Download Global Tensions and Economic Security, 2015 CCMR Executive

Global Tensions
and Economic Security
2015 CCMR Executive
Course in Decision Making
Naval Postgraduate School
May 13, 2015
Dr. Robert E. Looney
[email protected]
Outline
•
The Global Economic Crisis and Aftermath
• Overview
• Patterns of Recovery
• The Current Situation
• Forecasts/Scenarios
•
Key Risks
• Eurozone Crisis -- Financial market instability
• Instability in Oil Exporting Countries
• African Debt – Increased vulnerabilities
• China Hard Landing – Instability in the global economy
• Falling Defense Expenditures in the West – Declining world security
•
General Lessons
2
The Global Crisis
3
Economic Crisis and Security Threats
“The global recession is America’s primary near-term security
concern.”
Admiral Blair – Director of National Intelligence
(February 2009)
“The single biggest threat to national security is the national
debt.”
Admiral Mullen, Chairman of the Joint Chiefs of Staff
(August 2010)
“I have to confess, I paid no attention to this (economics) as a
cadet and have done nothing to increase my awareness of
economics issues between age 22 and 59. I should have
paid attention.”
General Dempsey, Chairman of the Joint Chiefs of Staff
(October 2011)
4
Global Economy Overview I
The Changing Global System
• Before the 2008-09 crisis, the main feature of the global
economy was its rapid integration – has continued but at
a slower pace since the crisis
• However, economic policies largely set at the national
level to benefit domestic economy
• These policies are increasingly affecting other economies
• External effects are particularly important in the financial
sector due to potential for large and abrupt changes in:
• Capital flows
• Asset prices
• Interest rates, exchange rates, and
• Credit availability.
5
Global Economy Overview II
The 2008-09 global economic crisis and its aftermath
illustrate this new reality
• Characterized by defective growth models in advanced
economies based on
• Excess monetary expansion/credit and
• Debt-driven domestic aggregate demand
• Complicated by structural flaws and limited adjustment
mechanisms especially in Europe leading to
• Instability
• An on-going crisis
• Large negative shock to the real economy
• Emerging economies were subsequently affected by
• Credit tightening (including trade finance)
• Rapid declines in exports
6
Global Economy Overview III
• Post-crisis policy largely based on credit expansion and
debt reduction
• Unconventional monetary policy – United States
• Lowered cost of credit for debtors and those seeking to borrow
for business expansion
• Came at the at expense of savers – lower interest rates
• Did not work well because investment constrained by deficient
domestic demand relative to capacity
• Savers sought higher returns in emerging economies
• Causing increases in credit and causing upward pressure
on exchange rates and asset prices – responded with
• Limits on capital inflows
• Reserve accumulation and
• Measures to restrict credit and restrain asset-price inflation
7
Global Economy Overview IV
• Situation changed in May 2013 when U.S. Federal reserve
indicated it might taper its purchase of long-term assets
• Asset prices shifted and in emerging economies
• Capital rushed out,
• Caused credit markets to tighten and
• Exchange rates to fall
• Causing a slowdown in short-term growth.
• The reversals may have longer term adverse effects – although
not clear at this point
• While China’s output is affected by advanced country
economic performance – financial system largely isolated
• Capital account less open, foreign currency reserves of $2.5
trillion mean exchange rate is controllable
8
Global Economy Overview V
• Decentralized policy and growing externalities will result
in a partial de-globalization
• Not a good idea to run persistent current account deficits and
become dependent on (temporarily) low-cost foreign capital
• Open capital accounts may be replaced by rules-based
constraints on financial capital flows
• Lesson from crisis
• Pattern of accumulating reserves via current account surplus will
be more pronounced in order to manage exchange rates
• Public purchases of domestic assets to stabilize asset prices net
capital flows will become increasingly common.
• Successful countries will be those who learn to live with
growing policy interdependency without much policy
coordination
9
Crisis Has Accelerated Changes in World GDP
10
Decline of the G-8
11
Patterns of Future Pubic Debt
12
Debt Vulnerability
13
Industrial Recovery
14
Patterns of Recovery from The Crisis I
Patterns of Recovery
• Differences in GDP levels and growth rates since the
beginning of the crisis strikingly diverse:
• Far exceed differences in economic performance observed prior
to the crisis.
• Even within Europe and within the euro area.
• Can assign countries to groups based on the depth of the
initial output loss and the gap between pre-crisis and
post-crisis growth.
