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MELTDOWN

paul.mason.01@bbc.co.uk. MELTDOWN. US GDP. US GDP (VOLATILITY). US GDP + INFLATION. THE GREAT MODERATION. Good luck?. Structure?. Policy?. BERNANKE.

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MELTDOWN

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  1. paul.mason.01@bbc.co.uk MELTDOWN

  2. US GDP

  3. US GDP (VOLATILITY)

  4. US GDP + INFLATION

  5. THE GREAT MODERATION Good luck? Structure? Policy?

  6. BERNANKE • In the United States a deep and liquid financial system has promoted growth by effectively allocating capitaland has increased economic resilience by increasing our ability to share and diversify risks, both domestically and globally” • (15 June 2007)

  7. US GDP

  8. US GDP VS DEBT AS % OF GDP

  9. THE DEBT DECADE

  10. ASSET BUBBLES “whereassets trade in high volumes at prices much higher than intrinsic value…”

  11. DOTCOM (NASDAQ)

  12. + ASSET BACKED SECURITIES

  13. + COMMODITY INDEX

  14. + HEDGE FUND ASSETS 10x

  15. + CREDIT DEFAULT SWAPS 58x • 2000 $1 TRILLION • $58 TRILLION • (not to scale)

  16. WHAT DROVE THE BUBBLES? American over-borrowing? Low interest rates? Asian over-saving?

  17. THE GLOBAL IMBALANCES

  18. US TRADE DEFICIT

  19. + CHINA DOLLAR RESERVES 2008 = $2 TRILLION

  20. THE GLOBAL IMBALANCES “Capital now flows upstream, from the world’s poor to the richest country of all…” Martin Wolf

  21. A QUICK RECAP • Low interest rates • + Oversupply of savings (Asia) • = Rising debt in USA • 2001: Dotcom bubble bursts • Asset backed security bubble begins • Where to find new, high-risk, high-interest borrowers? …

  22. folks like these…?

  23. …folks like these?

  24. SUBPRIME • Detroit, Michigan • 2004: • 75% of all new mortgages = subprime • 2007: • 65,000 homes foreclosed • 1/5 homes empty • “We buy homes for cash”

  25. US HOUSING COLLAPSE % change y-o-y Case Shiller 10x cities

  26. HOUSING + DOW JONES

  27. HOUSING + DOW + OIL $147

  28. THE RECKONING OCT 07-08 • $2 TRILLION WRITTEN OFF BY BANKS • $2 TRILLION MORE TO COME? (IMF) • $12 TRILLION IN GLOBAL BAILOUTS (INC CREDIT GUARANTEES) • $2.4+ TRILLION FISCAL STIMULUS • $1 TRILLION IMF LENDING • $32 TRILLION OFF EQUITIES • GLOBAL GDP = $64 TRILLION • GLOBAL FINANCE = $196 TRILLION

  29. WHERE ARE WE NOW?

  30. WHERE ARE WE NOW? • END OF Q109 • US ECONOMY: -6.1% • UK ECONOMY: -4%? • CHINA: growth down from 12% to 6% • WORLD ECONOMY: -2%? • WBANK/11 JUNE -3% • MFR EXPORTS: - 40% yoy Q1 • IMF: 11% chance of global deflation (Jan)

  31. THE STATE • Rescued freemarket capitalism • Owns large chunks of banking system • A generation of moral hazard? • A generation of fiscal pain?

  32. CHINA • $580 stimulus, 2/3 from banks • Micro-level policy change • Exports down 26% yoy • Domestic investment up 30% • End of export-led growth model?

  33. IDEOLOGY? • Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief… I made a mistake in presuming that the self-interest of banks and others was such that they were best capable of protecting their own shareholders” • Greenspan (23.10.08)

  34. THE DANGERS? • Debt overhang = global lost decade • Fiscal stimulus ‘borrows’ 2010 growth • …or does not happen? (USA) • Monetary stimulus = competitive devaluations • Global trade doesn’t recover: national “pools” of capital • UXBs: Germany? Sweden? China?

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