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Imbalances in International
Economic System
Dr. Jacob A. Frenkel
STRICTLY PRIVATE AND CONFIDENTIAL
Chairman, JPMorgan Chase International
Reinventing Bretton Woods Committee
Paris, France
December 10, 2010
J.P.Morgan Chase
Imbalances in the Global
Economic System
Dr. Jacob A. Frenkel
STRICTLY PRIVATE AND CONFIDENTIAL
Chairman, JPMorgan Chase International
Chairman, Group of Thirty (G30)
Former Governor, Bank of Israel
GLOBES, Israel Business Conference
Tel Aviv, Israel
December 12-13, 2010
J.P.Morgan Chase
Six Global Imbalances
• International Payments Imbalances
• China and the Global System
• Fiscal Imbalances
• Imbalances and the Euro-zone Crisis
• Imbalances between Developed and
Developing Countries
• Long-term Demographic Challenges
12/7/2010
3
Global Payments Imbalances
• Current Accounts Imbalances
• International Reserves
• Foreign Holdings of US Treasuries
• Savings Imbalances
12/7/2010
4
Current Account of Balance of Payments
(U.S. dollars, bill.)
600
$582
US$ billions, 2011
Of Which:
China $325
Japan $133
300
$189
$23
0
-$21
-$80
-300
-$400
-600
United States
Latin America
and the
Caribbean
Sub-Saharan European Union Middle East, N.
Africa
Africa, & Russia
Asia
Source: IMF, last update Oct 01 2010, WEO (2011 Forecast)
12/7/2010
5
J.P.Morgan Chase
Current Account of Balance of Payments
(U.S. dollars, bill.)
700
Asia,
2011:
$582B
Asia & Oil Exporters Save
500
M iddle East,
N. Africa, &
R u ssia,
2011:
$189B
300
100
EU, 2011:
$ 2 3B
-100
Europe Balances
-300
US Spends
-500
-700
-900
2000
US, 2 011:
-$ 4 00B
IMF Forecasts
European Union
United States
Middle East, N. Africa, & Russia
Asia
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, last update Oct 01 2010, WEO (2010 & 2011 Forecast)
12/7/2010
6
J.P.Morgan Chase
Accumulation of Foreign Exchange
Reserves (Bill. Usd)
3,000
2,750
($B)
2,500
$2,648
2,500
Stock
Flow
2,250
$2,024.4
October 2010
(2005 – 2010)
2,000
2,250
2,000
1,750
1,750
1,500
1,500
1,250
1,250
($B)
$1,059
1,000
1,000
750
750
$453
500
$384
500
$349.1
$293
$237.7
250
250
0
$141.1
$93.7
Taiwan
South
Korea
0
China
Japan
Russia
Taiwan
South
Korea
China
Japan
Russia
Source: Nat'l Statistical Institutes, Foreign-Exchange Reserves ex. Gold, last Observation: 10/2010, (China 9/2010)
12/7/2010
7
J.P.Morgan Chase
Global Treasury Holdings
(% of Total)
25%
21%
20%
20%
15%
11%
10%
5%
5%
4%
4%
Brazil
Caribbean
3%
0%
China
Japan
UK
OPEC
Russia
Source: US Treasury, Last Observation: August 2010
12/7/2010
8
J.P.Morgan Chase
Gross National Savings as a % of GDP
(% of GDP)
50
46
40
33
30
23
19
20
11
10
0
China
India
Japan
Euro Area
United States
Source: IIF (last update: China - June 2010; India - sep 2010), JPMorgan, IMF-IFS (last Update: Oct 2010)
12/7/2010
9
J.P.Morgan Chase
China and the Global System
• China and the Trading System
• The Destinations of Exports
• International Reserves and Exchange
Rates
12/7/2010
10
China’s Role in Global Trade (bill. Usd)
Exports
$748
Asia
Imports
Exports
$274
People’s
Republic of
China
Imports
$610
$850
U.S.
