The World Economic & Financial The World Economic & Financial System: Risks & ProspectsSystem: Risks & Prospects

Prof. Jacob A. FrenkelProf. Jacob A. FrenkelChairman JPMorgan Chase International &Chairman JPMorgan Chase International &

Chairman Group of Thirty (G30)Chairman Group of Thirty (G30)

1 1/28/2010

The Tenth Herzliya Conference

January 31-February 3, 2010

IDC. Herzliya, Israel

Six Global ChallengesSix Global Challenges

• Financial MarketsFinancial Markets

• The Global EconomyThe Global Economy

• Global ImbalancesGlobal Imbalances

• Exit Strategy: Monetary PolicyExit Strategy: Monetary Policy

• Exit Strategy: Fiscal PolicyExit Strategy: Fiscal Policy

• The Demographic ChallengeThe Demographic Challenge2 1/28/2010

3

Global Financial Markets: Is the Global Financial Markets: Is the Worst Over?Worst Over?

•Equity MarketsEquity Markets

•Risk AppetiteRisk Appetite

•Regulatory ReformRegulatory Reform

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4

Global Equity MarketsGlobal Equity Markets

Source: Bloomberg, Market Data, Last Update Jan 27, 2010

2007 2008 200940

60

80

100

120

140

160

DevelopedMarkets

Emerging Markets

(US$ returns, 12/31/2006 = 100)

MSCI Developed Markets MSCI Emerging Mrkets

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5

UBS Global Equity Strategy Risk Appetite UBS Global Equity Strategy Risk Appetite IndicatorIndicator

2007 2008 2009-7

-6

-5

-4

-3

-2

-1

0

1

2(index)

High Risk Appetite

Low Risk Appetite

Source: UBS, Last Observation Jan 22, 2010

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The Global Economic SystemThe Global Economic System

•Global Growth ProjectionsGlobal Growth Projections

• The Rise of Developing CountriesThe Rise of Developing Countries

•UnemploymentUnemployment

•Global Trade and ProtectionismGlobal Trade and Protectionism

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-6

-4

-2

0

2

4

6

8(% from a year ago)

US Eurozone Japan Asian NIC

Real GDP Growth (%) Industrial CountriesReal GDP Growth (%) Industrial Countries

7 1/27/2010

Source: IMF, av. Annual growth rates, last update Jan 26 2010, WEO (2008 Estimate, 2009 & 2010 Forecast)

Asia NICs 4.8%

Japan 1.7%

Eurozone 1.0%

US 2.7%

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Real GDP Growth (%) Developing CountriesReal GDP Growth (%) Developing Countries

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-5

0

5

10

(% from a year ago)

Russia Developing Asia Africa Central & Eastern Europe Latin America

8

Source: IMF, av. Annual growth rates, last update Jan 26 2010, WEO (2008 Estimate, 2009 & 2010 Forecast)

Developing Asia 8.4%

Africa 4.3%

Russia 3.6%

Central & East. Europe

2.0%

Latin America 3.7%

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GDP Shares: the new Center of GravityGDP Shares: the new Center of Gravity

China, 3.6%

India, 2.8%

Japan, 9.1%

EU, 27.4%

USA, 22.8%

Brazil, 3.1%

2008200819901990

China, 11.4%

India, 5.0%

Japan, 6.4%

EU, 22.1%

USA, 20.1%

Brazil, 2.9%

Source: IMF, av. Annual growth rates, last update Oct 01 2009, WEO (2009 Estimate 2010 Forecast)

9 1/28/2010

Global Growth Contributions (%)Global Growth Contributions (%)

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

30

40

50

60

70

Industrial

Developing

(% contribution to GDP growth, based on PPP)

Industrial World Developing World

Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)

10 1/28/2010

11

Unemployment Rate (%)Unemployment Rate (%)

2000 2001 2002 2003 2004 2005 2006 2007 2008 20093

4

5

6

7

8

9

10

11(%)

Eurozone U.S Japan

Source: National Statistical Institutes, last observation Eurozone & Japan 11/ 09, U.S. 12/ 09

Japan 5.2%

Eurozone 10.0%

U.S. 10.0%

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World Trade Volume World Trade Volume

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-10

-5

0

5

10

(annual percentage change)IMF Projections

2009: -12.3%

2010: +5.8%

12

Source: IMF, av. Annual growth rates, last update Jan 26 2010, WEO (2008 Estimate, 2009 & 2010 Forecast)

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Global Payments ImbalancesGlobal Payments Imbalances

•Current Accounts ImbalancesCurrent Accounts Imbalances

• Foreign Exchange ReservesForeign Exchange Reserves

•Savings ImbalancesSavings Imbalances

•Savings ImbalancesSavings Imbalances

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14

Current Account of Balance of PaymentsCurrent Account of Balance of Payments

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-800

-600

-400

-200

0

200

400

600

800($B) Asia

$658B

ME Oil Exp. plus Russia

$214B

Eurozone -$36B

U.S. - $370B

Asia & Oil Exporters SaveAsia & Oil Exporters Save

Europe BalancesEurope Balances

US SpendsUS Spends

Source: IMF, av. Annual growth rates, last update Oct 01 2009, WEO (2009 Estimate 2010 Forecast)

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15

Current Account of Balance of PaymentsCurrent Account of Balance of Payments

Source: IMF, av. Annual growth rates, last update Oct 01 2009, WEO (2009 Estimate 2010 Forecast)

-$325

-$36 -$22 -$37

$214

$658

-400

-100

200

500

US Eurozone Africa Latin America Middle East + Russia

Asia

Of which:

China $451

Japan $106

US$ billions, 2010US$ billions, 2010

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16

•Accumulation of Foreign Exchange Reserves ($B)Accumulation of Foreign Exchange Reserves ($B)

$2,399

$997

$399 $348$270

0

500

1,000

1,500

2,000

2,500

China Japan Russia Taiwan South Korea

($B)

$1,775.5

$175.3

$295.1

$105.5$70.3

0

250

500

750

1,000

1,250

1,500

1,750

China Japan Russia Taiwan South Korea

($B)

StockStockStockStock

FlowFlow(2005 – 2009)(2005 – 2009)

FlowFlow(2005 – 2009)(2005 – 2009)

Source: Nat'l Statistical Institutes 12/ 2009, Foreign-Exchange Reserves ex. Gold.

