Download An unconventional truth - Global Research | Solutions | HSBC

abc
Economics
Global
Global Research
An unconventional
truth
As the Western world mimics Japan,
have unconventional policies failed?
 As Japanese stagnation beckons for the
West…
 …policymakers are still not being
sufficiently unconventional
For many years, Western policymakers told us they knew
how to avoid Japan’s plight. Yet, having slashed interest
rates, borrowed heavily and adopted unconventional
approaches, their earlier claims now look decidedly suspect.
With inflation still excessively low and with growth stalling,
Western economies are beginning to show economic
symptoms previously assumed to be uniquely Japanese.
With huge private-sector debts, the risk of falling into a
debt-deflation trap is on the rise. Admittedly, activity in
Europe has rebounded even as the US economy has stalled.
Yet the overall level of activity in the Western world is still
incredibly depressed. The desire to atone for the sins of the
credit boom has hampered the pace of recovery.
13 September 2010
Stephen King
Chief Economist
HSBC Bank plc
+44 20 7991 6700
[email protected]
View HSBC Global Research at: http://www.research.hsbc.com
Issuer of report:
HSBC Bank plc
Disclaimer & Disclosures
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
Major problems with the policy framework – not fully
acknowledged by the high priests of monetary policy – are
limiting the success of unconventional measures. In the first
half of 2010, as the initial signs of economic recovery came
through, all the focus was on exit strategies. This was a
major mistake, placing too much emphasis on the real
economy when, all the while, inflation was excessively low
in the US and in much of Europe.
No longer is the real economy affecting inflation. At zero
interest rates, it’s the other way around. The more inflation
declines, the higher real interest rates become. People then
repay debt with even greater enthusiasm, preventing any
initial economic recovery from being sustained.
There is a strong case for abandoning inflation targets
altogether and replacing them with price-level targets.
Central bankers claim this reform would make little
difference but, as we argue, at least it would force them to
maintain zero rates well into the recovery, avoiding the exit
strategy confusion seen in the first half of 2010. In a world
of excessively low inflation, it is important to persuade the
public that interest rates won’t rise until the spectre of
deflation is completely eradicated. Nevertheless, risks are
involved, most obviously a major decline in the dollar.
abc
Economics
Global
13 September 2010
An unconventional truth
 Hopes of avoiding a Japanese-style stagnation are fading
 Unconventional policies need unconventional frameworks
 It’s time to say goodbye to inflation targets
It’s the levels that matter
While it’s all smiles in Europe, there’s a growing
sense of despair in the US. Germany, that
perennial economic underperformer, has suddenly
offered a reminder of the vim of yesteryear, with a
scintillating increase in GDP of 2.2% in the
second quarter of 2010. The US, however,
managed a rise of only 0.4% (or, as American
addicts of hyperbole like to say, an annualised
gain of 1.6%). For all its famed potency, the US
economy is suddenly looking very limp indeed.
With the labour market soft, the housing market in
freefall and even durable goods orders running out
of puff, near-term prospects look decidedly shaky
(for a more detailed assessment of our latest US
forecasts, see Kevin Logan’s 26 August 2010
note, Fed at the Crossroads.)
It’s a complete reversal of fortune relative to
developments earlier in the year, when the US
appeared to be enjoying a growth spurt while much
of Europe was still economically moribund and
staring into the abyss of a sovereign debt crisis.
Europeans should not, however, revel too much in
their unexpected moment of Schadenfreude.
Quarterly movements in GDP are inherently
volatile: Germany’s good fortune in the second
quarter may not last. And, at the time of writing,
nervousness over sovereign debt was making an
unwelcome reappearance.
2
1. The US picked up first but Germany and the UK have been
more impressive recently
% Qtr
3
2
1
0
-1
-2
-3
-4
-5
Q1 09
US
Q2 09
Q3 09
UK
Q4 09
Japan
Q1 10
% Qtr
3
2
1
0
-1
-2
-3
-4
-5
Q2 10
Germany
Source: Thomson Reuters Datastream
More importantly, when recent developments are
placed within the context of the economic crisis as a
whole, many Western economies find themselves in
roughly the same position. Compared with previous
economic cycles, the latest outcomes make for grim
reading. Charts 2-4, for example, show that the path
for the level of real GDP since the peak in economic
activity in 2007 has been very depressed in the US,
the UK and Germany compared with virtually all
other economic cycles since the 1970s.
abc
Economics
Global
13 September 2010
2. This US economic cycle has been very disappointing: levels of real GDP across economic cycles
Index, Economic Peak=100
120
US
Index, Economic Peak=100
120
110
110
100
100
90
90
80
80
P-8
P-4
Economic Peak
P+4
P+8
Quarters before and after economic peak
Nov 73 IV
Mar 80 I
Jul 81 III
Jul 90 III
Jul 69 III
P+12
P+16
May 01 II
Nov 07 IV
Source: Bureau of Economic Analysis, NBER
3. Despite Germany’s recent vigour, it’s been the worst downswing on record: levels of real GDP across economic cycles
Index, Economic Peak=100
Index, Economic Peak=100
Germany
110
110
105
105
100
100
95
95
90
90
85
85
P-8
P-4
Aug 73 III
Economic Peak
P+4
P+8
Quarters before and after economic peak
Jan 80 I
Jan 91 I
P+12
P+16
Jan 01 I
Apr 08 II
Source: Thomson Reuters Datastream, ECRI
4. Economic life was (slightly) worse for the UK in the early years of Margaret Thatcher, but only just: levels of real GDP
Index, Economic Peak=100
Index, Economic Peak=100
UK
110
108
106
104
102
100
98
96
94
92
90
110
108
106
104
102
100
98
96
94
92
90
P-8
P-4
Sept 74 III
Economic Peak
P+4
P+8
Quarters before and after economic peak
Jun 79 II
May 90 II
P+12
P+16
May 08 II
Source: Thomson Reuters Datastream, ECRI
3
abc
Economics
Global
13 September 2010
5. The value of US GDP is remarkably depressed: levels of nominal GDP across economic cycles
US
Index, Economic Peak=100
150
Index, Economic Peak=100
150
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
P-8
P-4
Economic Peak
P+4
P+8
Quarters before and after economic peak
Nov 73 IV
Mar 80 I
Jul 81 III
Jul 90 III
Jul 69 III
P+12
P+16
May 01 II
Nov 07 IV
Source: Bureau of Economic Analysis, NBER
6. Germany’s experience is even worse: the value of GDP is very depressed: levels of nominal GDP across economic cycles
Index, Economic Peak=100
Index, Economic Peak=100
Germany
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
P-8
P-4
Aug 73 III
Economic Peak
P+4
P+8
Quarters before and after economic peak
Jan 80 I
Jan 91 I
P+12
P+16
Jan 01 I
Apr 08 II
Source: Thomson Reuters Datastream, ECRI
7. UK inflation has been higher than elsewhere but, for nominal GDP purposes, has been offset by lower output
Index , Ec onomic Peak =100
220
220
190
190
160
160
130
130
100
100
70
70
P-8
P-4
Sept 74 III
Source: Thomson Reuters Datastream, ECRI
4
Index , Economic Peak=100
UK
Econom ic Peak
P+4
P+8
Quarters before and after ec onomic peak
J un 79 II
May 90 II
P+12
P+16
May 08 II
abc
Economics
Global
13 September 2010
It’s a nominal world
Charts 5-7 provide similar comparisons, but this
time in nominal terms. Measured this way, recent
recoveries have been particularly disappointing,
reflecting both the weak pace of recovery and, in
the US and Germany, persistent inflationary
undershoots. While the UK position looks similar,
the mix between output and inflation is not quite
the same: output has been still weaker while
inflation has been higher.
