The Outlook for the U.S. and Global Economies Dan North Euler Hermes Chief Economist, North America MAY 2012 MAY 2012

The Outlook for the U.S.

and Global EconomiesDan NorthEuler Hermes Chief Economist, North America

MAY 2012MAY 2012

2 2012 | © Copyright Euler Hermes

The Outlook May, 2012The Outlook May, 2012

• Overall Cautious OptimismOverall Cautious Optimism• RisksRisks

• Debt uncertainty in Europe/U.S.Debt uncertainty in Europe/U.S.• A positive, but weak U.S. economyA positive, but weak U.S. economy

• Forces and measuresForces and measures• Government responsesGovernment responses

• ConclusionsConclusions

ntshlntshl


The Economic Outlook for 2012 in a nutshellThe Economic Outlook for 2012 in a nutshell

Eur dbtEur dbt

World growth should fall from 3.0% in 2011 to +2.7% for World growth should fall from 3.0% in 2011 to +2.7% for 2012, with emerging economies leading the way (Asia 2012, with emerging economies leading the way (Asia ex-Japan, China, India, Latin America). ex-Japan, China, India, Latin America).

In the US, growth should be around 2% for 2012. In the US, growth should be around 2% for 2012.

Recession in the Euro zone which will be severe for Recession in the Euro zone which will be severe for several economies. Risk of disorderly default or exit several economies. Risk of disorderly default or exit from the EMU is rising.from the EMU is rising.


European Debt Crisis European Debt Crisis UncertaintyUncertainty

• This started over This started over 2 yrs2 yrs ago. Europe is burning while its leaders ago. Europe is burning while its leaders fiddle.fiddle.

• What happens whenWhat happens when Greece defaults again?Greece defaults again?• What happens ifWhat happens if Italy, Spain, France need bailouts?Italy, Spain, France need bailouts?• Latest plan: fiscal unity + ECB printing €’s. Had fiscal targets Latest plan: fiscal unity + ECB printing €’s. Had fiscal targets

before – ignored. before – ignored. • Will also need European Financial Stability Fund (EFSF) 500B €, Will also need European Financial Stability Fund (EFSF) 500B €,

IMF, EU. China? U.S. Fed / taxpayer? IMF, EU. China? U.S. Fed / taxpayer? • 7 changes in government7 changes in government• 9 downgrades9 downgrades• Dozens of meetingsDozens of meetings• 17 countries, heads of state, finance ministers, central banks, 17 countries, heads of state, finance ministers, central banks,

commercial banks, ECB/IMF/EU.commercial banks, ECB/IMF/EU.• It’s visibility goes up and downIt’s visibility goes up and down• Problem is UNCERTAINTY!Problem is UNCERTAINTY!

Afct usAfct us


European Debt Crisis European Debt Crisis UncertaintyUncertaintyHow Does It Affect Us?How Does It Affect Us?

• Exports to EuropeExports to Europe<2% of our GDP<2% of our GDP

• Financial contagionFinancial contagionPossibility that our banks are exposed to losses Possibility that our banks are exposed to losses

in in Europe - all debt markets are eventually linkedEurope - all debt markets are eventually linked

• ConfidenceConfidenceFear slows consumersFear slows consumersFinancial markets weakenFinancial markets weaken

• None of the three by themselves that much, but all None of the three by themselves that much, but all three together could be a significant dragthree together could be a significant drag

US dbtUS dbt


U.S. Debt UncertaintyU.S. Debt Uncertainty• U.S. debt problem is different. In contrast to U.S. debt problem is different. In contrast to

Europe, U.S. will never have to default because it Europe, U.S. will never have to default because it can do what no one else can – print U.S. dollars.can do what no one else can – print U.S. dollars.

• U.S. problem is government has no plan to U.S. problem is government has no plan to reduce debt that’s so high it hurts the economy.reduce debt that’s so high it hurts the economy.

• Deficits continue and debt/GDP at 100% for next Deficits continue and debt/GDP at 100% for next 10 years. No attempt to reform entitlements. 10 years. No attempt to reform entitlements.

• Congress is stuck…fiscal cliff, debt ceiling, 2012 Congress is stuck…fiscal cliff, debt ceiling, 2012 elections…uncertaintyelections…uncertainty

• Uncertainty over taxes, regulation hurting Uncertainty over taxes, regulation hurting growth.growth.

