canada 2020 speakers series: niall ferguson on "the great recession"

Presented to www.canada2020.ca

American Recessional? The Crisis of Globalization

Ottawa, February 23, 2009


The end of the Age of Leverage


The end of the Age of Leverage

• At peak, U.S. consumption was 72% of GDP– Pre-bubble norm 1975 to 2000: 67%

• But income from labor didn’t keep pace• Net equity extraction from 3% of disposable

personal income in 2000 to 9% in 2006– From 1997 to 2008 amount of debt required to

generate $1 of GDP grew from $2.50 to $3.50

• Net national saving declined and then turned negative

• So U.S. had to rely on capital imports– $3bn of capital inflows each business day


Global imbalancesCurrent account balances as percentages of global GDP

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Oil exporters

Emerging Asia

Japan

Euro Area

United States


Fuelled a property bubble and bustCase-Shiller national indices, annual rate of change, 1988-2008

-25

-20

-15

-10

-5

0

5

10

15

20

25

Janu

ary

1988

Janu

ary

1989

Janu

ary

1990

Janu

ary

1991

Janu

ary

1992

Janu

ary

1993

Janu

ary

1994

Janu

ary

1995

Janu

ary

1996

Janu

ary

1997

Janu

ary

1998

Janu

ary

1999

Janu

ary

2000

Janu

ary

2001

Janu

ary

2002

Janu

ary

2003

Janu

ary

2004

Janu

ary

2005

Janu

ary

2006

Janu

ary

2007

Janu

ary

2008

Composite-10

Composite-20


Not Great Depression 2.0 … YetAnatomy of a recession, 2007-8

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

2007-IV 2008-I 2008-II 2008-III 2008-IV

Government consumption expendituresand gross investment

Net exports of goods and services

Gross private domestic investment

Personal consumption expenditures

-0.2

+0.9

+2.8

-0.5Figures show percentage change in real GDP at annual rate-3.8


But a Great Recession …

• House prices down 25% from peak and falling– 13.6m homeowners underwater

• Savings rate up from 0.7% to 3.6% Sept-Dec• U.S. banks (17% of lending) are in freefall

– Projected losses on unsecuritized loans $1.1trn + securities write-downs ~$700bn = $1.8trn (Roubini)

– FDIC insured banks’ capitalization $1.3trn; investment banks’ $110bn after TARP recap of $230bn

• Securitization markets (22% of lending) have collapsed 2008 c/w 2007– US commercial MBS -95%; US student loan ABS

-47%; US auto ABS -45%; US credit card ABS -24%


The new policies

1. Term Asset-Backed Securities Loan Facility (TALF) to revive securitization with up to $1trn

2. Public Private Investment Fund (PPIF) to buy up to $1trn of bank assets

3. American Recovery and Reinvestment Act (ARRA) $787bn ~5.5% of projected GDP

4. Homeowner Affordability and Stability Plan (HASP) $275bn to reduce interest payments for 7-9 million homeowners


(Out of the) ballpark figures

• CBO estimated deficit to be $1.2trn (8.3%) before stimulus package so could go to $1.4trn this year (~10%)

• Total exposure of taxpayer: ~$9.7trn– Federal Reserve, Treasury Department and Federal

Deposit Insurance Corporation have already lent or spent almost $3trn over past 2 years and pledged to provide up to $5.7trn more if needed

– $1trn in stimulus packages, ~$3trn in lending and spending and $5.7trn in agreements to provide aid (Bloomberg)


Who pays?

• At height of the credit boom, 50% of all borrowing by US households and non-financial businesses was financed by foreigners, with Asian central banks playing the lead role– Chinese reserves ~$2.3trn of which $1.7trn in USD– Last year Chinese holdings of Treasuries rose 15% to ~ $700bn

• But quarterly pace of accumulation in China’s foreign exchange reserves plunged 74% last year– In November China was a net seller of $9.2bn of Treasuries

• China’s foreign reserves will increase by only $177bn this year, down from ~$415bn last year

• Total Chinese outflows in the fourth quarter of 2008 were as much as $240bn


The perils of protection

• Geithner’s accusation of “currency manipulation” at his confirmation hearing

• Over the 2005–07 period, fully 45 pieces of anti-China trade legislation were introduced in the US Congress, tho’ not passed

• Stimulus package’s “Buy America” provision and the restriction on H-1B visas for new NY bank hires

• All a little worrying when 80%+ of Canada’s exports go to the U.S.


Geopolitical implications?


1. Even faster Chinese catch-up?Goldman GDP projections (bn 2006 $) BRICs v the "G4", 2006-2050

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2006 2011 2016 2021 2026 2031 2036 2041 2046

Brazil

China

India

Russia

Germany

Japan

United Kingdom

United States

"Il Sorpasso": 2027 (previously 2040)


2. Like £, $ to lose reserve status?USD per GBP daily close, 1900-2008

0

1

2

3

4

5

6

7

01/02/1900 05/07/1907 08/20/1914 11/11/1921 12/13/1928 01/14/1936 02/17/1943 04/04/1950 04/26/1957 06/08/1964 10/01/1971 07/09/1980 03/13/1989 08/22/1997 02/06/2006


But God still watches over …


1. Crisis could slow catch-up

Projections by NF Projections by GSChina 6% US 1% China US

2026 8,602 16,161 19,753 20,594 2036 15,404 17,852 36,330 26,824 2041 20,614 18,763 47,383 30,589


2. And dollar has rallied


Along with US Treasuries


Why? It’s not just a global crisis


It’s a crisis of globalization


And that hits others harder

• It’s an unfair world: The American crisis hurts others more than it hurts America

• Because the U.S. retains “safe haven” status, despite its fiscal problems

• Which is because of its relative political stability in an increasingly unstable world

• Which gives it maximum fiscal and monetary room for maneuver


But worse for allies than rivals?