&
EU
Source: National Bureau of Statistics of China, 12-months through September 2010
12/7/2010
11
J.P.Morgan Chase
European Union Exports by Destination
2000
2010
Asia ex
China,
39%
Asia ex
China,
38%
US, 42%
US, 57%
China,
19%
China,
5%
Source: Eurostat, Last Observation: Aug 2010
12/7/2010
12
J.P.Morgan Chase
U.S. Exports by Destination
2000
Asia ex
China,
49%
2010
Asia ex
China,
44%
EU, 41%
EU, 48%
China,
15%
China,
3%
Source: US Department of Commerce, Last Observation: Sep 2010
12/7/2010
13
J.P.Morgan Chase
China Exports by Destination
2010
2000
EU, 24%
EU, 19%
US, 22%
US, 22%
Asia ex
China,
59%
Asia ex
China,
54%
Source: Customs General Administration, Last Observation: Oct 2010
12/7/2010
14
J.P.Morgan Chase
China Foreign Exchange Reserves
3,000
(Bill. $)
2,750
2,500
2,250
2,000
1,750
1,500
Level of China's Foreign Exchange Reserves
1,250
1,000
750
500
250
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: China Economic Information Net, Last Observation: September 2010
12/7/2010
15
J.P.Morgan Chase
China’s Foreign Exchange: Yuan/USD,
Yuan/EUR
8.4
(Yuan/Eur)
(Yuan/Usd)
11.5
11.0
8.2
10.5
8.0
10.0
7.8
9.5
7.6
9.0
EUR-CNY
7.4
8.5
7.2
8.0
7.0
USD-CNY
7.5
6.8
7.0
USD-CNY Exchange Rate
EUR-CNY Exchange Rate
6.6
2000
6.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Federal Reserve System, ECB, Last Observation: 07 Dec, 2010
12/7/2010
16
J.P.Morgan Chase
Fiscal Imbalances
• Budget Deficits
• Public Debt
12/7/2010
17
Fiscal Positions: General Government
Net Lending/Borrowing
2
(Percent of GDP)
0
-2
Euro Area,
2 0 11:
-5 .1%
-4
-6
Japan,
2 0 11:
-8 .9%
-8
-10
US, 2 011:
-9 .7%
-12
IMF Forecasts
Euro Area
-14
2000
2001
2002
2003
United States
Japan
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Oct 1 2010, WEO (2009 Estimate, 2010 & 2011 Forecast)
12/7/2010
18
J.P.Morgan Chase
Fiscal Positions: Net Public Debt
140
(Percent of GDP)
120
Japan,
2 0 11:
1 2 9.5%
100
US, 2 011:
7 2 .7%
80
Euro Area,
2 0 11:
7 0 .4%
60
40
20
2000
IMF Forecasts
Euro Area
2001
2002
United States
Japan
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Oct 1 2010, WEO (2009 Estimate, 2010 & 2011 Forecast)
12/7/2010
19
J.P.Morgan Chase
Imbalances & The Euro-Zone Crisis
• Unemployment & Competitiveness
• Budget Deficits and Public Debt
• Savings and Payments Imbalances
• Spreads, CDS, and Banks
• “Bad Zones” and the Crisis
12/7/2010
20
Unemployment Rate (%): Selected Euro
Area Countries
Spain:
2 0 .8%
(% of Labor Force)
22
20
18
Ireland:
1 3 .6%
16
14
Greece:
1 2 .2%
12
10
Portugal:
1 0 .6%
8
Germany:
7 .5 %
6
4
Portugal
Greece
Spain
Ireland
Germany
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Eurostat, Last Observation: Ireland, Germany (10/10); Portugal, Spain (9/10); Greece (8/10)
12/7/2010
21
J.P.Morgan Chase
Relative Unit Labor Costs
160
(index, 100 = Q2 2001)
Ita ly: 42.9%
150
140
Sp ain:
34.9%
130
Eu ro Area:
28.1%
120
G reece:
18.1%
110
100
90
G ermany:
-2.1%
80
70
60
Germany
Italy
2002
2003
Greece
Spain
2004
2005
Euro Area
US: -32.5%
United States
50
2001
2006
2007
2008
2009
2010
Source: OECD Outlook, Last Observation: Q1 2010
12/7/2010
22
J.P.Morgan Chase
Fiscal Position: General Government Net
Lending/Borrowing – Euro Area Countries
5
(Percent of GDP)
G ermany,
2011:
-3.7%
0
Portugal,
2011:
-5.2%
-5
Sp ain,
2011:
-6.9%
Greece,
2011:
-7.3%
-10
Ireland, 2011:
-11.2%
-15
IMF Forecasts
Ireland
Spain
Greece
Portugal
Germany
-20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Oct 1 2010, WEO (2009 Estimate, 2010 & 2011 Forecast)
12/7/2010
23
J.P.Morgan Chase
Fiscal Positions: Net Public Debt –
Select Euro Area Economies
125
Greece,
2011:
117.2%
