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US reversion to high interest rate
regime during 1980s-90s
VOLCKER INTEREST RATE SHOCK
Source: Gerard Duminil and
Dominique Levy
Patrick Bond ([email protected])
1
Rest of world profoundly affected:
Real interest rate as experienced in Third World
VOLCKER INTEREST RATE SHOCK
Source: Gerard Duminil and
Dominique Levy
Patrick Bond ([email protected])
2
Corresponding slowdown
in world GDP growth
Patrick Bond ([email protected])
3
Dubious statistics:
Correcting the GDP bias (global)
Patrick Bond ([email protected])
Source: Redefining Progress, San Franciscso
4
Especially low growth since 1980, and
extremely uneven development
Dramatic
differences in
annual %
change of
per capita
GDP (note:
constant 1995$,
not PPP values)
Source: Alan Freeman
GDP per capita in 1995 dollars, 1982-2000
Rest of the World
Advanced or Advancing Countries
1982
2000
1,457
1,116
15,383 26,134
Annual percent growth in GDP per capita over the given period
10%
5%
1970-1980
1980-2000
0%
-5%
-10%
Major industrial countries
Other advanced economies
Developing
Countries in Transition
-15%
Patrick Bond ([email protected])
5
Trends in capital accumulation:
Did the after-tax profit rate recover?
 US corporate profit
rate appears to
recover from 1984;
 but interest
payments remain
at record high
levels;
 subtract interest
expenses -- net
revenue is very low
during 1980s-90s.

Source: Gerard Dumenil and
Dominique Levy
VOLCKER SHOCK
Patrick Bond ([email protected])
6
Corporations spent 1980s-90s
paying off historically high debt
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
7
Source of profits changed
during globalisation/finance era
 US corporate
profits came far
less from
manufacturing
products;
 much greater
sources of profits
came from abroad;
 profits also came
more from financial
assets.
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
8
Credit/stock market bubbles:
US financial profits and vulnerability
VOLCKER SHOCK
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
9
US financiers doubled in asset-value
relative to non-financial corporations
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
10
US rentiers grabbed much more of
the national income
VOLCKER SHOCK
Source: Gerry Epstein and
Dorothy Power
Patrick Bond ([email protected])
11
Another feature of the credit bubble:
Is US household debt sustainable?
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
12
Are US households now so indebted
that they cannot save?
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
13
US stock market bubbles
corrected for earnings
 US price-earnings ratios (black line) show herd movements
 red line is based upon 10-year earnings averages (as per
Shiller), which highlight 30-35 year cycles of extreme
overvaluation
 Source: Michael Alexander
Patrick Bond ([email protected])
14
US stock market cycle
corrected for accumulated resources
By considering
share prices in
relation to firm
‘resources’
(accumulated
earnings), a
clearer picture
emerges of
valuation -- and
overvaluation
 Source: Michael Alexander
Patrick Bond ([email protected])
15
Implications of the 2000 crash:
US pension shortfalls (demographics important too)
Fortune 500 pension assets in relation
to pension benefit obligations (PBOs)
Stock market and US bond yields
DOT COM BUBBLE BURST
Source: International Monetary Fund
Global Financial Stability Report 2004, p.90
Patrick Bond ([email protected])
16
With stock market crash,
falling household assets…
DOT COM BUBBLE BURST
Source: Papdamitrou, Shaikh, dos Santos
and Bond
Zessa,
Patrick
([email protected])
Jerome Levy Institute, Bard College
17
… but housing prices kept
asset values high
Source: Robert Brenner
Patrick Bond ([email protected])
18
… thanks to mortgage refinancings:
Interest rates declined following Asian crisis
Source: NY Federal Reserve Bank Patrick Bond ([email protected])
19
An indication of a housing bubble:
Asset prices soar above rental rates
Source: Center for Economic
Policy Research
Patrick Bond ([email protected])
20
What might housing crash mean for
the rest of the economy?
