Patrick Bond (pbond@sn.apc.org)1 US reversion to high interest rate regime during 1980s-90s Source:...

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Patrick Bond (pbond@sn.apc.org) 1

US reversion to high interest rate regime during 1980s-90s

Source: Gerard Duminil and Dominique Levy

VOLCKER INTEREST RATE SHOCK

Rest of world profoundly affected:

Real interest rate as experienced in Third World

Source: Gerard Duminil and Dominique Levy

VOLCKER INTEREST RATE SHOCK

Corresponding slowdownin world GDP growth

Dubious statistics:Correcting the GDP bias

(global)

Source: Redefining Progress, San Franciscso

Especially low growth since 1980, andextremely uneven development

Dramatic differences in annual % change of per capita GDP (note: constant 1995$, not PPP values) Source: Alan Freeman

1980-2000

1970-1980

Major industrial countries

Other advanced economies

Developing

Countries in Transition

GDP per capita in 1995 dollars, 1982-2000

1982 2000Rest of the World 1,457 1,116Advanced or Advancing Countries 15,383 26,134

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

Corporations spent 1980s-90spaying off historically high debt

Source of profits changedduring 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.

Credit/stock market bubbles:US financial profits and

vulnerability

VOLCKER SHOCK

US financiers doubled in asset-value relative to non-financial

corporations

US rentiers grabbed much more of the national income

Source: Gerry Epstein and Dorothy Power

VOLCKER SHOCK

Another feature of the credit bubble:

Is US household debt sustainable?

Are US households now so indebted that they cannot save?

US stock market bubblescorrected 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

US stock market cyclecorrected 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

Implications of the 2000 crash:US pension shortfalls (demographics important too)

Source: International Monetary Fund Global Financial Stability Report 2004, p.90

Fortune 500 pension assets in relation to pension benefit obligations (PBOs)

Stock market and US bond yields

DOT COM BUBBLE BURST

With stock market crash,falling household assets…

Source: Papdamitrou, Shaikh, dos Santos and Zessa, Jerome Levy Institute, Bard College

… but housing prices keptasset values high

Source: Robert Brenner

… thanks to mortgage refinancings:

Interest rates declined following Asian crisis

Source: NY Federal Reserve Bank

An indication of a housing bubble:

Asset prices soar above rental rates

Source: Center for Economic Policy Research

What might housing crash mean for the rest of the economy?

Source: Robert Brenner

Another speculative market: energy (potentially crucial in future, given fossil fuel exhaustion and carbon

trading)

Source: International Monetary Fund Global Financial Stability Report 2004, pp.59-60

Market volatility – energy in comparison

# of energy options/futures traded

Energy market volatility:electricity and oil prices

US trade and current account deficits

Danger ahead: while US wins from global investment, it is

vulnerable

Financial crashes in other economies:

Asia was looted, 1997-98; US ‘won’

Source: Federal Reserve Bank of NY

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…

US trade benefits from East Asian crisis:

currency-induced import boom

Source: Federal Reserve Bank of NY

US trade benefits from global power structure: Falling commodity prices and

‘unequal exchange’

200400

8001000

16001800

volume of unequalexchange (T-value)

point estimates byAmin, Kohler

Source: Gernot Kohler

Reflective of commodity export trends:

globalisation’s falling minerals and agricultural prices

But worsening US current account reflects net trade/investment

deficits

Source: Papdamitrou, Shaikh, dos Santos and Zessa, Jerome Levy Institute, Bard College

To compensate:Dramatic shifts in US capital

Source: International Monetary Fund Global Financial Stability Report 2004, Table 1

HUGE DECLINE IN INWARD FDI

SLOWDOWN OF OUTWARD FDI AND PORTFOLIO INVESTMENT

Financing of US capital inflows

Foreign purchases of US financial assets:

Net by type, and accumulated foreign owned

Source: International Monetary Fund Global Financial Stability Report 2004, p.20,36

Recent global economic volatilitySize of int’l capital markets, 2003 (US$

billions)

Recent financial/currency upheavals:

Stock market index changes

GLOBAL MARKET CRASHREVIVAL OF STOCK MARKETS

Stock market volatility, 2000-04 (% change by period)

Source: International Monetary Fund Global Financial Stability Report 2004, Table 10 = STOCK MARKET CRASH OF 1/3

US mutual funds flowed back to Wall Street

SWITCH INTO CORPORATE FUNDS

SWITCH OUT OF INT’L FUNDS

Lower US issuance of newinternational debt securities (US$ billions)

EURO TAKES LEAD OVER $

Outstanding international debt securities (US$ billions)

New international syndicated credit facilities, by currency (US$ bns)

DECLINE FROM US, EUROPE

Volatility and dangers persist Huge growth of exchange-traded financial derivatives, 1987-

INTEREST RATE BETS RISE

Increase in over-the-counterderivatives (US$ billions)

INTEREST RATE BETS SOAR

Over-the-counter derivatives:notional amount, by currency

Emerging market turbulence:Falling capital inflows, rising

outflows

E.ASIA CRISIS

SUSTAINED NET OUTFLOWS

As portfolio finance inflows decline, hedge funds take lead over mutual

Emerging market currency turbulence:

US$ v. Latin American and Asian currencies

3 SUCCESSFUL $ PEGS WITH CURRENCY CONTROLS:

3 SERIOUS CRASHES:

Emerging market currencies v. US$:

Latin America and Asia, % change

3 SERIOUS CRASHES:

Emerging market currencies v. US$:

Europe, Middle East, Africa

2 MORE SERIOUS CRASHES:

Emerging market currencies v. US$:Europe, Middle East and Africa, %

change

2 MORESERIOUSCRASHES:

AND FOUR EXCESSIVECORRECTIONS

Emerging markets’stock market volatility

9/11 FALLOUT

ASIAN FINANCIAL CRISIS

30-day rolling volatility index, measured by Morgan Stanley

Emerging markets’ stock market volatility(index by sector)

NEGATIVE

Emerging market bond returns (20 July 2004, basis points)

Highest returns: Nigera, Bulgaria, Ecuador, Panama, Peru, Russia, Venezuela (4%+)

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

Emerging market debt rates of return

China factor:Vast FDI and equity issuance

US$ billions

9/11 FALLOUT

Danger sign:Net capital flight worsens

US$ billions

Net capital flightfrom Asia

US$ billions

Net capital flightfrom Africa

US$ billions

Net capital flightfrom Middle East

US$ billions

Exposure of international banks to emerging markets

Extreme foreign gearing:

Venezuela, Singapore,

Czech Republic, Croatia,

Paraguay, Mexico, Hong Kong, Slovac

Republic, Romania,

Poland

Emerging markets’ $ reservesMost (relatively) wealthy: Malaysia, Czech Republic, Thailand,

China, Korea

Strength of Asian, US and other major banking systems

Terribly risky: Indonesia, Pakistan, China, Japan, Thailand, Philippines, Korea

Strength of Latin American and E.European banking systems

Terribly risky: Argentina, Uruguay, Bolivia, Venezuela, Ukraine, Turkey

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 (pbond@sn.apc.org)1 US reversion to high interest rate regime during 1980s-90s Source:...

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