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.

G20 becoming the major policy vehicle in international trade negotiations. Secured $800 to international organizations with $500 billion going to IMF. China and India are becoming more important to the talks. IMF helped Poland, Columbia, and Mexico with flexible credit lines = $80 billion, $75 billion commitment to others.

G-20 Member Countries and Organizations:ArgentinaAustraliaBrazilCanadaChinaFranceGermanyIndiaIndonesiaItalyJapanMexicoRussiaSaudi ArabiaSouth AfricaSouth KoreaTurkeyUnited KingdomUnited StatesEuropean 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)