DOT COM BUBBLE BURST
Source: Robert Brenner
Patrick Bond ([email protected])
21
Another speculative market: energy
(potentially crucial in future, given fossil fuel exhaustion and carbon trading)
# of energy options/futures traded
Market volatility – energy in comparison
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, pp.59-60
22
Energy market volatility:
electricity and oil prices
Source: International Monetary Fund
Global Financial Stability Report 2004, p.63
Patrick Bond ([email protected])
23
US trade and
current account deficits
Source: Gerard Dumenil and
Dominique Levy
Patrick Bond ([email protected])
24
Danger ahead: while US wins from
global investment, it is vulnerable
Source: Gerard Dumenil
and Dominique Levy
Patrick Bond ([email protected])
25
Financial crashes in other economies:
Asia was looted, 1997-98; US ‘won’
financial crash of
Thailand, Malaysia,
Indonesia, and
S.Korea:
massive bank outflow
(‘other flows’), which
soon reached the US;
dramatic decline in
Asian currency values;
decline in Asian
imports from US, and
rise in exports to US…
Source: Federal Reserve Bank of NY
Patrick Bond ([email protected])
26
US trade benefits from East Asian crisis:
currency-induced import boom
Source: Federal Reserve
Bank of NY
Patrick Bond ([email protected])
27
US trade benefits from global power structure:
Falling commodity prices and ‘unequal exchange’
Source: Gernot Kohler
Patrick Bond ([email protected])
28
Reflective of commodity export trends:
globalisation’s falling minerals and agricultural prices
Patrick Bond ([email protected])
29
But worsening US current account
reflects net trade/investment deficits
Source: Papdamitrou, Shaikh, dos Santos
and Bond
Zessa,
Patrick
([email protected])
Jerome Levy Institute, Bard College
30
To compensate:
Dramatic shifts in US capital flows
HUGE DECLINE IN INWARD FDI
SLOWDOWN OF OUTWARD FDI AND PORTFOLIO INVESTMENT
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 1
31
Financing of US capital inflows
Source: International Monetary Fund
Global Financial Stability Report 2004, p.148
Patrick Bond ([email protected])
32
Foreign purchases of US financial assets:
Net by type, and accumulated foreign owned
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, p.20,36
33
Recent global economic volatility
Size of int’l capital markets, 2003 (US$ billions)
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 3
34
Recent financial/currency upheavals:
Stock market index changes
REVIVAL OF STOCK MARKETS
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 10
GLOBAL MARKET CRASH
35
Stock market volatility, 2000-04
(% change by period)
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 10
36
= STOCK MARKET CRASH OF 1/3
US mutual funds flowed back
to Wall Street
SWITCH INTO CORPORATE FUNDS
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 2
SWITCH OUT OF INT’L FUNDS
37
Lower US issuance of new
international debt securities (US$ billions)
EURO TAKES LEAD OVER $
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 2
38
Outstanding international debt securities
(US$ billions)
EURO TAKES LEAD OVER $
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 2
39
New international syndicated credit
facilities, by currency (US$ bns)
DECLINE FROM US, EUROPE
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 2
40
Volatility and dangers persist
Huge growth of exchange-traded financial derivatives, 1987-2003
INTEREST RATE BETS RISE
Source: International Monetary Fund
Global Financial Stability Report 2004, Table 6
Patrick Bond ([email protected])
41
Increase in over-the-counter
derivatives (US$ billions)
INTEREST RATE BETS SOAR
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 4
42
Over-the-counter derivatives:
notional amount, by currency
EURO TAKES LEAD OVER $
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 5
43
Emerging market turbulence:
Falling capital inflows, rising outflows
E.ASIA CRISIS
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 1
SUSTAINED NET OUTFLOWS
44
As portfolio finance inflows decline,
hedge funds take lead over mutual funds