These charts help to emphasise a key point about
this crisis. The trampoline bounce that has
typically followed recessions has simply refused
to materialise on this occasion. Some still argue
that the US has, so far, done well to avoid the
“double-dip” scenario of the early 1980s, when
GDP fell in both 1980 and 1982. This, however,
rather misses the point. Between those two
recessions, output rose at a vigorous pace. Today,
despite the absence of a double dip, the overall
loss of output has been greater. The absence of
decent recovery following a major collapse in
activity, not the presence or otherwise of double
dips, is the key defining feature of the real
economy in this crisis.
Inflation used to be too high
but it’s now too low
The challenges don’t end there. Twenty or thirty
years ago, recessionary clouds came with
disinflationary silver linings. Excessively high
inflation would typically drop to more acceptable
levels. Indeed, successive recessions were
accompanied by lower and lower inflation. As
inflation came down, interest rates fell. More
way, to make do with lower savings) and an
improvement in the efficiency by which resources
were allocated given the greater veracity of the
invisible hand.
8. Once upon a time, US inflation was too high…
% Yr
US core inflation
% Yr
14
12
10
14
12
10
8
6
4
8
6
4
2
0
2
0
70
75
80
85
90
95
00
05
10
Source: Thomson Reuters Datastream
We’ve borrowed too much
Today, however, there are no such silver linings.
Rather than being too high, inflation is now too
low. Periods of weak activity are likely to push
inflation down to even lower rates. Indeed, in
many parts of the Western world, the threat comes
not from inflation but, instead, from deflation.
This is unfortunate given the huge increase in
Western indebtedness in recent years. Charts 9, 10
and 11 track movements in debt by main sector in
the US. They are suggestive of serious fault lines
within the US economy. As we shall see, debt and
deflation are hardly happy bedfellows:
importantly, Adam Smith’s invisible hand was
able to operate free of distortion: price signals are
more potent when inflation is lower and, hence,
less volatile. The overall result was a pick-up in
the pace of economic growth reflecting both a
willingness to take on more debt (or, put another
5
abc
Economics
Global
13 September 2010
9. Household borrowing went crazy earlier in the decade
1
The pace of household debt accumulation
accelerated rapidly from 2000 through to
2007, boosted by low interest rates designed
to prevent the US from plunging into a Japanstyle stagnation following the 2000 stock
market crash. The willingness and ability of
households to borrow were helped along by
the now-familiar boom in securitisation and
the associated gains in house prices, leading
to a feeding frenzy full of dangers.
2
Contrary to the prevailing conventional
wisdom regarding listed companies, the US
corporate sector as a whole has not been
deleveraging over the last decade, at least not
relative to GDP. In the mid- to late-1990s,
companies built up very little in the way of
excess debts. Since then, however, it’s been a
roller coaster ride. Debts rose rapidly in the
run-up to the 2001 recession. Corporate deleveraging then began in earnest. It didn’t last
very long, however. Seduced by low interest
rates and with a belief in the smoother and
longer economic cycle, many companies
began to borrow heavily, partly because the
profit share within GDP had risen so far. By
2008, corporate debt as a share of GDP had
risen to a new all-time-high. Relative to
profits, the situation is not as bad, but that’s
only because profits have risen rapidly as a
share of GDP at the expense of household
income. If companies are finding it easier to
cope with higher debts, it’s only because
households are finding life more difficult.
Chart 12 supports this view: the gap between
the manufacturing ISM survey, a barometer
of business conditions, and US consumer
confidence is, by some margin, the biggest
it’s ever been.
US household liabilities
% GDP
105
95
85
% GDP
105
95
85
75
65
55
45
35
75
65
55
45
35
60
65 70 75
80 85 90 95 00
Total liabilities
05 10
Source: Thomson Reuters Datastream. Expressed as four quarter moving average
10. Companies have seen debts rising as a share of GDP
US non-financial, non-farm business liabilities
% GDP
140
% GDP
140
120
120
100
100
80
80
60
60
40
40
60
65
70 75
80 85 90 95 00 05 10
Total liabilities
Source: Thomson Reuters Datastream. Expressed as four quarter moving average
11. As households and companies have deleveraged, so the
government has stepped up its borrowing
US general government liabilities
% GDP
100
% GDP
100
90
90
80
80
70
70
60
60
50
50
40
40
60
65
70
75 80 85
90
95
00
05 10
Total liabilities
Source: Thomson Reuters Datastream. Expressed as four quarter moving average
6
abc
Economics
Global
13 September 2010
12. Companies may be more confident but consumers are not
Index
Index
80
70
160
120
60
50
40
80
40
30
20
0
67
72
77
82 87 92 97 02 07
ISM manufaturing surv ey (LHS)
US consumer confidence (RHS)
Source: Thomson Reuters Datastream
3
More recently, consistent with the collapse in
economic activity and the credit crunch, both
households and companies have begun to
reduce their debts. In both cases, debt ratios
have fallen as a share of GDP. However, the
declines have not gone very far, in part because
the level of GDP is still very depressed (in other
words, the denominator of the various
debt/GDP ratios is miserably low).