(Percent of GDP)
115
IMF Forecasts
Greece
Germany
Ireland
Spain
Portugal
Portugal,
2011:
82.9%
105
95
Ireland,
2011:
63.0%
85
75
Sp ain,
2011:
60.9%
65
55
G ermany,
2011:
60.4%
45
35
25
15
5
-5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Oct 1 2010, WEO (2009 Estimate, 2010 & 2011 Forecast)
12/7/2010
24
J.P.Morgan Chase
Change in Gross National Saving Rate:
Select European Counties (2000 – 2009)
8
6
(Difference, in %-point between 2000 - 2007 Saving Rate)
5.8
0
Change
between
2000-2007
4
(Difference, in %-point between 2007 - 2009 Saving Rate)
-2
-2.1
-3.2
-4
-3.3
-4.3
-4.5
2
0.6
-3.9
-3.8
-6
0
-0.5
-1.3
-2
-8
-1.6
Change
between
2007-2009
-2.0
-10
-4
Ireland
Greece
Portugal
France
Italy
Spain
UK
Greece
-12
Germany
-5.0
Ireland
-5.1
France
Italy
Spain
UK
Germany
-6
Portugal
-10.2
Source: Eurostat, Last Update: November 8, 2010
12/7/2010
25
J.P.Morgan Chase
Change in Gross National Saving Rate:
Select European Countries (2000 – 2009)
4
(Difference, in %-point between 2000 - 2009 Saving Rate)
2
1.3
0
-2
-2.6
-4
-3.4
-4.8
-6
-5.5
-8
-8.4
-10
-8.8
-12
-12.2
-14
Germany
UK
Spain
Italy
France
Portugal
Greece
Ireland
Source: Eurostat, Last Update: November 8, 2010
12/7/2010
26
J.P.Morgan Chase
Euro Area Current Account
Balance Decomposed (% of GDP)
10
(Percent of GDP)
Germany,
2 0 11:
5 .8 %
8
6
4
2
0
-2
-4
-6
-8
Stage 2
EMU
-10
Ireland, Spain,
Greece, &
Portugal, 2011:
-5 .3%
Euro
adoption
-12
IMF Forecasts
Germany
Ireland, Spain, Greece, & Portugal
-14
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Oct 1 2010, WEO (2009 Estimate, 2010 & 2011 Forecast)
12/7/2010
27
J.P.Morgan Chase
Domestic and External Gross
Government Debt (% of GDP)
Source: Eurostat, National Statistical Institutes
12/7/2010
28
J.P.Morgan Chase
10yr Government Bond Yield Spread
1,000
(spread over German Bunds, bps)
Greece
8 7 7bp
900
800
700
600
Greece
Spain
Portugal
Ireland
Ireland
5 3 2bp
500
400
Portugal
3 0 9bp
300
200
Spain
2 3 0bp
100
0
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Source: Bloomberg Market Data, end-of-month value, Last Observation: Dec 6, 2010
12/7/2010
29
J.P.Morgan Chase
European Sovereign and Corporate CDS
Spreads
(basis points)
200
180
Sovereigns,
6 D ec '10:
1 8 5bp
160
140
120
100
C orporates,
6 D ec '10:
1 0 7bp
80
60
iTraxx Western Europe SovX (sovereign), generic 5y
iTraxx Europe (corporate), generic 5y
40
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Source: Markiit iTraxx data, Last Observation: Dec 6, 2010
12/7/2010
30
J.P.Morgan Chase
Bank Holdings of Government Securities
30
(% of Total Government Securities Outstanding)
25
20
Euro Area
15
10
US
5
European Banks
US Banks
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: ECB, Federal Reserves, Last observation: End of 2009
12/7/2010
31
J.P.Morgan Chase
Gross Government Debt and Budget
Deficit (% of GDP 2009)
Gross General Government Debt (% of GDP), 2009
130
Greece
Italy
110
Belgium
"Bad" - Zone"
90
France
Hungary
Germany
70
Portugal
US
Euro Area
UK
Netherlands
Ireland
50
Spain
Sweden
Slovakia
Latvia
30
Czech
Bulgaria
Romania
10
0
-2
-4
-6
-8
-10
-12
-14
-16
General Government Balance (% of GDP), 2009
Source: Eurostat, National Statistical Institutes
12/7/2010
32
J.P.Morgan Chase
Current Account Balance and Budget
Deficit (% of GDP 2009)
Current Account (% of GDP), 2009
15
10
Latvia
Netherlands
5
Estonia
Germany
Japan
0
Hungary
Euro Area
France
UK
Italy
US
Romania
Ireland
Slovakia
-5
Spain
Bulgaria
Portugal
-10
Greece
"Bad" - Zone"
-15
0.00
-2.00
-4.00
-6.00
-8.00
-10.00
-12.00
-14.00
-16.00
General Government Balance (% of GDP), 2009
Source: Eurostat, National Statistical Institutes
