US reversion to high interest rate regime during 1980s90s

1
US reversion to high interest rate regime during
1980s-90s
VOLCKER INTEREST RATE SHOCK

• Source Gerard Duminil and Dominique Levy

2
Rest of world profoundly affectedReal interest
rate as experienced in Third World
VOLCKER INTEREST RATE SHOCK

• Source Gerard Duminil and Dominique Levy

3
Corresponding slowdownin world GDP growth
4
Dubious statisticsCorrecting the GDP bias
(global)

• Source Redefining Progress, San Franciscso

5
Especially low growth since 1980, andextremely
uneven development

• Dramatic differences in annual change of
  per capita GDP (note constant 1995, not PPP
  values)
• Source Alan Freeman

6
Trends in capital accumulationDid the after-tax
profit rate recover?

• US corporate profit rate appears to recover from
  1984
• but interest payments remain at record high
  levels
• subtract interest expenses -- net revenue is very
  low during 1980s-90s.
• Source Gerard Dumenil and Dominique Levy

VOLCKER SHOCK
7
Corporations spent 1980s-90spaying off
historically high debt

• Source Gerard Dumenil and Dominique Levy

8
Source of profits changedduring
globalisation/finance era

• US corporate profits came far less from
  manufacturing products
• much greater sources of profits came from abroad
• profits also came more from financial assets.
• Source Gerard Dumenil and Dominique Levy

9
Credit/stock market bubblesUS financial profits
and vulnerability
VOLCKER SHOCK

• Source Gerard Dumenil and Dominique Levy

10
US financiers doubled in asset-value relative to
non-financial corporations

• Source Gerard Dumenil and Dominique Levy

11
US rentiers grabbed much more of the national
income
VOLCKER SHOCK

• Source Gerry Epstein and Dorothy Power

12
Another feature of the credit bubbleIs US
household debt sustainable?

• Source Gerard Dumenil and Dominique Levy

13
Are US households now so indebted that they
cannot save?

• Source Gerard Dumenil and Dominique Levy

14
US stock market bubblescorrected for earnings

• US price-earnings ratios (black line) show herd
  movements
• red line is based upon 10-year earnings averages
  (as per Shiller), which highlight 30-35 year
  cycles of extreme overvaluation
• Source Michael Alexander

15
US stock market cyclecorrected for accumulated
resources

• By considering share prices in relation to firm
  resources (accumulated earnings), a clearer
  picture emerges of valuation -- and overvaluation
• Source Michael Alexander

16
Implications of the 2000 crashUS pension
shortfalls (demographics important too)
Fortune 500 pension assets in relation to
pension benefit obligations (PBOs)
Stock market and US bond yields
DOT COM BUBBLE BURST

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.90

17
With stock market crash,falling household assets
DOT COM BUBBLE BURST

• Source Papdamitrou, Shaikh, dos Santos and
  Zessa, Jerome Levy Institute, Bard College

18
but housing prices keptasset values high

• Source Robert Brenner

19
thanks to mortgage refinancingsInterest rates
declined following Asian crisis

• Source NY Federal Reserve Bank

20
An indication of a housing bubbleAsset prices
soar above rental rates

• Source Center for Economic Policy Research

21
What might housing crash mean for the rest of the
economy?
DOT COM BUBBLE BURST

• Source Robert Brenner

22
Another speculative market energy (potentially
crucial in future, given fossil fuel exhaustion
and carbon trading)
of energy options/futures traded
Market volatility energy in comparison
Source International Monetary Fund Global
Financial Stability Report 2004, pp.59-60
23
Energy market volatilityelectricity and oil
prices
Source International Monetary Fund Global
Financial Stability Report 2004, p.63
24
US trade and current account deficits

• Source Gerard Dumenil and Dominique Levy

25
Danger ahead while US wins from global
investment, it is vulnerable

• Source Gerard Dumenil and Dominique Levy

26
Financial crashes in other economiesAsia was
looted, 1997-98 US won

• financial crash of Thailand, Malaysia, Indonesia,
  and S.Korea
• massive bank outflow (other flows), which soon
  reached the US
• dramatic decline in Asian currency values
• decline in Asian imports from US, and rise in
  exports to US

• Source Federal Reserve Bank of NY

27
US trade benefits from East Asian
crisiscurrency-induced import boom

• Source Federal Reserve Bank of NY

28
US trade benefits from global power structure
Falling commodity prices and unequal exchange

• Source Gernot Kohler

29
Reflective of commodity export trends
globalisations falling minerals and
agricultural prices


30
But worsening US current account reflects net
trade/investment deficits

• Source Papdamitrou, Shaikh, dos Santos and
  Zessa, Jerome Levy Institute, Bard College