4
The inevitable response to household and
corporate deleveraging has been a huge
increase in government debt as a share of GDP
unprecedented in the modern era. Associated
with both a Keynesian fiscal response and a
desire to take “bad apple” assets out of the
financial system, the increase in government
debt has been an essential part of the “rescue”
of the US economy in a mission designed to
avoid the mistakes made during the Great
Depression. The US is, of course, not alone.
Across the developed world, government debt
ratios have expanded at an extraordinary pace.
Fortunately for governments, bond investors
have happily snapped up the additional
issuance without so much as a murmur (unless
the issuers happen to be in the European
periphery). Overall, the increase in government
debt has, at least for the US, more than offset
the reductions in household and corporate debt.
It’s probably fair to say that higher debts led to
the crisis, but the crisis, in turn, has led to even
higher debts.
In itself, debt isn’t necessarily a problem. After
all, debt levels relative to GDP have been rising in
the US and the UK on a secular basis for decades
without upsetting the economic applecart. It’s
when debt is high and economic conditions begin
to deteriorate unexpectedly that the dangers of
either stagnation or, even worse, a downward
deflationary spiral, begin to build.
The dynamics of animal spirits
To understand why, it’s worth thinking about the
economic conditions which tend to encourage
households and companies to increase or reduce
their borrowing. These conditions partly relate to
the institutional arrangements within a country –
independent central banks, the rule of law and so
on – but also to John Maynard Keynes’ “animal
spirits” – why confidence about the future waxes
and wanes.
13. The Master…allegedly
Source: Google
For borrowers and lenders, the mid-years of the
decade were happy days. The stock market crash
had been shrugged off. The Federal Reserve had
delivered remarkably low interest rates. Although
inflation was worryingly low, the recession itself
had proved to be very modest: the “Greenspan
put” still seemed to be in full working order.
Companies were deleveraging but household
7
abc
Economics
Global
13 September 2010
confidence was high, helped by a soaring housing
market. Government bonds and, indeed, a whole
range of other bonds were underpinned by the
savings of rapidly growing emerging nations,
whose current account surpluses led to a “global
savings glut” linked to substantial increases in
holdings of currency reserves. People could feel
confident about the future. With modest inflation,
low interest rates were here to stay. Markets
seemed to function well. With their commitment
to price stability, policymakers knew how to
avoid the deep recessions of old. And Americans
“knew” that house prices always went up.
14. US long-term interest rates have been persistently lower
than expected
%
US 10-yr bond yield
%
7
6.5
6
5.5
5
4.5
4
3.5
3
2.5
2
7
6
5
4
3
2
00 01
02
03
04 05 06
07
08
09
10
Red lines indicate forecasts for end-year 10-year bond yields made at the beginning of
each year
Source: Thomson Reuters Datastream, Consensus
15. What went up…
Index
Index
US house prices
400
400
300
300
200
200
100
100
0
0
Q1
Q1
Q1
Q1
Q1
1975 1980 1985 1990 1995
Q1
Q1
Q1
2000 2005 2010
OFHEO house price index
Source: Thomson Reuters Datastream
8
Animal spirits were bubbling over. Although
some commentators – and a handful of
policymakers – suggested that things weren’t
quite right, the broad consensus was that growth
would be maintained and that, in the event of a
housing reverse, there would be, at worst, a soft
landing for the US economy. And, if that were
true, no amount of debt could really be too high.
Or so it seemed. We now know better. The crisis
has revealed, layer by layer, the intrinsic
weaknesses of the old approach. Low and stable
inflation no longer guarantees economic stability.
Financial markets don’t allocate capital
efficiently. House prices are not guaranteed to
rise. Securitisation has seemingly increased, rather
than reduced, systemic risk. Lower levels of
economic activity have left real incomes
remarkably depressed. Trust in the financial
system has evaporated. And the “Greenspan put”
is long forgotten. Following the biggest policy
stimulus ever seen, economies are still struggling
to recover.
Irving Fisher and your inner
Austrian
That struggle can be divided into two parts. First,
and now widely recognised, the combination of
high debt, zero nominal interest rates and
collapsing inflation rates is undermining the
effectiveness of traditional monetary measures (in
an Irving Fisher-style debt deflation). Imagine,
for example, that the equilibrium real interest rate
required to kick-start economic activity is -4%. If
inflation is at 1% and interest rates on cash
cannot, by definition, fall below zero, it follows
that the economy can never rebound, at least using
conventional monetary tools. Only if inflation
rises can real interest rates reach the appropriate
equilibrium. But in a world where households and
companies are deleveraging aggressively, creating
significantly higher inflation may not be so easy.
abc
Economics
Global
13 September 2010
16. He wasn’t very keen on deflation
17. The last economic cycle was one of the weakest in the postwar period
Peak-to-peak
Annualised average
growth rate (%)
Q2 53 - Q3 57
Q3 57 - Q2 60
Q2 60 - Q3 69
Q3 69 -Q4 73
Q4 73 - Q1 80
Q1 80 -Q3 81
Q3 81 -Q3 90
Q3 90 - Q2 01
Q2 01 -Q4 07
2.40
2.92
4.57
3.48
2.86
1.37
3.28
3.25
2.51
Source: Bureau of Economic Analysis
Source: Google
The second aspect, not so well understood other
than by those from the Austrian school of
economics, is the extent to which productive
potential growth has been overstated as a result of
debt-dependency over many years. Put another
way, economies have been living beyond their
means as a result of easy access to credit and low
interest rates. The US provides a very good
example. On a peak-to-peak basis, economic
growth in the 1980s and 1990s averaged over 3%
per year. Between the 2000 and 2007 peaks, the
growth rate was only 2.5%, indicating a slower
underlying rate of expansion. Yet the US still
lived off excessively low interest rates, an
expansionary fiscal policy, a willingness by
foreigners to hold more and more US securities
and a massive expansion of securitisation, all of
which doubtless added to growth in the short
term. But if, at 2.5% per year, growth was
temporarily elevated through a major
misallocation of capital into, for example, the
housing market, what will happen now that these
misallocations are being rectified? Arguably, the
US borrowed from the future, partying like there
was no tomorrow. It’s now threatened by a longterm hangover.