December 2009

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17

9.8

22.823.5

31.033.4

48.5

0

5

10

15

20

25

30

35

40

45

50

CHINA INDIA KOREA, REP.OF

GERMANY JAPAN UNITEDSTATES

Source: EIU estimates, annual average rates, Last update 10/2009

National Savings Rate Comparison National Savings Rate Comparison Gross Domestic Savings: 2009 (% of GDP)Gross Domestic Savings: 2009 (% of GDP)

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18

Challenges to Monetary PolicyChallenges to Monetary Policy

•Global Interest Rate CutsGlobal Interest Rate Cuts

•Central Banks’ Balance SheetCentral Banks’ Balance Sheet

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Coordinated Global Rate CutsCoordinated Global Rate Cuts

19

2005 2006 2007 2008 2009 2010

0

1

2

3

4

5

6(%)

Canada Eurozone Japan United States United Kingdom

Source: Bloomberg Market Data, Last Update: January 29, 2010

UK %0.5

Eurozone %1.0

Japan %0.10

US %0.25

Canada %0.25

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Total Assets of Key Central BanksTotal Assets of Key Central Banks

20

Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-1050

100

150

200

250

300

350

400

BoE 307

Fed256

ECB156

(indexed July 2007=100)

(INDEX) BoE (INDEX)Federal Reserve (INDEX) ECB

Source: Federal Reserve System, ECB, BOE, Last Observation: ECB, BoE January 22, 2010/ Fed January 22, 2010

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21

Challenges to Fiscal PolicyChallenges to Fiscal Policy

•Global BudgetGlobal Budget Deficits Deficits

•Global DebtGlobal Debt

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Fiscal Positions: Budget BalanceFiscal Positions: Budget Balance

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-14

-12

-10

-8

-6

-4

-2

0

2(% of GDP)

United States Japan Eurozone

Eurozone-6.6%

U.S. -10.0%

Japan-10.2%

Source: IMF, av. Annual growth rates, last update Oct 01 2009, WEO (2009 Estimate 2010 Forecast)

22 1/28/2010

Fiscal Positions: Net DebtFiscal Positions: Net Debt

Source: IMF, av. Annual growth rates, last update Oct 01 2009, WEO (2009 Estimate 2010 Forecast)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

30

40

50

60

70

80

90

100

110

120(% of GDP)

United States Japan Eurozone

Japan115%

Eurozone86%

US67%

23 1/28/2010

24

•WorldWorld

•Developed CountriesDeveloped Countries

•Developing CountriesDeveloping Countries

•China, India, AfricaChina, India, Africa

Long-term Demographic ChallengeLong-term Demographic Challenge

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Source: United Nations Populations Division, Last update 2009

World Demographic Challenge: World World Demographic Challenge: World Population SharesPopulation Shares

2010

China, 20%

Europe, 11%

US, 5%

Other, 33%

Africa, 15%India, 18%

% Share of World

Population

25 1/28/2010

Projected change in population 2010 - 2030 :

Source: United Nations Populations Division, Last update 2009

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Change in Population between 2010 - 2030 (in millions)

World Demographic ChallengeWorld Demographic Challenge

+1400.2M

2010 Level: 6,908,689M

2030 Level: 8,308,894M

26 1/28/2010

Projected change in population 2010 - 2030 :

Source: United Nations Populations Division, Last update 2009

Developed Countries Demographic ChallengeDeveloped Countries Demographic Challenge

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Change in Population between 2010 - 2030 (in millions)

+44.4M

2010 Level: 1,237,228M

27

2030 Level: 1,281,629M

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Projected change in population 2010 - 2030 :

Source: United Nations Populations Division, Last update 2009

Developing Countries Demographic ChallengeDeveloping Countries Demographic Challenge

+1355.8M

0

50,000

100,000

150,000

200,000

250,000

300,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Change in Population between 2010 - 2030 (in millions)

2010 Level: 5,671,461M

2030 Level: 7,027,268M

28

Projected change in population 2010 - 2030 :

Source: United Nations Populations Division, Last update 2009

China Demographic ChallengeChina Demographic Challenge

+108.3M

-60,000

-35,000

-10,000

15,000

40,000

65,000

90,000

115,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Change in Population between 2010 - 2030 (in millions)

2030 Level: 1,462,468M

2010 Level: 1,354,148M

29

Projected change in population 2010 - 2030 :

Source: United Nations Populations Division, Last update 2009

India Demographic ChallengeIndia Demographic Challenge

+270.1M

-50,000

-25,000

0

25,000

50,000

75,000

100,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Change in Population between 2010 - 2030 (in millions)

2010 Level: 1,214,465M

30

2030 Level: 1,484,599M

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Projected change in population 2010 - 2030 :

Source: United Nations Populations Division, Last update 2009

Africa Demographic ChallengeAfrica Demographic Challenge

+491.1M

0

20,000

40,000

60,000

80,000

100,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Change in Population between 2010 - 2030 (in millions)

2030 Level: 1,524,187M

2010 Level: 1,033,042M

31 1/28/2010