• But that’s just one aspect of the economy, let’s But that’s just one aspect of the economy, let’s look at the details…look at the details…


The four forces which started and The four forces which started and ended the recession can help ended the recession can help forecast the outlook:forecast the outlook:

• OilOil• HousingHousing• Fed policiesFed policies• FearFear

(GDP: $15T, 3.3% ave. growth. It’s the “size” of the (GDP: $15T, 3.3% ave. growth. It’s the “size” of the economy. Use it to measure the “size” of other big economy. Use it to measure the “size” of other big numbers like budget deficit/debt)numbers like budget deficit/debt)


-200%

-100%

0%

100%

200%

300%

400%19

72

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

-5%

0%

5%

10%Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth

Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI

oil price shocks often contribute to recessions

Oil Price Shocks and the Economy

290%

140%

56%38%21% 28% 36%

-36%


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400%19

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1974

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2008

2010

2012

-5%

0%

5%





290%

140%

56%38%21% 28% 36%

-36%

28%

32%


Recent oilRecent oil

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1974

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2012

-5%

0%

5%





290%

140%

56%38%21% 28% 36%

-36%

28%

32%

8%


gasgas

30

40

50

60

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May

-200

7

Au

g-2

007

No

v-20

07

Feb

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8

May

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8

Au

g-2

008

No

v-20

08

Feb

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9

May

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9

Au

g-2

009

No

v-20

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Feb

-201

0

May

-201

0

Au

g-2

010

No

v-20

10

Feb

-201

1

May

-201

1

Au

g-2

011

No

v-20

11

Feb

-201

2

May

-201

2

Brent

WTI

$90

$107

Oil Prices, $/bbl: an extended $10 rise in oil cuts 0.2% - 0.3% off U.S. GDP growth:

source: World Bank

Brent Crude, $/bblYear Average Change GDP loss2007 $732008 $98 $25 -0.50%2009 $62 -$36 0.72%2010 $80 $18 -0.36%2011 $111 $31 -0.63%

below the peaks,and falling...slowing global economy, easing fears


Gasoline prices more closely related Gasoline prices more closely related to Brent – not enough pipeline to get to Brent – not enough pipeline to get glut of WTI to refineries fast enoughglut of WTI to refineries fast enough

gasgas

30

40

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May

-200

7

Au

g-2

007

No

v-20

07

Feb

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8

May

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8

Au

g-2

008

No

v-20

08

Feb

-200

9

May

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9

Au

g-2

009

No

v-20

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Feb

-201

0

May

-201

0

Au

g-2

010

No

v-20

10

Feb

-201

1

May

-201

1

Au

g-2

011

No

v-20

11

Feb

-201

2

May

-201

2

Brent

WTI

$90

$107

Oil Prices, $/bbl: an extended $10 rise in oil cuts 0.2% - 0.3% off U.S. GDP growth:

source: World Bank

Brent Crude, $/bblYear Average Change GDP loss2007 $732008 $98 $25 -0.50%2009 $62 -$36 0.72%2010 $80 $18 -0.36%2011 $111 $31 -0.63%

below the peaks,and falling...slowing global economy, easing fears


hsnghsng

1.5

2.0

2.5

3.0

3.5

4.0

4.5U.S. Regular Gasoline Prices,$/gallon

source: EIA

4/2/12: 3.94

5/14/12: 3.71

$0.23 drop is great, but it's <6%...

7/7/08: 4.11

good: below the peaks, and falling


HousingHousing

fndmntlfndmntl

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

M / M

Y / Y

Case - Shiller Home Price Index, % Change

S&P/Case-Shiller

16%? How about 6%


HousingHousing

Yld crvYld crv

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

500

1,000

1,500

2,000

2,500A

pr-

02

Ap

r-0

3

Ap

r-0

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Ap

r-0

5

Ap

r-0

6

Ap

r-0

7

Ap

r-0

8

Ap

r-0

9

Ap

r-1

0

Ap

r-1

1

Ap

r-1

2

U.S. Housing MarketFundamental Measures, Seasonally Adjusted Annualized Rates

sources: National Association of Realtors, Census

Existing 1-Family Home Sales(right scale), -35%

Starts, -68%

Permits, -68%

New 1-Family Home Sales, -75%


-6%

-4%

-2%

0%

2%

4%

6%

8%

10%1

Q7

2

1Q

74

1Q

76

1Q

78

1Q

80

1Q

82

1Q

84

1Q

86

1Q

88

1Q

90

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1Q

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12

-300

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-100

0

100

200

300

400

500Yield Curve:

10yr-3 mo Treasuries (bps)

Source: Census Bureau, Federal Reserve

The Treasury Yield Curve vs. GDP

Yld crvYld crv


-6%

-4%

-2%

0%

2%

4%

6%

8%

10%1

Q7

2

1Q

74

1Q

76

1Q

78

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88

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1Q

12

-300

-200

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0

100

200

300

400

500Yield Curve:


Real GDP Growth,Y/Y % Change



Yld crvYld crv


150

200

250

300

350

400

1/10

3/10

5/10

8/10

10/1

012

/10

3/11

5/11

7/11

10/1

112

/11

2/12

5/12

Yield Curve Steepness: 10 yr-3 mo. yield (bps), still positive, but has fallen

Source: Federal Reserve

sovereign debt worries

weak economic data

Jck Hole

Nov mtg go QE2!

Sep hint

Yld crvYld crv


lendnglendng

150

200

250

300

350

400

1/10

3/10

5/10

8/10

10/1

012

/10

3/11

5/11

7/11

10/1

112

/11

2/12

5/12

Yield Curve Steepness: 10 yr-3 mo. yield (bps), still positive, but has fallen

Source: Federal Reserve

sovereign debt worries

weak economic data

Jck Hole

Nov mtg go QE2!

Sep hint

Arab Spring

Japan

euro/US worries

euro worries

oil prices

weak economic

data


Banks are lending, fear recedingBanks are lending, fear receding

recaprecap

-30%

-20%

-10%

0%

10%

20%

30%

40%6-

74

6-76

6-78

6-80

6-82

6-84

6-86

6-88

5-90

5-92

5-94

5-96

5-98

5-00

5-02

5-04

5-06

5-08

5-10

5-12

Commercial and Industrial Loansquarterly annualized % change

source: Federal Reserve

Finally! Lending is resuming.

one reason this recovery has taken so long compared to others


RecapRecap

• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag, now improving has been a drag, now improving• HousingHousing flat flat• Yield curveYield curve positive but falling positive but falling• LendingLending good good

• So what do the measures of the So what do the measures of the economy say?economy say?


GDP recoveringGDP recovering

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q1-19

74

Q1-19

76

Q1-19

78

Q1-19

80

Q1-19

82

Q1-19

84

Q1-19

86

Q1-19

88

Q1-19

90

Q1-19

92

Q1-19

94

Q1-19

96

Q1-19

98

Q1-20

00

Q1-20

02

Q1-20

04

Q1-20

06

Q1-20

08

Q1-20

10

Q1-20

12

Real Gross Domestic Product (GDP)annualized quarterly growth rate

source: BEA

Whew!

(but still < ave)


Consumption: income fuels spendingConsumption: income fuels spending

-10%

-5%

0%

5%

10%

Mar

-07

Sep-0

7

Mar

-08

Sep-0

8

Mar

-09

Sep-0

9

Mar

-10

Sep-1

0

Mar

-11

Sep-1

1

Mar

-12

Real PCE

Real DPI

source: BEA

Personal Consumption Expenditures (PCE) & Disposable Personal Income (DPI)

real % growth rate, 3 mos. annualized

consumption OK, income not

mfrmfr


Manufacturing strongManufacturing strong

20

30

40

50

60

70A

pr-

07

Ap

r-08

Ap

r-09

Ap

r-10

Ap

r-11

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r-12

Manufacturing

Mfr new orders

source: ISM

Institute of Supply Management Manufacturing Indices>50 means expansion

Monthly survey asks if conditions are same, better, or worse for: new orders, production, employment, supplier deliveries, inventories, customer inventories, prices, backlogs, new export orders, imports.

good: new orders tend

to lead

cntnrscntnrs


Two last measures, BankruptciesTwo last measures, Bankruptcies

brptbrpt

0

5,000

10,000

15,000

20,000

25,000

30,000

Q4

-19

80

Q4

-19

82

Q4

-19

84

Q4

-19

86

Q4

-19

88

Q4

-19

90

Q4

-19

92

Q4

-19

94

Q4

-19

96

Q4

-19

98

Q4

-20

00

Q4

-20

02

Q4

-20

04

Q4

-20

06

Q4

-20

08

Q4

-20

10

Q4

-20

12

U.S. Business Bankruptcy Filings, quarterly

40-50% annual growth rates from 2008 - 2009

f'cast 2012 = -10%

down 11 consec Q's, 1st time ever

source: Administrative Office of the U.S. Courts, Euler Hermes


But But perceptionperception of risk still very high: of risk still very high:

0

20

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4/9

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4/1

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4/1

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4/1

2

Default Risk: Corporate Bond Spread Over TreasuriesMoody's seasoned Aaa - 10 year Treasury Note

average since 1953 is 76 bps

Source: Moody's, Federal Reserve

subprime begins

Lehman fails

sovereign debt pt.1

Japan, Arabia,

Europe, US, oil

still far above

average

emplyemply


-1,000

-800

-600

-400

-200

0

200

400

600

Apr-02

Apr-03

Apr-04

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Apr-11

Apr-12

3%

4%

5%

6%

7%

8%

9%

10%Non-Farm Payroll Jobs Created (000's) (left scale)

Jobs Created and the Unemployment Rate

source: Labor Department

UnemploymentRate (right axis)


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3%

4%

5%

6%

7%

8%

9%

10%Non-Farm Payroll Jobs Created (000's) (left scale)

Jobs Created and the Unemployment Rate

source: Labor Department

UnemploymentRate (right axis)

4 yrs later, less than half

recovered

recprecp


RecapRecap

• Four forces caused/ended recessionFour forces caused/ended recession• OilOil has been a drag but improving has been a drag but improving• HousingHousing flat flat• Yield curveYield curve positive but falling positive but falling• LendingLending good good• GDP, consumer weak, manufacturing GDP, consumer weak, manufacturing

goodgood• Employment alarmingEmployment alarming• To fix it, the government is causing two To fix it, the government is causing two

big problems:big problems:Debt & Potential InflationDebt & Potential Inflation

fiscfisc


FISCAL POLICYFISCAL POLICY

Congress, AdministrationCongress, AdministrationSpending, taxing, borrowingSpending, taxing, borrowing

deficits/debt, budgets…deficits/debt, budgets…

mathmath


• Year 1: spent $80Year 1: spent $80• Original budget for year 2: spend $110Original budget for year 2: spend $110• Final budget for year 2: spend $90Final budget for year 2: spend $90

• In Washington, even though they’re In Washington, even though they’re spending $10 more in year 2,spending $10 more in year 2, this is what this is what they call a $20 “cut”.they call a $20 “cut”.

• Both sides do thisBoth sides do this

Budget Math in WashingtonBudget Math in Washington

defsdefs


Spending, Deficits and DebtSpending, Deficits and Debt

Gov’t spendsGov’t spends $10 $10

Gov’t gets tax revenue Gov’t gets tax revenue $6$6

DeficitDeficit $4$4

Treas. gets loan, issues $4 notes/bondsTreas. gets loan, issues $4 notes/bonds

How big is $4T? Don’t know - measure How big is $4T? Don’t know - measure against size of the economy - GDPagainst size of the economy - GDP

debtdebt


1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%19

6119

6319

6519

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7119

7319

7519

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8119

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8519

8719

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9119

9319

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9719

9920

0120

0320

0520

0720

0920

1120

1320

1520

1720

1920

21

Federal Debt as a % of GDP (OMB)Accumulated deficits become debt…Accumulated deficits become debt…


20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%19

6119

6319

6519

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9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

1320

1520

1720

1920

21

Federal Debt as a % of GDP (OMB)

1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%

Debt>90% = -1% GDPDebt>90% = -1% GDP

Accumulated deficits become debt…Accumulated deficits become debt…

Def red comDef red com


The Simpson - Bowles Deficit Reduction The Simpson - Bowles Deficit Reduction Commission finally said it out loud:Commission finally said it out loud:

We must touchWe must touch the “third rails” of the “third rails” of • Social SecuritySocial Security• MedicareMedicare

If we don’t we will never be able to balance If we don’t we will never be able to balance the budget - entitlements will become the the budget - entitlements will become the entireentire budget budget

The rest is whistling past the graveyard…The rest is whistling past the graveyard…


Discretionary, 11%

Defense, 21%

Interest, 5%

Income Security, 19%

Social Security, 21%

Health, 24%

Outlays, 2010 Budget, $3.5TOutlays, 2010 Budget, $3.5T


Outlays, 2010 Budget, $3.5TOutlays, 2010 Budget, $3.5T

Discretionary, 11%

Defense, 21%

Interest, 5%

Income Security, 19%

Social Security, 21%

Health, 24%

entltmntsentltmnts


EntitlementsEntitlementsEntitlement spending, particularly Medicare or Entitlement spending, particularly Medicare or some other form of national healthcare, will be one some other form of national healthcare, will be one of the two most contentious and important social, of the two most contentious and important social, political and economic issue for several political and economic issue for several generations, the other being energy (ex war). generations, the other being energy (ex war).