Now put the deflation and productive potential
themes together. Future real income growth will
be weaker than in the past. Real interest rates
cannot fall to a market-clearing level. The
implications are scary:
1
Asset prices will come under downward
pressure. A combination of inappropriately
high real interest rates and falling
expectations about future levels of economic
activity will slowly undermine valuations.
The behaviour of the US housing market in
recent months is consistent with this view, as
is the longer-term failure of equities to make
headway after the peak in 2000.
2
Even with zero interest rates, debtors may
still continue to repay their debts. If
expectations regarding future nominal income
gains have declined, and real interest rates
cannot fall far enough to offset this
disappointment, debtors may begin to regret
their earlier indulgence.
3
Falling asset prices don’t just undermine
perceptions regarding wealth. They also make
life more difficult for borrowers by reducing
the collateral against which they can raise
loans. Moreover, for households entering
negative equity, the decline in wealth almost
inevitably leads to higher-than-desired saving.
4
Policymakers slowly begin to lose credibility.
As deleveraging takes hold amongst
9
abc
Economics
Global
13 September 2010
of deflation led to Japanese interest rates staying
too high for too long while Bernanke’s speech
provided a list of unconventional policies to be
pursued by the Federal Reserve in the unlikely
event that interest rates might fall to zero
alongside undesirably low inflation.
18. Japan’s stagnation provides a worrying precedent
JPY trn
Amongst policymakers and economists there is no
real consensus on how to proceed. The Federal
Open Markets Committee is completely split on
what to do next. In academic circles, bust-ups have
become a regular occurrence, with Paul Krugman,
the Nobel Laureate, venting his spleen at anyone
daring to suggest that budget deficits should be
brought under control. In the medical profession,
you might seek a second opinion. In the economics
profession, you can find five or six different
opinions. In these circumstances, rebuilding animal
spirits is not likely to be an easy task.
There is, however, a grudging recognition that we
are living in increasingly difficult times. A
handful of months ago, few US officials would
countenance the idea that the US might possibly
go down the Japanese deflationary route. At the
Federal Reserve, policymakers took comfort in
research produced earlier in the decade:
Preventing deflation: Lessons from Japan’s
Experience in the 1990s (Federal Reserve
International Finance Discussion Paper, 2002) and
Deflation: Making Sure It Doesn’t Happen Here
(Ben Bernanke, 2002). The Japan paper argued
that policymakers’ failure to anticipate the threat
10
JPY trn
Q1 2010
Q1 2005
Q1 2000
Q1 1995
550
500
450
400
350
300
250
200
Q1 1985
Japan’s difficulties are coming
back to haunt the Western
world
Japan nominal GDP
550
500
450
400
350
300
250
200
Q1 1980
To use a medical analogy, it’s as if the economic
patient has acquired a rare, poorly understood,
disease for which the only treatment is experimental
drugs that cannot be guaranteed to succeed.
Q1 1990
households and companies, so fiscal numbers
deteriorate rapidly. Large budget deficits and
rising government debt/GDP ratios may either
be unfundable (Greece) or not politically
sustainable (the UK). Meanwhile, central
bankers increasingly have to contemplate
policy options which, long ago, were to be
found only in the dustiest of textbooks.
Source: Thomson Reuters Datastream
In hindsight, both pieces were overly optimistic
regarding the Western world’s ability to avoid
Japanese-style deflation. Heeding Japan’s plight,
the Federal Reserve and other central banks did
cut interest rates aggressively from 2007 onwards
yet, with one or two exceptions, Western inflation
has continued to drop like a stone. Many of Ben
Bernanke’s deflationary “cures” have already
been used (although the options to purchase
bucket loads of Treasuries and to launch
Friedman-ite helicopters full of money is still out
there). Worse, Bernanke’s speech ended with
observations which now look rather unfortunate.
Specifically, Japan’s economy faces some
significant barriers to growth besides deflation,
including massive financial problems in the
banking and corporate sectors and a large
overhang of government debt …Fortunately, the
US economy does not share these problems, at
least not to anything like the same degree,
suggesting that anti-deflationary monetary and
fiscal policies would be more potent here than
they have been in Japan. That may have been the
case in 2002, but it is less obviously so now.
abc
Economics
Global
13 September 2010
The similarity with Japan is grudgingly being
recognised. Seven Faces of the “Peril” (July
2010), penned by James Bullard, the President
and CEO of the Federal Reserve Bank of St
Louis, expresses concern about the decline in
inflation and inflation expectations in the US and
raises the possibility that the US, like Japan before
it, could settle into an equilibrium of excessively
low inflation, zero interest rates and economic
stagnation. Like Bernanke eight years ago, he
recommends purchases of Treasuries as part of a
quantitative easing programme to jolt the
economy away from a deflationary trap. In his
words, The experience in the UK seems to suggest
that appropriately state-contingent purchases of
Treasury securities are a good tool to use when
inflation and inflation expectations are “too low”.
When might inflation be “too low”? The problem
goes all the way back to the Federal Reserve’s
Japanese deflation paper, in which the authors
observed that Japan’s deflationary slump was
very much unanticipated by Japanese
policymakers and observers alike, and that this
was a key factor in the authorities’ failure to
provide sufficient stimulus …when inflation and
interest rates have fallen close to zero, and the
risk of deflation is high, stimulus – both monetary
and fiscal – should go beyond the levels
because the public understands that the Federal
Reserve will be vigilant and proactive in
addressing significant further deflation. While
this is a much more open-minded assessment than
anything on offer from the Bank of Japan in the
early 1990s, Bernanke’s conclusions are in danger
of becoming circular: deflation will be avoided
not because the Fed will be vigilant and proactive
but, instead, because the public believes not only
that the Fed will be vigilant and proactive but also
that the Fed’s actions will work, which is not
quite the same thing.