12/7/2010
33
J.P.Morgan Chase
Gross National Saving Rate and Budget
Deficit (% of GDP 2009)
30
Gross National Saving Rate (% of GDP), 2009
Latvia
25
Estonia
Sweden
Austria
Germany
Japan
Czech
Hungary
20
Romania
Netherlands Belgium
Slovakia
Bulgaria
15
Spain
Euro Area
France
Italy
UK
Portugal
10
US
Ireland
Greece
5
"Bad" - Zone"
0
0.00
-2.00
-4.00
-6.00
-8.00
-10.00
-12.00
-14.00
-16.00
General Government Balance (% of GDP), 2009
Source: Eurostat, National Statistical Institutes
12/7/2010
34
J.P.Morgan Chase
Imbalances Between Developed and
Developing Countries
• GDP: Distribution and Growth
• Demographic Trends
12/7/2010
35
Real GDP Growth (%) World Economy
GDP Growth
(Avg Annual Growth Rate, Constant Prices)
Country
2000
2005
2007
2008
2009
2010
2011
World
4.8
4.6
5.3
2.8
-0.6
4.8
4.2
Industrial Countries
4.2
2.7
2.7
0.2
-3.2
2.7
2.2
Developing Countries
5.8
7.3
8.7
6.0
2.5
7.1
6.4
Source: IMF, av. Annual growth rates, last update Oct 01 2010, WEO (2009 Estimate, 2010 & 2011 Forecast)
12/7/2010
36
J.P.Morgan Chase
Advanced & Emerging Economies
Contribution to Global GDP Growth
4.5
(% contribution to annual Global GDP Growth, based on PPP weights)
Developing,
2011: 3.1%
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
In dustrial,
2011: 1.1%
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
IMF Forecasts
Industrial
Developing
-3.0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: IMF, av. Annual growth rates, last update Oct 1 2010
12/7/2010
37
J.P.Morgan Chase
Global GDP Shares
1990
2010 IMF Forecast
Other
Advanced
Economies
Latin
America
India, 3%
9%
8%
Other
Emerging
Economies
China, 4%
Other
Advanced
Economies
Latin
America
India, 5%
9%
17%
Other
Emerging
Economies
8%
18%
China
14%
27%
20%
23%
EU-27
9%
United
States
20%
United
States
EU-27
Japan
Japan, 6%
Source: IMF, WEO Database, last update Oct 1 2010, WEO (2010 Forecast)
12/7/2010
38
J.P.Morgan Chase
World Population Shares (2010 – 2030)
2010
2030
Europe
Europe
Other
Other
10.6%
Africa
22.3%
Latin
America
and the
Caribbean
8.7%
Africa
15.0%
18.3%
8.5%
Japan,
1.8%
United
States of
America,
4.6%
23.3%
Latin
America
and the
Caribbean
19.6%
17.6%
China
Japan,
1.4%
United
States of
America,
4.5%
India
17.6%
8.3%
China
17.9%
India
Source: United Nations Populations Division, Last update 2009
12/7/2010
39
J.P.Morgan Chase
World Population Shares (2010 – 2030)
2030
2010
Developed
Developed
15%
18%
85%
82%
Developing
Developing
Source: United Nations Populations Division, Last update 2009
12/7/2010
40
J.P.Morgan Chase
World Demographic Projection
Change in Population between 2010 - 2030 (in millions)
350
300
250
200
150
100
50
0
-50
0-9
10-19
20-29
Source: United Nations Populations Division, Last update 2009
12/7/2010
30-39
40-49
50-59
Projected Change in Population
from 2010 - 2030:
41
60-69
+1400.2M
70-79
80+
2010 Level:
6909M
2030 Level:
8309M
J.P.Morgan Chase
Developed Countries Demographic
Projection
Change in Population between 2010 - 2030 (in millions)
40
30
20
10
0
-10
-20
-30
0-9
10-19
20-29
Source: United Nations Populations Division, Last update 2009
12/7/2010
30-39
40-49
50-59
Projected Change in
Population from 2010 - 2030:
42
60-69
+44.4M
70-79
80+
2010 Level:
2030 Level:
1237M
1282M
J.P.Morgan Chase
Developing Countries Demographic
Projection
Change in Population between 2010 - 2030 (in millions)
300
250
200
150
100
50
0
-50
0-9
10-19
20-29
Source: United Nations Populations Division, Last update 2009
12/7/2010
30-39
40-49
50-59
Projected Change in Population
from 2010 - 2030:
43
60-69
+1355.8M
70-79
80+
2010 Level:
5671M
2030 Level:
7027M
J.P.Morgan Chase