• The cumulative output loss during the crisis is
• The sum of the gap between 2008 and 2007 GDP,
• Plus the gap between 2009 and 2007 GDP, expressed in
percentage points of 2007 GDP.
15
Patterns of Recovery from The Crisis II
• Countries were allocated to the following groups:
• Real GDP level lower in 2009 than in 2007 and projected to be
lower in 2016 than in 2009. Croatia, Greece, Italy, Portugal.
• Cumulative output loss during the crisis smaller than 4% of
GDP, and annual post-crisis real GDP growth (2009–16) more
than half the pre-crisis (2000-2007) rate. Belgium, Canada,
France, Norway, Switzerland, United States.
• Cumulative output loss during the crisis between 4 and 8%
percentage points of GDP and annual post-crisis growth more
than half the pre-crisis rate. Austria, Denmark, Germany, Japan,
Sweden, United Kingdom.
16
Patterns of Recovery from The Crisis III
• Groups (contd.)
• Cumulative output loss during the crisis between 4 and 8
percentage points of GDP and annual post-crisis growth less
than half the pre-crisis rate. Czech Republic, Netherlands,
Serbia, Spain.
• Cumulative output loss during the crisis more than 8
percentage points of GDP and annual post-crisis growth more
than half the pre-crisis rate. Estonia, Hungary, Ireland,
Lithuania.
• Cumulative output loss during the crisis more than 8
percentage points of GDP and annual post-crisis growth less
than half the pre-crisis rate. Bulgaria, Finland, Latvia, Romania,
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Slovenia.
Current Global Situation I
• Six years after the 2008-09 crisis, economic performance
still disappoints, failing to regain pre-crisis vitality
• Emerging economies far from the dynamic miracles they once
seemed
• Rich countries still grappling with problems exposed by the crisis
• Return to days of buoyant growth seems far away
• Level of dissatisfaction summed up at September 2014 G20 meeting – their summary statement:
• “Growth in the global economy is uneven and remains below the
pace required to adequately generate much needed jobs.”
• Worse -- they saw new threats in financial markets and
deteriorating geopolitics
• Little unity among the member countries who account for
85% of world output
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Current Global Situation II
19
Current Global Situation III
20
Current Global Situation IV
• Although the global picture is disappointing there are
signs of optimism along with underperformance:
• The growth surge in the in the UK along side economic
weakness in France
• Recent optimism in India together with the disappointing
performance of Russia and Brazil exposing their weaknesses.
• Across the world recovery can not be easily
characterized as V-shaped or L-shaped
• Instead OECD feels there is a “growing degree of divergence
between the major economies”
• U.S. economy appears to be expanding at a moderate pace with
unemployment falling
• U.K and Canada are also growing above their normal rates of
expansion
21
Current Global Situation V
• Most of the current concern is with the Eurozone.
• With inflation falling close to zero, demand in the region
• Appears insufficient to bring down an 11.5% unemployment rate
• May not prevent bloc from sliding into deflation
• The loss in economic momentum may:
• Dampen private investment and
• Heightened geopolitical risks – populist governments that have a
further negative impact on business and consumer confidence.
• In Japan early optimism over Abenomics – economic
policies of the prime-minister is now
• Tempered with the fear that rising taxes are a major drag on
growth
• Facing the need for major, but politically unpopular structural
reforms – resulting in questions over whether Japan would
continue on its path
22
Current Global Situation VI
• In today’s global economy
• No longer the advanced world that is most important for global
trends
• Fully 30 percent of global growth in 2014 will occur in China –
about twice the share of the U.S.
• Clearly the success of China’s economy is now vital for
the rest of the world. However there are problems.
• For the medium-term, there is not much evidence that the
Chinese economy has made much progress in its critical
rebalancing efforts
• In the short-term, are fears of a housing crash and bank failures
• Housing prices have dropped 9.3% over the last year with
• Sales registering the deepest contraction since 2008
• Moody’s estimates that a 10% fall in both property transactions and
prices would reduce growth by 1.5% to 2% bringing it to 5 or 6%
23
Current Global Situation VII
• At October 2014 Conference, even the IMF showing
increased pessimism
• The IMF feels there are many emerging concerns:
• Geopolitical tensions from the Middle East and Russia could
• “trigger large spillovers of activity in other parts of the world
through a renewed bout of increased risk aversion in global
financial markets.”