The problem relates partly to credibility. Central
banks will succeed not on the back of polices
alone but also on the back of the influence of their
policies on the public’s expectations. Those
expectations depend not so much on a deep
understanding of economics but, instead, on an act
of faith in a central bank’s powers (in a similar
manner, we routinely believe that flicking a light
switch turns on the lights, even if we have no
knowledge of the physics behind the process).
19. Japanese money supply growth collapsed in the 1980s
% Yr
% Yr
Money supply growth
15
15
12
12
9
9
6
6
conventionally implied by baseline forecasts of
future inflation and economic activity. While this
3
3
0
0
conclusion sounds fine, it raises an obvious
question. How can we know with any conviction
-3
that the risk of deflation is high?
Relying on an Act of Faith
-3
90
91
92
93
94
95
96
97
98
99
00
Japan M2 + CDs
Source: Thomson Reuters Datastream
Ben Bernanke’s remarks at the Jackson Hole
jamboree for the world’s central bankers on 27
August 2010 suggest that the Federal Reserve is –
at least in public – simply not willing to admit that
the risk of deflation is high. In his words, Falling
into deflation is not a significant risk for the
United States at this time, but that is true in part
11
abc
Economics
Global
13 September 2010
20. The Western world is following Japan’s monetary trail
% Yr
23. Japanese equities used to be flavour of the month
% 4Qtr
Money supply growth
15
15
10
10
5
5
0
0
-5
-5
Japanese equity prices
40000
40000
30000
30000
20000
20000
10000
10000
00 01 02 03 04 05 06 07 08 09 10
US M2 (LHS)
Eurozone M3 (LHS)
UK M4 ex intermediate OFCs (RHS)
0
0
85
90
95
00
Nikkei 225
05
10
Source: Thomson Reuters Datastream
Source: Datastream
21. Japanese bond yields collapsed
%
9
8
7
6
5
4
3
2
1
0
24. Western equities have made little headway since 2000
%
9
8
7
6
5
4
3
2
1
0
Japanese bond yields
87 89 91 93 95
97 99 01
Index 1995=100
Index 1995=100
Equity prices
400
350
300
250
200
150
100
50
0
400
300
200
100
0
03 05 07 09
95
10 year yield
97
UK
99
01
03
US
05
07
09
Germany
Source: Bloomberg
Source: Datastream
22. Western bond yields are also incredibly low
%
1 0 year yield
%
9
8
7
6
5
4
3
2
1
9
8
7
6
5
4
3
2
1
95
98
US
Source: Bloomberg
12
01
04
UK
07
10
Germany
Acts of faith, however, can be undermined if
expectations aren’t met. This is precisely the
problem facing policymakers in the Western
world. Having declared so many times in public
that they knew how to avoid a Japan-style
financial and economic crisis, it becomes
increasingly difficult to explain why the West is
now showing so many symptoms once thought to
be unique to Japan. Interest rates are remarkably
low, budget deficits are extraordinarily high,
money supply growth has collapsed, households
and companies are deleveraging and inflation is
uncomfortably low. All this despite the biggest
policy stimulus known to man.
abc
Economics
Global
13 September 2010
As Bernanke remarked in Jackson Hole,
policymakers now have to consider the trade-off
between allowing inflation to drop too far and
using policies which are poorly understood, at
least in terms of the magnitude of their effects.
For the Federal Reserve, the next step is likely to
be to adopt the quantitative easing strategy
already used by the Bank of England. But will the
strategy be successful?
26. They were going up but UK house prices have now
stalled again
Index, 1993=100
400
350
300
250
200
150
100
50
400
350
300
250
200
150
100
50
91
The UK experience: work in
progress
Index, 1993=100
UK house prices
93
95
97
99
01
03
05
07
09
Nationwide monthly average house price index
Source: Thomson Reuters Datastream
The UK’s experience so far has been mixed. The
mix between activity (low) and inflation (high) has
been rather unattractive and, despite sterling’s
prodigious decline in 2008, there has been little sign
of the “rebalancing” of the UK economy away from
domestic consumption towards exports. Moreover,
at the time of writing, house prices had started to
decline again following a 10% rebound from the
earlier lows: if quantitative easing was supposed to
work by pushing asset prices higher, the effect now
seems to be fading. The equity market has also
struggled to make progress.
25. UK exports have recovered, but not by enough to deliver
rebalancing
% Yr
8
6
4
2
0
-2
-4
-6
-8
00 01
UK consumption and export growth
02
03
04
05
Consumption (LHS)
06
07
08
% Yr
25
20
15
10
5
0
-5
-10
-15
09
Nevertheless, UK inflation has bucked the
disinflationary trend seen across other nations,
having persistently surprised on the upside in
recent months. If quantitative easing is supposed
to work by raising both inflation and inflation
expectations, the UK’s experience might be
described as a qualified success. The most
obvious qualification comes from the behaviour
of the exchange rate. Sterling’s 2008 collapse led
to higher import prices and, for exporters, higher
sterling prices, both of which may have fed
through to higher domestic inflation. However,
it’s not obvious that inflation will remain
elevated. First, the Bank of England might frown
upon a permanent increase in the inflation rate.
Second, a one-off fall in the exchange rate may
only lead to a one-off rise in the price level: only
if the exchange rate is expected to fall on a
continuous basis is there likely to be a permanent
increase in inflation expectations.
10
Exports (RHS)
Source: Thomson Reuters Datastream
13
abc
Economics
Global
13 September 2010
27. At least the UK is further away from deflation…
% Yr
6
Headline inflation
% Yr
6
4
4
2
2
0
0
-2
-2
00
01
02
03
04
UK
05
US
06
07
08
09
10
Eurozone
Source: Thomson Reuters Datastream
a central bank conducts monetary policy with the
zero rate bound in mind, information
dissemination concerning monetary policy from
the central bank to the private sector is critical to
manifest the policy effects. Specifically, QE is
most likely to work if the central bank makes a
pre-commitment not to raise interest rates at the
first sign of recovery. That way, as growth picks
up and inflation eventually rises, the central bank
is effectively promising the public to keep interest
rates low (indeed, as inflation rises, real interest
rates fall): a reward, if you like, for those who
choose to borrow in uncertain times.
Listening to the Japanese….