One generation will not be getting the benefits One generation will not be getting the benefits they think are owed them and another generation they think are owed them and another generation will be taxed to exhaustion to try to provide them.will be taxed to exhaustion to try to provide them.

But it is not hopeless nor doomsday because the But it is not hopeless nor doomsday because the math is simple, but right now politicians seem to math is simple, but right now politicians seem to be incapable of mustering the political will to fix it.be incapable of mustering the political will to fix it.

isunceisunce


-100

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-60

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monthly (left axis)

6 month ave. (right)

Net Issuance of U.S. Treasury Securities, $B

source: Bureau of Public Debt

isunceisunce


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monthly (left axis)

6 month ave. (right)

Net Issuance of U.S. Treasury Securities, $B

source: Bureau of Public Debt

FYI, this week alone, the Treasury FYI, this week alone, the Treasury is indebting you and your kids for:is indebting you and your kids for:$30B 4 wk. bills$30B 4 wk. bills$30B 3 mo. bills$30B 3 mo. bills$27B 6 mo. bills$27B 6 mo. bills$35B 2 yr. notes$35B 2 yr. notes$35B 5 yr. notes$35B 5 yr. notes$29B 7 yr. notes$29B 7 yr. notes

Fisc revFisc rev


Fiscal Policy ReviewFiscal Policy Review

We need CLARITY, CERTAINTY, a plan, instead we We need CLARITY, CERTAINTY, a plan, instead we have:have:• No 2011 budget, no 2012 budgetNo 2011 budget, no 2012 budget• 2013 Admin. budget DOA – more debt and deficit2013 Admin. budget DOA – more debt and deficit• 2013 Republican budget DOA2013 Republican budget DOA• Budget Control Act of 2011 (BCA) and its Super Budget Control Act of 2011 (BCA) and its Super Committee did nothing to reduce debt, did nothing Committee did nothing to reduce debt, did nothing to reform Medicare and Social Securityto reform Medicare and Social Security• Four administration deficit reduction plans 2011Four administration deficit reduction plans 2011• Many others from Congress, Commissions, Many others from Congress, Commissions, candidatescandidates• Borrowing more every day…Borrowing more every day…

stuckstuck


FISCAL POLICY REVIEWFISCAL POLICY REVIEWCongress stuck - What now?Congress stuck - What now?

Things could change at:Things could change at:

• 2012 Fiscal cliff (expiration of Bush and 2012 Fiscal cliff (expiration of Bush and payroll tax cuts, some jobless benefits, payroll tax cuts, some jobless benefits, sequestration, ceiling?)sequestration, ceiling?)

• 2012 elections2012 elections• 2024 Medicare goes insolvent2024 Medicare goes insolvent• 2050 Social Security goes insolvent2050 Social Security goes insolvent• Do note that this is the current situation – Do note that this is the current situation –

it can changeit can change

monmon


MONETARY POLICYMONETARY POLICY

The Federal Reserve Bank,The Federal Reserve Bank,Ben BernankeBen Bernanke


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Fed Funds

Mortgages

10-yr

Interest Rates


Yld crvYld crv


-6%

-4%

-2%

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10%1

Q7

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-300

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500Yield Curve:


Real GDP Growth,Y/Y % Change



txttxt


MONETARY POLICYMONETARY POLICY• Lowering the Lowering the short termshort term Fed Funds interest rate Fed Funds interest rate

usually worksusually works


MONETARY POLICYMONETARY POLICY• Lowering the Lowering the short termshort term Fed Funds interest rate Fed Funds interest rate

usually worksusually works• But this time needed an extra boost, lowering But this time needed an extra boost, lowering

long termlong term interest rates. interest rates.• Quantitative easing:Quantitative easing:• Fed prints new $ billsFed prints new $ bills• Buys Treasury bonds in open marketBuys Treasury bonds in open market• Raises bond prices, lowering interest rates Raises bond prices, lowering interest rates

(they move in opposite directions)(they move in opposite directions)• Puts $ into financial systemPuts $ into financial system• And creates inflationary pressures… QE3?And creates inflationary pressures… QE3?