Source: International Monetary Fund
Global Financial Stability Report 2004, p.149
Patrick Bond ([email protected])
45
Emerging market currency turbulence:
US$ v. Latin American and Asian currencies
3 SERIOUS CRASHES:
3 SUCCESSFUL $ PEGS WITH CURRENCY CONTROLS:
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 11
46
Emerging market currencies v. US$:
Latin America and Asia, % change
3 SERIOUS CRASHES:
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 11
47
Emerging market currencies v. US$:
Europe, Middle East, Africa
Source: International Monetary Fund
2 MORE SERIOUS CRASHES:
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 11
48
Emerging market currencies v. US$:
Europe, Middle East and Africa, % change
AND FOUR
EXCESSIVE
CORRECTIONS
2 MORE
SERIOUS
CRASHES:
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 11
49
Emerging markets’
stock market volatility
30-day rolling volatility index, measured by Morgan Stanley
ASIAN FINANCIAL CRISIS
9/11 FALLOUT
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 15
50
Emerging markets’ stock market volatility
(index by sector)
HIGH
HIGH
LOW
HIGH
LOW
HIGH
HIGH
LOW
NEGATIVE
LOW
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 10
51
Emerging market bond returns
(20 July 2004, basis points)
Highest returns: Nigera, Bulgaria, Ecuador, Panama, Peru, Russia, Venezuela (4%+)
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 12
52
Emerging market bond market
(local) interest rate spreads, 2000-04
Stratospheric prices (>10%): Argentina, Ivory Coast, Dominican Republic
High prices (>5%): Ecuador, Venezuela, Uruguay, Brazil, Nigeria
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 13
53
Emerging market debt rates of return
Source: International Monetary Fund
Global Financial Stability Report 2004, p.22
Patrick Bond ([email protected])
54
China factor:
Vast FDI and equity issuance
US$ billions
9/11 FALLOUT
Source: International Monetary Fund
Global Financial Stability Report 2004, p.129
Patrick Bond ([email protected])
55
Danger sign:
Net capital flight worsens
US$ billions
Source: International Monetary Fund
Global Financial Stability Report 2004, p.124
Patrick Bond ([email protected])
56
Net capital flight
from Asia
US$ billions
Source: International Monetary Fund
Global Financial Stability Report 2004, p.124
Patrick Bond ([email protected])
57
Net capital flight
from Africa
US$ billions
Source: International Monetary Fund
Global Financial Stability Report 2004, p.126
Patrick Bond ([email protected])
58
Net capital flight
from Middle East
US$ billions
Source: International Monetary Fund
Global Financial Stability Report 2004, p.126
Patrick Bond ([email protected])
59
Exposure of international banks to
emerging markets
Extreme
foreign
gearing:
Venezuela,
Singapore,
Czech
Republic,
Croatia,
Paraguay,
Mexico,
Hong Kong,
Slovac
Republic,
Romania,
Poland
Source: International Monetary Fund
Global Financial Stability Report 2004, p.33
Patrick Bond ([email protected])
60
Emerging markets’ $ reserves
Most (relatively) wealthy: Malaysia, Czech Republic, Thailand, China, Korea
Source: International Monetary Fund
Global Financial Stability Report 2004, p.143
Patrick Bond ([email protected])
61
Strength of Asian, US and other
major banking systems
Terribly risky: Indonesia, Pakistan, China, Japan, Thailand, Philippines, Korea
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 28
62
Strength of Latin American and
E.European banking systems
Terribly risky: Argentina, Uruguay, Bolivia, Venezuela, Ukraine, Turkey
Source: International Monetary Fund
Patrick Bond ([email protected])
Global Financial Stability Report 2004, Table 28
63
Long-term record of sovereign bankruptcy:
Percentage of countries in default, 1820-1999
 During debt crises
of the 1830s, 1880s
and 1930s, response
was default;
 During crises of
1980s-90s, response
was ‘restructuring’
(IMF/WB bailouts
plus structural
adjustment)
 Key variable:
centralised creditor
power.
Source: World Bank (2000), Global Finance
Tables 2000, Appendix G, Washington.
Patrick Bond ([email protected])
64