• The Fund has just downgraded many of their forecasts
• Big question is why countries are struggling to sustain
decent rates of growth
• Much has to do with remaining hangover from the
financial crisis.
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Current Global Situation VIII
• Factors continuing to limit the return to growth and job
creation
•
•
•
•
• High levels of public and private debt act as constraints on
• Government fiscal policy and
• Consumer spending
• Work to suppress aggregate demand below levels needed for
steady growth
Increased income inequality also tends to reduce consumer
spending
Policy uncertainty in many countries has resulted in falling
investment rates
Slowing world economy makes export-led growth more
difficult
Situation made worse by signs that productivity growth is
slowing, limiting the potential for sustainable growth revival
25
Current Global Situation IX
• In the emerging economies
• Growth has slowed from 7% per year before the crisis
• To a forecast of 5% between 2014 and 2018
• Moreover the decline is not just due to the slowdown in
China and India
• Growth rates are now lower than pre-crisis average in 70%
of emerging economies.
• The slowdown in emerging economies is due to:
• The prolonged weakness of high income economies,
• Failure to sustain economic reforms and
• The exhaustion of policy induced post-crisis boosts to
domestic demand.
• Still do not expect a major emerging economy crisis
26
Current Global Situation X
27
Current Global Situation XI
• Policy makers are in a bind in many countries
• In the Eurozone and Japan they are still trying to find ways to
stimulate demand
• In the U.S. and U.K interest rates are about to increase, but
there is widespread concern that any movement back to normal
might trigger financial turmoil
• However leaving monetary policy loose will encourage excessive
borrowing which may create bubbles and another financial crash
• In emerging markets the need is to push forward on structural
reforms to labor and product markets as well as education and
social security to enable more secure and rapid growth
• Not easy and mistakes are certain to happen.
• The economic environment in many parts of the world is
thus quite fragile with forecasts increasingly pessimistic.
28
The New Normal I
• The current situation has been called “The New Normal” -It
is characterized by:
• Deficient Demand – hard to generate enough demand to
absorb potential global supply – threat of deflation
• Stagnant Productivity. In advanced countries productivity
fallen from 2% a year to less than 1%
• Fragile Finance – system may be even more fragile than
before the crisis. Assets to equity very high making banks
vulnerable
• Unstable Politics – political stresses – hostility towards
elites, foreigners, international institutions make finding
solutions difficult
• Tense Geopolitics – Russia, China, ISIS, Iran, Ukraine –
create great uncertainty
• Challenge Overload – both domestic and international.
Breakdown of global governance when problems mounting29
– maintain open global economy, climate change, peace.
The New Normal: II
30
IMF Forecasts: 04-2015 I
31
IMF Forecasts: 04-2015 II
32
IMF Forecasts: 04-2015 III
33
Global Scenarios 2015
Three main scenarios:
• Baseline-Fragile, Divergent Muddle-Through Recovery (75%)
• Output gaps continue to close in U.S. Japan, Germany and the UK, and
low growth “New Mediocre” continues
• EMs grow below pre-crisis pace and few outperform.
• Inflation is controlled, deflation is avoided, “normalization” is slow
• Upside – Growth Acceleration (10%)
• Above potential growth in most DMs, spurred by pro-business
policies, investment, productivity and wage growth
• EM reforms support sustainable growth including in China
• Inflation is moderate as central banks raise interest rates
• Downside-Negative Feedback and Outflows (15%)
• A sharp China slowdown and EM currency or financial crisis
• Possible EU/Eurozone stress, U.S. policy mistakes, major wars
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and oil/trade disruption
EIU April 2015: Major Risks I
35
EIU April 2015: Major Risks II
36
Key Themes for 2015
37
Geopolitical Risks Intensifying
38
Assessment of Key Risks
• The current consensus forecasts and scenarios are
sensitive to a series of possible shocks/adverse
developments.
• Adverse developments in one or more areas might result
in increased instability and/or negative linkages leading
to lower growth rates:
1. Eurozone Crisis
2. Instability from Oil Price Decline
3. African Debt Problems
4. China Hard Landing
5. Declining Defense Expenditures in the West
39
Key Risk I: Eurozone Crisis I
•
•
•
•
•
•
The current crisis in the Euro-zone can be easily traced back to a
fundamental flaw in the Zone’s economic model:
The model concentrated monetary policy in the European Central
Bank (ECB) while leaving fiscal policy to individual member states
– inherently unstable arrangement
It denies member states monetary policy levers with which to help
their recoveries
Also makes deficit-funded stimulus harder as monetary policy can
be used to keep borrowing costs low.
