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World Output Fell 1.1% 2008 – 2009, first annual decline in 50 years
Central Banks lent money to each other. Governments spent stimulus
funds. No restrictions on trade.
US dollar maintained its value. No major defaults. Emerging markets
were stable.
Major international issue -- the problem of evaluating counterparty
risk measured by the OIS spread. Banking lending dried up.
Dollar shortages due to currency swaps -- Euros swaped for USD to buy USD
assets…risky when swap is due…USD becomes scarce.
Unwinding of carry trade caused greater volatility of currencies. Investors
had borrowed in cheap Japanese yen and bought high yielding assets in
Iceland, Brazil, and Australia. Later these investments were unwound due to
increased risk
USD does well
Some currencies crash at first, but these currencies later
recovered…for example 50% depreciation of Brazil, Korea, and
Mexico. Some Eastern European countries also suffered short
term pain.
Countries were better prepared since they had saved foreign
exchange reserves after the 1997 crisis. IMF was also more
flexible.
However, trade fell greatly and this transmitted the crash to
other countries.
Trade falls were contagious because of (1) global supply networks
being disrupted; (2) short term liquidity financing problems for
exports and imports; and (3) capital and consumer durables are
major part of trade and these were hit hardest
Countries less vertically integrated suffered greater loss of trade.
Example: Country A imports inputs for $80, value adds $20,
exports for $100
If it loses this good during recession then GDP falls by $20,
but average trade (X+IMP)/2 falls by $90, which implies
Trade/GDP falls
Major fall in long term capital movements
China and India did well during the crisis –
Mexico, Brazil did poorly, but recovered quickly
US actually did better than ½ of OECD countries in terms of GDP .
Inflation was muted (oil, aggregate demand, food) this made it
easier to conduct monetary policy. Japan had deflation.
Central Banks responded to the crisis by lowering borrowing rates – Japan did
not have much room. US is now like Japan.
Huge increase in the balance sheets of UK and US Central Banks – ECB and
Japan much less so.
The Fed made swap lines available to other Central Banks –
also made available to Brazil, Mexico, Singapore, and
Korea – Money paid back by February, collateralized, no risk
High automatic stabilizers : High tax countries = less stimulus,
Low automatic stabilizers: Low tax countries = high stimulus
Generally speaking stimulus throughout the world has been
1.5% - 2.0 % of GDP . In addition, there was no strong
movement towards protectionism.
G-20 Member Countries and Organizations:
Argentina
Australia
Brazil
Canada
China
G20 becoming the major policy
France
vehicle in international trade
Germany
negotiations. Secured $800 to
India
international organizations with
Indonesia
$500 billion going to IMF. China
Italy
and India are becoming more
Japan
important to the talks. IMF
Mexico
helped Poland, Columbia, and
Russia
Mexico with flexible credit lines =
Saudi Arabia
$80 billion, $75 billion
South Africa
commitment to others.
South Korea
Turkey
United Kingdom
United States
European Union
Growth > Forecasts.
Stimulus a Big Successful throughout the World?
US joins Spain, Ireland, Turkey and Iceland – big loss and weak recovery
of jobs
Global Imbalances Beginning to Change
(Chapter 3)
US Personal Consumption Has Risen Quickly and Leaves Little for the
Future
Higher Wealth Causes Lower Personal Saving – But What Causes Wealth
Movements?
Personal Saving Predicted by (1) Wealth/Income, (2) Credit Availability,
and (3) Unemployment Rate (for Precautionary Saving)
Housing prices steady instead of rising would
have raised saving rate 2 pct points
Saving rate expected to be around 4% in the future
Huge Bubble in House Construction
Unsustainable Trend in Ownership
This is a Troubling Sign – Commercial Real Estate is Falling Badly
Commercial Property Prices Appear to
be Bottoming – No Turnaround Though
Where will Business Investment Come From – It is Not Clear
US Looking for a Rapidly Expanding Current
Account. How Can This Happen?
(Chapter 4)