31
To compensateDramatic shifts in US capital flows
HUGE DECLINE IN INWARD FDI
SLOWDOWN OF OUTWARD FDI AND PORTFOLIO INVESTMENT

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 1

32
Financing of US capital inflows

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.148

33
Foreign purchases of US financial assetsNet by
type, and accumulated foreign owned

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.20,36

34
Recent global economic volatilitySize of intl
capital markets, 2003 (US billions)

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 3

35
Recent financial/currency upheavalsStock market
index changes
GLOBAL MARKET CRASH
REVIVAL OF STOCK MARKETS

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 10

36
Stock market volatility, 2000-04 ( change by
period)

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 10

STOCK MARKET CRASH OF 1/3
37
US mutual funds flowed back to Wall Street
SWITCH INTO CORPORATE FUNDS
SWITCH OUT OF INTL FUNDS

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 2

38
Lower US issuance of newinternational debt
securities (US billions)
EURO TAKES LEAD OVER

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 2

39
Outstanding international debt securities (US
billions)
EURO TAKES LEAD OVER

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 2

40
New international syndicated credit facilities,
by currency (US bns)
DECLINE FROM US, EUROPE

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 2

41
Volatility and dangers persist Huge growth of
exchange-traded financial derivatives, 1987-2003
INTEREST RATE BETS RISE

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 6

42
Increase in over-the-counterderivatives (US
billions)
INTEREST RATE BETS SOAR

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 4

43
Over-the-counter derivativesnotional amount, by
currency
EURO TAKES LEAD OVER

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 5

44
Emerging market turbulenceFalling capital
inflows, rising outflows
E.ASIA CRISIS
SUSTAINED NET OUTFLOWS

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 1

45
As portfolio finance inflows decline, hedge funds
take lead over mutual funds

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.149

46
Emerging market currency turbulenceUS v. Latin
American and Asian currencies
3 SERIOUS CRASHES
3 SUCCESSFUL PEGS WITH CURRENCY CONTROLS

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 11

47
Emerging market currencies v. USLatin America
and Asia, change
3 SERIOUS CRASHES

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 11

48
Emerging market currencies v. USEurope, Middle
East, Africa
2 MORE SERIOUS CRASHES

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 11

49
Emerging market currencies v. USEurope, Middle
East and Africa, change
AND FOUR EXCESSIVE CORRECTIONS
2 MORE SERIOUS CRASHES

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 11

50
Emerging marketsstock market volatility
30-day rolling volatility
index, measured by Morgan Stanley
ASIAN FINANCIAL CRISIS
9/11 FALLOUT

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 15

51
Emerging markets stock market volatility(index
by sector)
HIGH
HIGH
LOW
HIGH
LOW
HIGH
HIGH
LOW
NEGATIVE
LOW

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 10

52
Emerging market bond returns (20 July 2004,
basis points)
Highest returns Nigera, Bulgaria, Ecuador,
Panama, Peru, Russia, Venezuela (4)

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 12

53
Emerging market bond market (local) interest
rate spreads, 2000-04
Stratospheric prices (gt10) Argentina, Ivory
Coast, Dominican Republic High
prices (gt5) Ecuador, Venezuela, Uruguay,
Brazil, Nigeria

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 13

54
Emerging market debt rates of return

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.22

55
China factorVast FDI and equity issuance
US billions
9/11 FALLOUT

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.129

56
Danger signNet capital flight worsens
US billions

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.124

57
Net capital flightfrom Asia
US billions

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.124

58
Net capital flightfrom Africa
US billions

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.126

59
Net capital flightfrom Middle East
US billions

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.126

60
Exposure of international banks to emerging
markets
Extreme foreign gearing Venezuela, Singapore,
Czech Republic, Croatia, Paraguay, Mexico, Hong
Kong, Slovac Republic, Romania, Poland

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.33

61
Emerging markets reservesMost (relatively)
wealthy Malaysia, Czech Republic, Thailand,
China, Korea

• Source International Monetary Fund
• Global Financial Stability Report 2004, p.143

62
Strength of Asian, US and other major banking
systems
Terribly risky Indonesia, Pakistan, China,
Japan, Thailand, Philippines, Korea

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 28

63
Strength of Latin American and E.European banking
systems
Terribly risky Argentina, Uruguay, Bolivia,
Venezuela, Ukraine, Turkey

• Source International Monetary Fund
• Global Financial Stability Report 2004, Table 28

64
Long-term record of sovereign bankruptcyPercenta
ge of countries in default, 1820-1999

• During debt crises of the 1830s, 1880s and
  1930s, response was default
• During crises of 1980s-90s, response was
  restructuring (IMF/WB bailouts plus structural
  adjustment)
• Key variable centralised creditor power.
• Source World Bank (2000), Global Finance Tables
  2000, Appendix G, Washington.