The qualifications don’t end there. In July 2006,
the Bank of Japan published a paper assessing the
impact of the quantitative easing policies pursued
in Japan between March 2001 and March 2006
(Effects of the Quantitative Easing Policy: A
Survey of Empirical Analyses, Hiroshi Ugai, Bank
of Japan Working Paper Series No.06-E-10). The
paper made three key observations:
1
2
Relative to the earlier zero interest rate policy
(ZIRP), the commitment to quantitative
easing lowered the yield curve, largely
because markets understood that the Bank of
Japan would not raise interest rates until
inflation had turned positive. Under the ZIRP,
there was a sense that the BoJ might raise
rates at the first sign of recovery, whether or
not inflation was above zero.
The expansion of the BoJ’s balance sheet had
only modest effects which were difficult to
capture empirically.
3
The purchase of government bonds (JGBs) –
as opposed to other assets – had a negligible
impact
In conclusion, the author noted that the largest
easing from QEP was through …influencing the
expected path of short-term interest rates …when
14
….and ignoring the Japanese
Yet this conclusion was not followed by Western
central banks in the first half of the year. In
Bernanke’s semi-annual testimony to Congress in
February, he said:
Although the federal funds rate is likely to remain
exceptionally low for an extended period, as the
expansion matures, the Federal Reserve will at
some point need to begin to tighten monetary
conditions to prevent the development of
inflationary pressures. Notwithstanding the
substantial increase in the size of its balance sheet
associated with its purchases of Treasury and
agency securities, we are confident that we have
the tools we need to firm the stance of monetary
policy at the appropriate time.
Intentionally or otherwise, these comments helped
fuel expectations that the Federal Reserve was
considering exit strategies, seemingly
contradicting the lessons from Japan’s economic
crisis. In a world of zero rates and falling
inflation, it’s important to emphasise that interest
rates won’t rise at the first sign of recovery. In
the US, at least, that message was lost in the first
half of the year, partly because the Federal
Reserve focused on real, rather than nominal,
economic developments. 10-year Treasury yields
abc
Economics
Global
13 September 2010
rose, a development which, in hindsight, appears
to have been inappropriate, particularly given the
subsequent decline in inflation. With zero shortterm interest rates, the most important task is to
ensure that deflation is avoided: a modest
recovery in economic activity when capacity is in
great abundance provides no guarantee that
inflation will stabilise at an acceptable rate, and
therefore is an inappropriate trigger for
discussions regarding exit strategies.
28. It would have been better had US Treasury yields stayed
low throughout
%
US 10 year Treasury yields
4.5
4
3.5
3
2.5
2
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
%
4.5
4
3.5
3
2.5
2
Source: Thomson Reuters Datastream
New frameworks for old
Why wasn’t this risk fully recognised? The
answer partly relates to “Japan denial”, a mistake
that is only now being understood. In addition,
despite all the hand-ringing in recent years, there
is still a strong sense among policymakers that the
old policy framework, despite its weaknesses,
operated reasonably well. Among the conclusions
contained in a paper presented by the Bank of
England at the 2010 Jackson Hole gathering
(Monetary Policy After the Fall by Charles Bean,
Matthias Paustian, Adrian Penalver and Tim
Taylor) were the following observations:
… the price-stability oriented policies of the
Great Moderation proved to be instrumental in
delivering not just low and stable inflation but
also steady growth for a sustained period.
This is true but only in a trivial sense (it’s a bit like
saying that, apart from the crashes, an airline has an
excellent safety record). The pursuit of inflation
targeting ultimately has led to the deepest
economic crisis in the Western world since the
1930s, either because the framework itself failed
(the belief in the framework’s lasting success led to
excessive risk-taking, thereby delivering precisely
the economic outcome the framework was
supposed to avoid) or because it was necessary but
not sufficient (inflation is not the only threat to
economic stability). Admittedly, the Bank of
England paper assessed other alternative
frameworks – such as price-level targeting – but
without any great enthusiasm: the welfare gains
from making the extra step [towards price level
targeting] may be limited, particularly when there
are costs to changing the framework. The issue is,
nevertheless, worthy of further investigation.
In other words, it’s fine to pursue unconventional
policies within a conventional framework because
the framework itself works perfectly well. In our
view, however, this approach fails to deal with the
role of private-sector expectations when interest
rates have dropped to zero and when inflation
subsequently continues to decline. The issue
relates to the stability of debt in real terms and the
incentive for households and companies to repay
debt when deflation looms.
Inflation targets and price
level targets
The key distinction between an inflation target
and a price-level target is that an inflation target
lets bygones be bygones whereas a price-level
target responds to past errors in thinking about
future policies. The Bank of England paper
argued, in effect, that in recent years there was
little to choose between the two approaches and,
therefore, that a move from an inflation target
towards a price-level target would probably
achieve very little.
15
abc
Economics
Global
13 September 2010
We disagree. While inflation surprised on both the
upside and the downside in recent years – thereby
mimicking a target for price stability – mimicking
a particular framework is not quite the same thing
as pre-committing to a particular framework. Our
view is that a conventional inflation-targeting
framework doesn’t work in an unconventional
world. What’s needed, instead, is an
unconventional framework. Price-level targeting
might just do the trick.
As interest rates drop to zero, so an economy
becomes more and more vulnerable to excessively
low inflation or even outright deflation. Imagine,
for example, that a central bank has an inflation
target of 2% but discovers that inflation begins to
undershoot. In response, the central bank cuts
interest rates. If, eventually, interest rates fall to
zero and inflation continues to undershoot, the
obvious danger is that real interest rates end up
too high: nominal interest rates cannot fall any
further. Put another way, the burden of debt rises
in real terms, creating an incentive to repay debt.
Demand ends up lower, contributing to further
deflation and, hence, an even bigger debt burden.
An inflation target does little to change the
dynamics of this process. Imagine that a central
bank announces a policy of quantitative easing in
response to a period of excessively low inflation
alongside zero interest rates. Already, the real
debt burden is too high, because inflation has
already been too low. Promising to return
inflation to its target rate merely locks in the
increase in the debt burden, thereby reducing the
willingness of households and companies to
borrow the extra funds made available through
quantitative easing. More is required.
Specifically, after a period of inflationary
undershoot, a subsequent period of inflationary
overshoot will be required to bring the price level
back to the original trajectory.