Bal shtBal sht


Quantitative Easing (QE)Quantitative Easing (QE)

10 yr work10 yr work

0

500

1,000

1,500

2,000

2,500

3,000

5-89

5-90

5-91

5-92

5-93

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5-10

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5-12

Federal Reserve Balance Sheet, $B


QE2, 2010-11

QE1, 2008

Huge easing,unprecedented increase

(3x) in liquidity

QE3?


Did QE2 work?Did QE2 work?Yield on 10 year Treasury Note

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%4

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hoped for this:

Jackson Hole

QE2

Sep hint



1.5%

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but got this:record rate of increase, inflationary expectations

Jackson Hole

QE2

Sep hint



1.5%

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but got this:record rate of increase, inflationary expectations

Jackson Hole

QE2

Sep hint

Arab Spring

Japaneuro

worries

risk aversion

oil prices, weak data, US worries

euro, US worries

work?work?



1.5%

2.0%

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Jackson Hole

QE2

Sep hint

Arab Spring

Japaneuro

worries

risk aversion

oil prices, weak data, US worries

QE2 ends...did it work?

euro, US worries

All sameAll same


QE2/3 = Printing money = Inflation = Dollar devaluationQE2/3 = Printing money = Inflation = Dollar devaluationThey are all the same thing.They are all the same thing.



Example; suppose today there is Example; suppose today there is • one loaf of bread priced at $1, up for auctionone loaf of bread priced at $1, up for auction• two hungry people, each with a printing presstwo hungry people, each with a printing press• to out-bid the other, each runs his press as fast as to out-bid the other, each runs his press as fast as possible until one breakspossible until one breaks• by then, the price of the bread is $1Mby then, the price of the bread is $1M



Example; suppose today there is Example; suppose today there is • one loaf of bread priced at $1, up for auctionone loaf of bread priced at $1, up for auction• two hungry people, each with a printing presstwo hungry people, each with a printing press• to out-bid the other, each runs his press as fast as to out-bid the other, each runs his press as fast as possible until one breakspossible until one breaks• by then, the price of the bread is $1Mby then, the price of the bread is $1M• printing money printing money created created inflation;inflation; price from $1 to $1M price from $1 to $1M• printing moneyprinting money devalueddevalued each $1 bill; each $1 bill each $1 bill; each $1 bill used to be worth one loaf of bread, but now is worth 1 used to be worth one loaf of bread, but now is worth 1 millionth of a loaf of breadmillionth of a loaf of bread

• Money was printed (QE)Money was printed (QE)• Inflation was createdInflation was created• The dollar was devaluedThe dollar was devalued

$ fall$ fall


$ devalued, QE at work$ devalued, QE at work

whywhy

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

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5%J

un

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$C -3%

C¥ -7%£ -7%

¥ -13%

$A -15%

€ -4%

SF-18%

source: Federal Reserve Bank of New York

$US weakening

Value of the USD from June 1, 2010


So, remind me, why are we doing that again?So, remind me, why are we doing that again?

QE = Printing money = Dollar devaluation = inflation QE = Printing money = Dollar devaluation = inflation meant to stimulate the economy by lowering meant to stimulate the economy by lowering interest ratesinterest rates

But dollar devaluation can also: But dollar devaluation can also: • Raise commodity prices – oil, metalsRaise commodity prices – oil, metals • Devalue the $14T in debt U.S. owesDevalue the $14T in debt U.S. owes• Boost exportsBoost exports• Create asset bubbles - real estateCreate asset bubbles - real estate

commodscommods


$ deval = higher commodities prices$ deval = higher commodities prices

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-10%

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70%S&P GS Commodity IndexTrade Wgtd $ (left scale)S&P GS Commodity IndexCrude Oil, WTI

Commodity & Oil Prices vs. $

$ weakening (left scale)

Debt dvlDebt dvl


Debt DevaluationDebt DevaluationSimple exampleSimple exampleToday: Lend $1 @10%. Loaf of Bread costs $1Today: Lend $1 @10%. Loaf of Bread costs $1Inflation goes to 20%Inflation goes to 20%

A Year later:A Year later:Creditor gets $1.10 back.Creditor gets $1.10 back.But now loaf of bread costs $1.20.But now loaf of bread costs $1.20.