The EZ is not an optimal currency area – the common monetary
authority is likely to act in ways that help some countries but not
others.
•
The ECB has pursued tight monetary policy that may prevent inflation in highgrowth states like Germany but could also be worsening the recession in Greece,
Spain and other struggling states.
•
Rigid labor markets prevent adjustments common in the United States.
Also Europe still lacks key elements necessary for a common
currency to work – Joint European Bank Regulator and a system
for dealing with troubled financial institutions, unconstrained
independent, central bank
40
Eurozone/US Recovery
41
Key Risk I: Eurozone Crisis II
• In Europe much of current stability is due to
• The pledge of the European Central Bank (ECB) to defend the
euro “at any cost”
• New financial instruments to defuse debt, and
• The start of a banking union
• However fiscal adjustment remains unsupportive;
unemployment is high in the core economies and
continues to increase in Southern Europe
• The ECB is under increasing pressures to move toward
US-style large-scale bond purchases – controversial
whether this will make any difference
• At the national level, many of the troubled countries have
the option of cutting spending or not cutting – both with
major downsides.
42
Key Risk I: Eurozone Crisis III
43
Key Risk I: Eurozone Crisis IV
44
Key Risk I: Eurozone Crisis V
1. Cut spending – pretty sure to deepen the recession
• Probably means more unemployment (already well
over 20% in Spain)
• May push wages down to more competitive levels –
history suggests this is very hard to do.
• Even so, lower wages will just make people’s debts
even harder to repay
• Meaning they are likely to cut their own spending
even more, or stop repaying their debts
• Lower wages may not even lead to a quick rise in
exports if other European economies markets are in a
recession too
• In any case, can probably expect more strikes and
protests and more nervousness in financial markets
(causing even higher interest rates) about whether 45
you really will stay in the euro
Key Risk I: Eurozone Crisis VI
2. Don’t cut spending
• Risks a financial collapse
• Amount borrowed each year has exploded since 2008 due to
economic stagnation and high unemployment
• But if economies are chronically uncompetitive within
the euro
• Markets liable to lose confidence in you – may fear that economies
simply too weak to support increasing debt load
• Meanwhile other European governments may not have
enough money to bail you out, or are legally/politically
constrained from doing so
• European central bank has said its mandate doesn’t
allow it to provide unlimited bond purchases
• Clearly only way out of crisis is a coordinated approach
involving creditors and debtors and international
institutions such as the IMF
46
Eurozone: Reason for Optimism
47
Countries at Risk: Greece I
Strengths (+) and weaknesses (-)
• (+) Euro area membership
• European financial assistance has protected the country against
a chaotic government default.
• (-) High public debt
• A history of weak fiscal discipline, combined with the long
economic contraction since 2008, has resulted in a very high
gross public debt ratio of 177% of GDP in 2013.
• (-) Weak competitiveness
• Rising labor costs in the years ahead of the crisis have resulted
in a weak export growth in recent years.
• (-) Poor institutional quality
• Greece is lagging other European countries in several indices of
institutional strength, like the rule of law, ease of doing business
and the corruption index.
48
Countries at Risk: Greece II
• Developments since the Greek elections, Fall 2014
• The recovery that Greece was experiencing last year has ground
to a halt, and
• Turned into what is very likely a new recession.
• The rhetoric out of Athens and the confrontation with its
European partners has
• Scared the private sector, and
• Triggered a massive capital outflow.
• Greece has decoupled from the recent improvement in
euro area activity,
• Indicated by the divergent evolution of the Purchasing Managers
Index (PMI) brought on by uncertainty
• This is weakening the Greek bargaining position
• Eurozone finance ministers unlikely to blink
• There is a 30% risk of a catastrophic Grexit.
49
Key Risk II Oil Price Decline I
50
Key Risk II Oil Price Decline II
51
Key Risk II: Nigeria
• Nigeria’s emergence as Africa’s largest economy due
mostly to rapid growth in services
• However, country still depends on oil for more than 60%
of state revenues and 90% of export earnings
• Compounding the problem is the escalating Islamist
insurgency in parts of the North.
• Oil production is down – averaging well below its 2.4mb/d
capacity due to massive theft and a lack of investment
following five years of legislative paralysis over reforms
for the industry – the result.
