crisis of 1956 ? is often recalled as the occasion on which Britain was forced under US pressure to abandon its remaining imperial designs. ? But recall also the important role played by a simultaneous run on the £ and the American decision not to help the beleaguered currency.
Athttp://ksghome.harvard.edu/~jfrankel/SalvatoreDeficitsHegemonJan26Jul+.pdf .
?
Frankel, “Could the Twin Deficits Jeopardize US Hegemony,”
Journal of Policy Modeling, 28, no. 6, Sept. 2006. Also “The Flubbed Opportunity for the US to Exercise Global Economic Leadership”; in The International Economy, XVIII, no. 2, Spring 2004 athttp://ksghome.harvard.edu/~jfrankel/FlubJ23M2004-.pdf
43
43
Jeffrey Frankel
James W. Harpel Professor of Capital Formation & Growth Harvard Kennedy School
http://ksghome.harvard.edu/~jfrankel/index.htm
Blog:http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/
Appendix:
IMF forecasts, April 2009
45
Shock Waves from the Financial Crisis
Karim Pakravan DePaul University ITAG October 21, 2008
Massive wealth destruction
Major Market Losses 2008
60.0% 50.0% $35,000 $30,000
30.0% 20.0% 10.0% 0.0%
$20,000 $15,000 $10,000 $5,000 $0
US
China/HK Major Europe
Market Cap
T okyo
T otal
% Loss
Dec-Sep Losses
($ billion)
(percent)
40.0%
$25,000
Fear sets in…
US & UK STOCK MARKETS
7000 6000 5000 4000 3000 2000 1/2/12 2/1/12 3/2/12 4/1/12 5/1/12 5/31/12 6/30/12 7/30/12 8/29/12 9/28/12 14000 13000 12000 11000 10000 9000 8000
FTSE
FTSE DJI A
DJIA
10.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1/15/12 1/29/12 2/12/12 2/26/12 3/11/12 3/25/12 4/8/12 4/22/12 5/6/12 5/20/12 6/3/12 6/17/12 7/1/12 7/15/12 7/29/12 8/12/12 8/26/12 9/9/12 9/23/12 10/7/12
..feeding in market volatility
US &UK STOCK MARKET 14-DAY VOLATILTY
DJI A FTSE
As contagion spreads globally…
MSCI (3-yr performance)
1,600 1,400 1,200 1,000 800 600 400
9
0
8/ 10
8/ 10
8/ 10
8/ 11
8/ 11
8/ 11
1
8/ 12
8/ 12
0/ 18
0/ 18
0/ 18
/1
/1
/1
/1
/1
/1
/1
/1
1
4
7
1
4
7
1
4
1
1
G7 I NDEX Standard Core
1
EM
7
/1
8/ 12
/0
/1
/1
1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500
1/2/12 1/16/12 1/30/12 2/13/12 2/27/12 3/12/12 3/26/12 4/9/12 4/23/12 5/7/12
G7
…emerging
5/21/12 6/4/12 6/18/12 7/2/12 7/16/12 7/30/12 8/13/12 8/27/12 9/10/12 9/24/12 10/8/12
MSCI (Y TD Performance)
markets feel the heat
EM
Led by the G-3…
GDP Growth 2008-2009
4.0% 2.0%
(%, y/y)
0.0% 1Q08 -2.0% -4.0% US EU Japan 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
..the global economy slides into recession
Global GDP Growth 2008-09
8.0% 6.0%
(%, y/y)
4.0% 2.0% 0.0% 1Q08 -2.0% Global Developed Emerging 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
1 /1
70
75
80
85
90
95
/0 9 /0 9 /0 9
4 /1 /1
7
1 0/ 1/ 0 9 /1 /1 0 /1 0 /1 0 /1 /1
1
4
7
1 0/ 1/ 1 0 /1 /1 1 /1 1 /1 1 /1 /1
1
DOLLAR INDEX
4
7
1
Dollar slump
0/ 1/ 1 1 /1 4 /1 7 /1 1
1 /1 2 /1 2 /1 2 0/ 1/ 1
2
Weak dollar..
US Trade Deficit (rolling 12-mos)
$800
$700
$600
$500
$400
$300 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
..helps narrow the external gap
US Trade Deficit Monthly
80
60
($ billion)
40 20
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
US & EU Sep/Oct rescue packages ($ billion)
800 700 600 500 400 300 200 100 0
USA Germany France Spain Other EU
History repeats itself
?
?
“Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks, which become so many mints to coin words into cash; and as the supply of words is inexhaustible, it may readily be supposed what a vast amount of promissory capital is soon in circulation. Every one now talks in thousands; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital, and falls back in amazement at the amount of public wealth, the "unexampled state of public prosperity. Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them madding after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; every one helps with his breath to swell the windy superstructure, and admires and wonders at the magnitude of the inflation he has contributed to produce. Speculation is the romance of trade, and casts contempt upon all its sober realities. It renders the stock-jobber a magician, and the exchange a region of enchantment. It elevates the merchant into a kind of knight-errant…. The slow but sure gains of snug percentage become despicable in his eyes; no "operation" is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune….” Washington Irving on the Panic of 1819
?
?
doc_278175408.ppt