16
29. Inflation and deflation….
% Yr
8
Inflation
% Yr
8
6
4
6
4
2
0
-2
2
0
-2
-4
-4
-6
1
2%
2
3
4
5
Deflation scenario
6
-6
7
8
9 10
Minimal deflation scenario
Source: HSBC
30. ….and the implications for the price level at zero interest
rates
Price level
130
120
Price level
130
Rising real debt burden
120
110
110
100
100
90
90
0
1
2
3
4 5 6 7 8 9
2% annual inflation target
Deflation scenario
Minimal deflation scenario
10
Source: HSBC
Charts 29 and 30 show the effects at work. Chart
29 shows (i) a path for inflation stuck persistently
at 2%, (ii) a deflation scenario where prices fall
before returning to the 2% target and (iii) a
deflation/inflation scenario where initial
inflationary undershoots are followed by
overshoots. Chart 30 shows the implications of
these scenarios for the price level. Option (iii)
leaves the price level temporarily lower than
option (i) whereas option (ii) leaves the price level
permanently lower.
In other words, faced with deflation, it makes sense
to commit persistently to loosen monetary policy, to
allow inflation to rise above its long-run target, to
prevent real debt levels from rising and to provide
no hint of exit strategies until the price level is
abc
Economics
Global
13 September 2010
returning to the original trend. A recovery in the real
economy is not enough to warrant a rise in interest
rates: if debtors believe that may happen, they will
repay debt more aggressively. As a consequence,
any nascent recovery may quickly come to a sticky
end. Seen this way, current fears over a double dip
are relatively easy to explain. The absence of a
price-level-targeting framework has led to
inevitable uncertainty over exit strategies that,
ultimately, has corroded confidence and led to a
serious loss of economic momentum.
Put another way, the focus of policymakers must
be on the nominal, not the real, economy for the
simple reason that, at the zero rate bound,
developments in the nominal economy, by
influencing real interest rates, determine events in
the real economy. Conventional thinking, where
developments in the real economy fed through via
the output gap into inflation, simply don’t apply.
Inflation (or the lack of it) is the cause of the
problem, not its consequence. Yet policymakers
are trapped in a world of convention. As Bernanke
explained at Jackson Hole, A rather different type
of policy option...would have the Committee
increase its medium-term inflation goals above
levels consistent with price stability. I see no
support for this option on the FOMC.
Conceivably, such a step might make sense in a
situation in which a prolonged period of deflation
had greatly weakened the confidence of the public
in the ability of the central bank to achieve price
stability, so that drastic measures were required
to shift expectations. Also, in such a situation,
higher inflation for a time, by compensating for
the prior period of deflation, could help return the
price level to what was expected by people who
signed long-term contracts, such as debt
contracts, before the deflation began.
However, such a strategy is inappropriate for the
United States in current circumstances...The
combination of increased uncertainty for
households and businesses, higher risk premiums
in financial markets, and the potential for
destabilizing movements in commodity and
currency markets would likely overwhelm any
benefits arising from this strategy.”
This rather misses the point about price-level
targeting. It is not a strategy to raise the Fed’s
medium-term inflation goals, as Bernanke puts it.
It is, instead, a pledge to ensure that there is no
lasting damage done to the economy as a
consequence of a descent into deflation: by
making the pledge, the risk of falling into
deflation may be significantly reduced. Pricelevel targeting, if explained properly, should help
crystallise the public’s expectations with regard to
future policy decisions and reduce fears of a
premature tightening of policy in a world of
excessive debts.
Unconventional policies in an
international economy: a
bonanza for some
Existing frameworks supply the wrong message.
Even if central banks are prepared to keep interest
rates low and adopt unconventional policies for an
“extended period”, the message may not get
through to the public, in part because central
bankers betray an ambiguity about the issue. They
simultaneously want both to dig the economy out
of a deflationary hole and to fret about the dangers
of inflation being too high. By doing so, they fail
to emphasise the need to hit a price-level, rather
than inflation, target. In effect, they threaten to
tighten monetary policy too early.
Even with the adoption of a price level target,
however, success is not guaranteed. The most
obvious problem – remarkably enough, hardly
ever discussed in policy circles – is the
international dimension. Monetary decisions in
one part of the world can easily leak out. The
Japan carry trade is an excellent example.
17
abc
Economics
Global
13 September 2010
Investors were able to borrow cheaply in yen and
re-invest the proceeds in markets all over the
world, from the US and the UK through to
Turkey, New Zealand and South Africa. The Bank
of Japan may have loosened monetary conditions
but, with perceptions about the Japanese economy
so depressed, most of the benefits went elsewhere.
Japan benefited only indirectly, as exports were
boosted by stronger domestic demand elsewhere
in the world.
The same may be true today. This time, however,
dollar, sterling and euro carry trades are
increasingly relevant. If US rates are expected to
remain low for a long time, investors will feel
comfortable borrowing in dollars and investing in
other parts of the world. The most obvious
beneficiaries of this process are the emerging
nations where, for the most part, debts are
relatively low and growth prospects are very
good. The US may have kept monetary policy
loose but the effect on monetary conditions has
been felt more keenly in China, Brazil and the
Middle East. How these countries cope with the
asset bubbles that might eventually transpire is, of
course, a key policy issue. After all, the original
yen carry trade doubtless contributed to the
excessive lending in the Western world in the runup to the 2007/08 credit crunch.
At this point, we return to the Austrian dilemma
outlined earlier. Unconventional policies work by
fixing a problem typically linked to excessively
pessimistic expectations regarding the future. Yet
if the future genuinely is worse than the past –
perhaps because past activity was inflated by an
asset bubble or a credit boom – it’s difficult to
think of any policy – unconventional or otherwise
– that will sort the problem out. In an international
context, attempting to fix a problem by lowering
interest rates or printing money might simply
leave investors flocking for safety in other parts of
the world. In 2010, the big “winners” included
18
emerging-market currencies and domestic assets,
commodity prices and the Japanese yen: the
common feature of these assets and monies is
simply that they are not part of the Western dollar,
euro or sterling bloc.
America’s creditors are increasingly foreign.