• Foreign portfolio investors have taken flight
• The government has slashed spending for 2015
• The stock market was down 23 percent in 2014 and
• The country’s currency has had a massive devaluation
• Infrastructure constraints will increasingly limit growth.
52
Key Risk II: Angola
• Low oil prices caused a 57% decline in oil earnings in January
2015 compared to same period in 2004
• Oil earnings account for:
•
95% of export earnings and 80% of tax revenues
• Revised budget cut by 25% or $1.8 trillion
• Capital expedites cut in half; recurrent by 20%
• Education and healthcare cut by 13.5%; transport by 75%
• Security left at 15.% of budget
• Budget deficit stands at 7% GDP and
• Current account deficit at 19% GDP – first deficit since 2009
• To cover shortfall government negotiating $ one billion in loans
and is planning on borrowing $9 billion including a %1.5 billion
dollar euro-bond to ensure progress on key projects
• Currency depreciating with a 40% black market spread.
• Inflation projected at 9%, fuel prices to rise
iI53
• Likely that rising living costs will cause protests and instability
Key Risk II: Iran
• Iran holds the world’s fourth largest reserves
• Country already struggling with impact of Western
sanctions before oil began to fall
• Government is seeking to rebalance the economy to
reduce its dependence on oil revenues
• From around 50% to closer to one third – would be the lowest in
decades
• With no prospect of oil prices going up in the near future
there is added pressure to strike a nuclear deal before the
June deadline
• US banking sanctions have cost Iran half its oil revenues.
• An agreement could potentially allow Iran to sell more crude and
have access to about $100bn of foreign exchange reserves
which it has been barred from accessing
• Failure could lead to a further shrinking of the economy and
social unrest
54
Key Risk II: Saudi Arabia
• Fiscal buffers are in place to offset the impact of any
potential domestic deficit.
• Still, country will be among the country’s most affected
by lower oil prices
• Oil receipts average 85% of exports and 90% of fiscal
revenues
• At $60 a barrel the country would have a fiscal deficit of
around 14% of GDP in 2015
• Its vast foreign exchange reserves of $750bn will offset
much of negative effects of lower oil prices
• Although denying it, likely pullback in spending on social
programs which had increased substantially following
unrest during the Arab spring
• Even so, Saudi Arabia has used leading position in OPEC
to resist calls for a production cut.
55
Key Risk II: Venezuela
• Venezuela is estimated to lose $700m for every dollar
drop in the price of oil – oil 96% of export revenues
• Even before the 2014 oil price drop, there was
speculation the country might have to default.
• These fears have intensified with the economy shrinking
3% in 2014
• Population is struggling with shortages of basic goods
and inflation is running at more than 63%
• Estimates are the country needs a price of above $130 to
balance its budget
• To cover some of the losses the country needs to
increase production to between 2.4mb/d and 2.8mb/d but
even under the best circumstances that would take years
to come on stream.
• PetroCaribe??
56
Countries at Risk: Russia I
• Strengths (+) and weaknesses (-)
• (+) Strong external position
• Russia has vast amount of FX-reserves which covers twelve
months of imports
• (+) Strong fiscal position
• Russia has a very low government debt of only around 8% of
GDP and posts marginal budget deficits.
• (-) Weak governance and weak rule of law
• Corruption is deeply embedded and widespread throughout
society, severely hindering the business environment.
• (-) High dependence on single commodity export
revenues
• The oil and gas sector dominates the economy by making up
70% of total exports and contributing 28% to GDP. Vulnerable to
international commodity fluctuations
57
Countries at Risk: Russia II
• Ruble has fallen 14% against the dollar so far this year
• In January international ratings agency Standard & Poor's
(S&P) lowered Russia's sovereign credit rating to junk status
(from BB+ to BBB-)
• Economic plan announced in January that will see the
government spend 2.34 trillion rubles (35 billion dollars) to
bolster key industries, including banks, and to boost its
troubled economy particularly in the regions.
• As part of the measures, Moscow plans a 10% cut in the
budgets of all but a handful of ministries. Defense, agriculture
and social spending are spared.
• Some infrastructure projects will have to take the main hit from
the spending cuts.
• Discord over defense will grow between liberals who urge
radical cuts and hawks who favor high defense spending.
• Government will look to support development of domestic
high-tech industry and try to boost the non-oil sector.