Creditors lose with inflation.Creditors lose with inflation.Debtors, like the U.S. government, win.Debtors, like the U.S. government, win.The U.S. government The U.S. government is ok withis ok with inflation. inflation.The U.S. government The U.S. government is ok withis ok with a weaker dollar. a weaker dollar.May be only way out of $14T in debt.May be only way out of $14T in debt.

Mon rvwMon rvw


MONETARY POLICY REVIEWMONETARY POLICY REVIEW

• Controls short term Fed Funds rateControls short term Fed Funds rate• But needed QE2, printed new money, pumped But needed QE2, printed new money, pumped

it into global financial systemit into global financial system• Meant to lower long-term interest ratesMeant to lower long-term interest rates• Also causes $ devaluationAlso causes $ devaluation• Raise commodities prices, devalue debt Raise commodities prices, devalue debt

(boost exports, asset bubbles)(boost exports, asset bubbles)• QE 3 possibleQE 3 possible• Other recent extraordinary measures: press Other recent extraordinary measures: press

conferences, inflation targets, forecasts, conferences, inflation targets, forecasts, blaming/asking Congressblaming/asking Congress

Fisc monFisc mon


0%

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-07

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Ind 45%

Chn 20%

Aus 15%

S.K. 30%

Eur 75%UK 80%US 100%

Jpn 200%

Chl 20%

source: central banks, national stat. off ices

line is central bank rate

# is debt/GDP

Monetary & Fiscal PolicyMonetary & Fiscal PolicyLess debt, faster recovery. Debt kills.Less debt, faster recovery. Debt kills.

Get itGet it


Monetary & Fiscal PolicyMonetary & Fiscal PolicyLess debt, faster recovery. Debt kills.Less debt, faster recovery. Debt kills.

European politicians get it, but can’t fix it. U.S. politicians don’t even get it.European politicians get it, but can’t fix it. U.S. politicians don’t even get it.

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-07

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O-0

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O-0

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A-1

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J-1

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O-1

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J-1

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A-1

2

Ind 45%

Chn 20%

Aus 15%

S.K. 30%

Eur 75%UK 80%US 100%

Jpn 200%

Chl 20%

source: central banks, national stat. off ices

line is central bank rate

# is debt/GDP

Glbl cnclGlbl cncl


Conclusions, GlobalConclusions, Global

GDP growth 2012 GDP growth 2012 • 2.7% global 2.7% global • most coming from China, emerging mktsmost coming from China, emerging mkts• around 2% in the U.S. around 2% in the U.S. • Europe:Europe:

• recession, severe in some countriesrecession, severe in some countries• risk of exits or disorderly defaults risingrisk of exits or disorderly defaults rising• EMU probably holds, but will need:EMU probably holds, but will need:

• a lot of timea lot of time• fiscal unity, ECB, EFSF, IMF/othersfiscal unity, ECB, EFSF, IMF/others

US cnclUS cncl


Conclusions, U.S.Conclusions, U.S.PositivesPositives

•Falling oil pricesFalling oil prices•Arab spring, Japan, weather, Arab spring, Japan, weather, oil, masked strengthoil, masked strength•Super stimulative monetary Super stimulative monetary policy will eventually helppolicy will eventually help•Yield curve positiveYield curve positive•Bank lendingBank lending•OK consumerOK consumer•Strong ManufacturingStrong Manufacturing•Bankruptcies fallingBankruptcies falling•Dollar fallingDollar falling•Global economy growingGlobal economy growing•2012 GDP growth anemic 2%2012 GDP growth anemic 2%

NegativesNegatives•Uncertainty from WDCUncertainty from WDC•Debt dragDebt drag•Uncertainty from Uncertainty from EuropeEurope•High oil pricesHigh oil prices•Personal Income weakPersonal Income weak•Housing market sickHousing market sick•Yield curve fallenYield curve fallen•High unemploymentHigh unemployment•Future InflationFuture Inflation


Thank you for your attention

Documents

The Outlook for the U.S. and Global Economies Dan North Euler Hermes Chief Economist, North America MAY 2012 MAY 2012