Approaching 50% of Treasuries are owned by
other nations, with China, Russia and Saudi
Arabia among the more important holders. They
have every reason to worry about unconventional
monetary policies: printing dollars might make
sense for the US but it doesn’t help America’s
creditors, who would suffer if, as a consequence,
the US dollar went into freefall.
Ultimately, the world’s creditors know that debtors
have a strong incentive to find some way or another
to default – either through an outright default, a
dose of inflation or a currency collapse.
Unconventional policies should be seen in this
regard. The intention of printing more dollars might
be to encourage US citizens to borrow more, safe in
the knowledge that they will not have to pay higher
interest rates for years to come (or, even better, that
real interest rates will fall as inflation eventually
rises). But if investors insist on remaining risk
averse, they will surely switch out of tainted dollar
assets into more attractive stores of value elsewhere
in the world, fearing that a weaker dollar will
simply destroy the value in foreign currency terms
of US assets held abroad. Rather than generating a
lasting recovery in economic activity, the most
likely result is a currency crisis. The capital and
exchange controls of old no longer exist to
maximise the domestic consequences of a monetary
action, whether conventional or otherwise. In the
quest for a quick fix, the international mobility of
capital – and its implications for exchange rates –
cannot be ignored.
So even though a price-level target has
considerable attractions compared with a standard
inflation target, it would be wrong to suggest that
Economics
Global
13 September 2010
abc
a monetary reform along these lines could
possibly solve all ills. It might reduce the risks of
a double dip or a descent into deflation but, in an
Austrian world, any monetary policy has its
limitations. The sad truth is that, having lived
beyond its means, the Western world will now
have to put up with many years of austerity.
Whatever the monetary regime, there is a price to
be paid.
19
Economics
Global
13 September 2010
Notes
20
abc
Economics
Global
13 September 2010
abc
Notes
21
Economics
Global
13 September 2010
abc
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Stephen King
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer
to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
the investment products mentioned in this document and take into account their specific investment objectives, financial
situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an
investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls
in value that could equal or exceed the amount invested. Value and income from investment products may be adversely
affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative
of future results.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1
2
3
22
This report is dated as at 13 September 2010.
All market data included in this report are dated as at close 9 September 2010, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
Economics
Global
13 September 2010
abc
Disclaimer
* Legal entities as at 31 January 2010
Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation
HSBC Bank plc
Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada)
8 Canada Square, London
Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf;
E14 5HQ, United Kingdom
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai;
'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC
Telephone: +44 20 7991 8888
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking
Fax: +44 20 7992 4880
Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul
Website: www.research.hsbc.com
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC
Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC
Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo
Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank
Argentina S.A., HSBC Saudi Arabia Limited.
This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FSA) and those
of its affiliates only. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place
between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited
(ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed
to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that
the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in
accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.
The document is distributed in Hong Kong by The Hongkong and Shanghai Banking Corporation Limited and in Japan by HSBC Securities (Japan) Limited.
Each of the companies listed above (the “Participating Companies”) is a member of the HSBC Group of Companies, any member of which may trade for its
own account as Principal, may have underwritten an issue within the last 36 months or, together with its Directors, officers and employees, may have a long or
short position in securities or instruments or in any related instrument mentioned in the document. Brokerage or fees may be earned by the Participating
Companies or persons associated with them in respect of any business transacted by them in all or any of the securities or instruments referred to in this
document. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP
SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors
specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the
FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services
Commission and the Financial Supervisory Service of Korea.
The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified.
The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical
data, nor shall the Participating Companies be liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from
publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject
to change without notice.
This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. HSBC Securities (USA) Inc. accepts
responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and
intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US
foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited,
Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act
(Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This
publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai
Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong
and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. HSBC
México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión
Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is
regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero
(SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia
General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones
Financieras (SIBOIF).
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home
jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC Bank plc is registered in
England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. (070905)
© Copyright. HSBC Bank plc 2010, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted,
on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA
(P) 142/06/2010 and MICA (P) 193/04/2010
[277868]
23
abc
Global Economics Research Team
Global
Emerging Europe, Middle East and Africa
Stephen King
Global Head of Economics
+44 20 7991 6700
[email protected]
Kubilay Ozturk
+44 20 7991 6045
Karen Ward
Senior Global Economist
+44 20 7991 3692
[email protected]
Madhur Jha
+44 20 7991 6755
[email protected]
Europe
Astrid Schilo
+44 20 7991 6708
[email protected]
Germany
Lothar Hessler
+49 21 1910 2906
[email protected]
France
Mathilde Lemoine
+33 1 4070 3266
[email protected]
United Kingdom
Stuart Green
+44 20 7991 6718
[email protected]
[email protected]
North America
Kevin Logan
+1 212 525 3195
[email protected]
Ryan Wang
+1 212 525 3181
[email protected]
Stewart Hall
+1 416 868 7523
[email protected]
Asia Pacific
Qu Hongbin
+852 2822 2025
[email protected]
Frederic Neumann
+852 2822 4556
[email protected]
Song Yi Kim
+852 2822 4870
[email protected]
Donna Kwok
+852 2996 6621
[email protected]
Sherman Chan
+852 2996 6975
[email protected]
Wellian Wiranto
+65 6230 2879
[email protected]
Seiji Shiraishi
+81 3 5203 3802
[email protected]
Yukiko Tani
+81 3 5203 3827
[email protected]
Sun Junwei
Associate
Sophia Ma
Associate
Murat Ulgen
+90 212 376 4619
[email protected]
Simon Williams
+971 4507 7614
[email protected]
Latin America
Janet Henry
Chief European Economist
+44 20 7991 6711
[email protected]
Andrew Grantham
+44 20 7991 2170
[email protected]
Alexander Morozov
+7 495 783 8855
[email protected]
Argentina
Javier Finkman
Chief Economist, South America ex-Brazil
+54 11 4344 8144
[email protected]
Ramiro D Blazquez
Senior Economist
+54 11 4348 5759
[email protected]
Jorge Morgenstern
Economist
+54 11 4130 9229
[email protected]
Brazil
Andre Loes
Chief Economist
+55 11 3371 8184
[email protected]
Mexico
Sergio Martin
Chief Economist
+52 55 5721 2164
[email protected]
Central America
Lorena Dominguez
Economist
+52 55 5721 2172
[email protected]