• U.S. -1.6%• Eurozone -2.0%• Germany -2.5%• Japan -2.6%• UK -2.8%• Canada -2.8%*• Asian NICs -3.9%

• China +6.7%• India +5.1%• Middle East +3.9%• Sub-Sahara +3.5%• Russia -0.7%• C&E Europe -0.4%

(all figures are IMF forecasts for 2009 % change in real GDP)


1. The indebted Anglosphere

Canada

AustraliaBritainUSA


Canadian virtue: Its own reward

• Banks leveraged at 18 to 1, compared with U.S. banks 26 to 1

• 12 years of budget surpluses

• Home prices down ~12%– No mortgage interest

deduction, no non-recourse loans

• But 80% of trade is with U.S.

• Canada now contracting faster than U.S.


2. A tale of two Asias

• Japan’s industrial output down 23% since September– Collapse of Chinese

demand plus strong ¥

• NICs: Singapore to contract 5%, S. Korea by 4%– Exports, net of import

content, are two-thirds of GDP in Hong Kong and Singapore, half for Malaysia and Thailand, one-third for South Korea and Taiwan

• China to grow ~6.7%– 20m rural migrant workers,

15 per cent of the total, have lost jobs

– China’s stimulus: fiscal deficit of 111bn yuan in 08

– But export reliance (36% of GDP) makes China vulnerable

• India will grow 5.1%– More Slumdog

Millionaires?


Percentage decline from peak to trough, 2008

0 5 10 15 20 25 30 35 40 45 50

Taiwan

Hungary

Japan

Thailand

Czech Republic

S Korea

Brazil

Poland

Argentina

Malaysia

United Kingdom

United States

Eurozone

Canada

Mexico

China

Australia

Exports

Industrial production


3. The centrifugal Eurozone

• IMF says European and British banks have 75% as much exposure to U.S. toxic assets as American banks themselves, yet write-downs have been $738bn in the U.S.: just $294bn in Europe

• In January 2009, yield spreads on 10-year Portuguese, French, Belgian, Greek, Spanish, Italian, Irish and Dutch bonds over benchmark German Bunds reached highest level since 1999

• West European banks provided three-quarters of the $4.7 trillion in cross-border loans to the Baltic countries and Eastern Europe– Exposure to eastern Europe is ~80% of Austrian GDP


Europe’s bank nightmareBank liabilities and leverage

0

50

100

150

200

250

300

Be

lgiu

m

Sw

itze

rlan

d

Ice

lan

d

Brit

ain

Ita

ly

Fra

nce

Ge

rma

ny

Sw

ed

en

De

nm

ark

Au

stria

Sp

ain

Ire

lan

d

US

A

Tu

rke

y

No

rwa

y

Po

lan

d

0

10

20

30

40

50

60

Short-term bank liabilities as %GDPAverage bank leverage (bankassets divided by net worth)


4. Eastern Europe’s crisis


The political consequences …

• Not only Canada …

• Greece, Iceland, Thailand

• Feb. 22: Latvia’s four-party coalition government resigned after two parties called for Prime Minister Ivars Godmanis to step down


The bluffer: Putin at Davos

• “There was a serious malfunction in the very system of global economic growth – namely, when one regional center endlessly prints money and reaps the benefits …

• “… the excessive dependence on what is basically the only reserve currency is dangerous for the world economy. So it would be reasonable to stimulate a process of getting a number of strong reserve currencies.

• “… The unipolar pattern of the world economy that is completely outdated by now must be replaced by a new system based on cooperation of several big centres. …

• “Let us be frank: provoking military-political instability and other regional conflicts is also a convenient way of deflecting people’s attention from mounting social and economic problems. Regrettably, further attempts of this kind cannot be ruled out.”


Why he’s bluffing

Russia will run out of reserves in just 14 months if it keeps spending them on currency intervention at current pace


The real challenge? Wen at Davos

• “The crisis has fully exposed the existing international financial system and governance structure defects. … [It is necessary to] increase the voice and representation of developing countries in international financial organizations and actively fulfill its [sic] role in the maintenance of international and regional financial stability.” (Wen Jiabao at Davos)

• “Whether China will continue to buy [U.S. bonds], and how much to buy, should be in accordance with China’s needs, and depend on the safety and protection of value of foreign exchange.” (Wen Jiabao at weekend)


Or maybe not

“Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion-$2 trillion … we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” (Luo Ping, a director-general at the China Banking Regulatory Commission, Feb. 11)


The People’s Daily, Feb. 20, 2009

“China and US have become stakeholders in terms of bilateral trade, a common destiny to share fortunes. Niall Ferguson, a US professor coined the term ‘Chimerica’. ‘Chimerica is a fantasy country that I dreamt up a couple of years ago. It’s the economy you get when you add together China plus America,’ said Ferguson.“… vividly common interests have tied China and US closer and closer together [and] the bilateral ties have gained more and more global importance and influence. … Generally speaking, China-US relations will be following a period of chillness before heading towards normalization.”


Conclusion

• It’s tempting to interpret this crisis as the end of the “American century”

• But the United States may in fact be in a stronger position than we think because of the asymmetric impact of this crisis

• The catch is that the crisis hits U.S. allies harder than rivals

• This may encourage a tougher policy from China and Russia

• But U.S. mustn’t confuse a Great Recession with an American Recessional

canada 2020 speakers series: niall ferguson on "the great recession"

Economy & Finance