58
Key Risk III: African Debt I
Debt growing problem in Africa
• Borrowing in dollars increasingly risky and expensive
• As local currencies depreciate on softening commodity
prices, repayment costs soar
• Threatening added costs of up to 10.8 billion dollars
• March 5, 2015 Ghana announced plans for a 1 billion ten
year Eurobond to repay part of its debt maturing in 2017
• Extremely low and increasingly negative bond yields in
developed economies encouraging capital flows to Africa
• Over past two years African states have issued 22 billion
dollars in dollar denominated debt
• Almost as much as total sovereign issuance across the
region in past nine years
59
Key Risk III: African Debt II
60
Key Risk III: African Debt III
• In last several months investors becoming more cautious
• Now oil exporters would have difficulty issuing debt on
favorable terms
• In addition to possible slow oil price recovery, principle
risk in dollar bond market is threat of earlier than
expected U.S. interest rate increase
• Markets could shift very rapidly with borrowing rates
increasing sharply
• Would make it considerably more difficult for countries to
access international capital at affordable rates
• Oil exporters will be hit the hardest – suffering high
repayment costs due to currency volatility.
• The debt situation makes many African countries
vulnerable to a fiscal crisis and internal unrest.
61
Key Risk IV: China Hard Landing I
Overview:
• China’s economy is currently going through a painful
transition to a more consumption based economy
• The days of double digit economic growth clearly over
• In the short run, slower growth is generating concern about
the nation’s near-and medium-term prospects
• There is an up-side to the gradual slowdown over the past
several years
• Growth in the coming years will be both robust and more sustainable
• The structural reforms that are central to the 12th Five Year Plan (20112015) will become somewhat easier to achieve
• On balance it appears China’s economy is headed in the
right direction, but still worrisome in the short-run
• However, key economic and political risks – including
corruption, social inequality and lack of progress in
governance reforms – must be addressed in order to assure
62
long-term economic growth.
Key Risk IV: China Hard Landing II
63
Key Risk IV: China Hard Landing III
• The risk of a sharp slowdown in China remains elevated
and will rise in the medium term as:
• Financial liberalization contends with
• Legacy debts from unproductive local government investments
and excess residential real estate construction
• Scenarios in two stages. Outcomes at the intermediate
stage can lead to any of the longer-term scenarios with
various probabilities
64
Key Risk IV: China Hard Landing IV
65
Key Risk V: Falling Defense Expenditures I
• Military expenditures are only one gauge of military
power.
• A given financial commitment may be adequate or
inadequate depending on:
• The number and capability of a nation’s adversaries
• How well a country invests its funds and
• What it seeks to accomplish
• Nevertheless trends in military spending do reveal
something about a country’s capacity for meeting threats
• Policymakers are currently debating the appropriate level
of US military spending given:
• increasingly constrained budgets
• the winding down of involvement in Afghanistan and
• the potential threats posed by Russia and China
66
Key Risk V: Falling Defense Expenditures II
67
Key Risk V: Falling Defense Expenditures III
68
Key Risk IV: Falling Defense Expenditures IV
69
Key Risk V: Falling Defense Expenditures V
70
Key Risk V: Falling Defense Expenditures VI
71
Key Risk V: Falling Defense Expenditures VII
• Although there are a few exceptions there is a stinking
contrast between rising defense expenditures in still
growing economies and austerity-induced cutbacks
elsewhere
• Robust growth in emerging world means that these
countries can increasingly afford to procure cutting edge
defense technologies
• Increased military spending is a zero sum game and will
inevitably generate arms races
• Certain countries – China, India, and Russia take the view
that their economic growth should be matched by
equally impressive developments in their military
capabilities.
• U.S. and European allies risk falling behind on defense
expenditures unless they can revive growth and better
72
control social expenditures.
General Lessons
• Nobody Really Understands the World Economy – economic
outcomes hard to predict because world economy is
continually in flux – “unknown unknowns” will always be
with us.
• That Goes Double for Financial Markets – financial markets
even more volatile than real economy – Starting with the
Dutch Tulip Bubble have had 350 years of financial crashes
and panics – unlikely to stop anytime soon – each one that
comes will take most people by surprise.
• The Battle of Financial Markets is Over: The Battle of State
Finance Has Begun – Speculators will test sovereign debt
markets. Clear that governments can no longer do
whatever it takes to fix economic problems. New, large and
unpredictable risks now hang over the global economy.
• The US and its allies will face a long period of slow growth
with contracting defense budets. This will require increased
cooperation, coordination, and flexibility in adapting to a
73
fundamentally altered budgetary environment
The End
• Questions?
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