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The World Economic & Financial System: Risks & Prospects

The World Economic & Financial System: Risks & Prospects. Dr. Jacob A. Frenkel Vice Chairman AIG, Chairman G30. Forum Istanbul Istanbul, Turkey April 24-25, 2008. Global Payments Imbalances. Current Account Imbalances The US Dollar Exchange Rate The Dollar and the Trade Balance. 2.

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The World Economic & Financial System: Risks & Prospects

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  1. The World Economic & Financial System: Risks & Prospects Dr. Jacob A. Frenkel Vice Chairman AIG, Chairman G30 Forum Istanbul Istanbul, Turkey April 24-25, 2008

  2. Global Payments Imbalances • Current Account Imbalances • The US Dollar Exchange Rate • The Dollar and the Trade Balance 2

  3. Current Account of Balance of Payments Asia $650B Asia & Oil Exporters Save ME Oil Exp. plus Russia $497B Europe Balances Eurozone -$98B U.S. - $615B US Spends Source: IMF, av. annual growth rates, last update April 9 2008, WEO (2007 estimate, 2008 forecast) 3

  4. Trade Weighted Value of U.S. Dollar 29 Mar ‘02 112.46 21 Apr ‘08 71.33 Source: Federal Reserve, 3/31/2000 = 100, end of quarter, last observation 21 Apr 2008. 4

  5. U.S. Trade Balance and the Dollar Q4 2007 -4.3% Apr 21 ’08 80.37 Source: U.S. Department of Commerce, last observation: Trade Balance Q4/2007, Trade-weighted Dollar Apr 21 2008

  6. U.S. Housing • Prices, Sales and Inventories • Mortgages • Delinquencies 6

  7. Changes in U.S. Home Prices Mar 2008 -7.1% Source: National Ass. of Realtors, Annual growth in median home prices, quarterly averages, last Observation 3/2008 7

  8. U.S. New Home Sales and Housing Starts New Home Sales: 0.6M Housing Starts: 1.03M Source: U.S. Dep. of Commerce, National Association of Realtors, quarterly averages, last observation Starts 3/2008, Sales 2/2008 8

  9. U.S. Home Inventory-to-Sale Ratio New Home: 9.8 Existing Home: 9.5 Source: U.S. Dep. of Commerce, National Association of Realtors, last observation (New 2/2008), (Existing 3/2008) 9

  10. U.S. Delinquencies Q4 2007 17.31% (left) Q4 2007 5.82% (Right) Source: Mortgage Bankers Association, last observation Dec 31 2007 10

  11. U.S. Composition Mortgage Market Source: Mortgage Bankers Association, last observation June 30 2007 11

  12. Financial Market dislocations • Securitization Boom • Financial Market Spreads 12

  13. U.S. Asset-backed CP: Securitization Boom Source: Federal Reserve, last update 18 Apr 2008 13

  14. Spread between 3 Month LIBOR & T-Bills Source: Federal Reserve, last update April 22 2008 14

  15. Emerging Market Credit Spreads Source: JP Morgan, last Observation 21 Apr 2008

  16. Inflation • Headline Inflation • Oil Price Inflation • Global CPI Inflation 16

  17. Headline CPI Inflation (%) U.S. 4.0% Eurozone 3.6% Japan 1.0% Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last Observation 2/08 (Japan), 3/08 (Eurozone, US) 17

  18. Oil Price per Barrel 22 Apr ‘08 $117.5 18

  19. Global Inflation (%) 19

  20. U.S. Recession Risks • Retails Sales: Housing & Non-Housing • Construction Spending • Investment: Business & Residential • Consumer Confidence and Spending • Corporate Profits 20

  21. U.S. Change inRetail Sales Source: The Census Bureau, Quarterly Averages, Last Observation 2/2008 21

  22. U.S. Construction Spending By Sector Private Non-residential Public Private Residential Res. Constr. Spending 2007-Q4 $462B Non-Res. Constr. Spending 2007-Q4 $380B Public Constr. Spending 2007-Q4 $294B Source: U.S. Census Bureau, last observation 2/2008 22

  23. U.S. Investment Business Investment Residential Investment Source: Bureau of Economic Analysis, Annual Rate, last observation 12/2007 (2007 estimate) 23

  24. U.S. Consumer Confidence and Spending Source: Conference Board, BEA, period averages; last observation 2/08 Consumer Spending, 3/08 Consumer Confidence 24

  25. U.S. Corporate Profits as % of GDP Q4 2008 7.92% Source: U.S. Department of Commerce, last observation 12/2007 25

  26. Contribution to U.S. GDP Growth Q4 2007 .78% Q4 2007 -.84% Source: U.S. Department of Commerce, last observation Q4/2007

  27. Global Economic Growth • The World Economy • Industrial Countries • Developing Countries 27

  28. Global GDP Growth (%) Source: IMF, av. annual growth rates, last update April 9 2008, WEO (2007 estimate, 2008 forecast) 28

  29. Real GDP Growth (%) Industrial Countries Asian NICs 4.0% Eurozone 1.4% Japan 1.4% U.S. 0.5% Source: IMF, av. annual growth rates, last update April 9 2008, WEO (2007 estimate, 2008 forecast) 29

  30. Real GDP Growth (%) Developing Countries Developing Asia 8.2% Russia 6.8% Africa 6.3% Central & East. Europe 4.4% Latin America 4.4% Source: IMF, av. annual growth rates, last update April 9 2008, WEO (2007 estimate, 2008 forecast)

  31. Risks 1. Risk of U.S. Housing Recession spreading throughout the economy 2. Risk of “Liquidity Crisis” Transforming into “Insolvency Crisis” 3. Risk of Rising Budget Deficits 4. Impact of a persisting U.S. Current Account deficit 5. Risk of dysfunctional capital markets due to excessive uncertainty 6. Risk of a disorderly adjustments of Exchange Rates 7. Risk of Protectionism 8. Impact of demographic trends on long term Public Finances 9. Risk of further increases in oil prices: Inflation & Recession. 10. Pro-cyclical accounting practices aggravating Financial Stress. 11. Risk of Terrorism 31

  32. Long-term Demographic Challenge • Developed Countries • Developing Countries • U.S., Europe 32

  33. Developed Countries Demographic Challenge Projected change in population 2005 - 2025: +37.7M Source: United Nations Populations Division 33

  34. Developing Countries Demographic Challenge Projected change in population 2005 - 2025: +1,402.8M Source: United Nations Populations Division 34

  35. Europe Demographic Challenge Projected change in population 2005 - 2025: -21.2M Source: United Nations Populations Division 35

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