Saturday, September 26, 2009

The Fall of Finance

Probably the best coverage of global financial markets is done by McKinsey.
This is a yearly report and here is the  latest:
Some amazing stats:
Falling equities accounted for virtually all of the drop in global financial assets. The world's equities lost almost half their value in 2008, declining by $28 trillion. Markets have regained some ground in recent months, replacing $4.6 trillion in value between December 2008 and the end of July 2009. Global residential real estate values fell by $3.4 trillion in 2008 and nearly $2 trillion more in the first quarter of 2009. Combining these figures, we see that declines in equity and real estate wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009
That's well over double the size of the US economy
Credit bubbles grew both in the United States and Europe before the crisis. Contrary to popular perceptions, credit in Europe grew larger as a percent of GDP than in the United States. Total US credit outstanding rose from 221 percent of GDP in 2000 to 291 percent in 2008, reaching $42 trillion. Eurozone indebtedness rose higher, to 304 percent of GDP by the end of 2008, while UK borrowing climbed even higher, to 320 percent.
I must ask Steve Keen what the equivalent Australian stat is
Financial globalization has reversed, with cross-border capital flows falling by more than 80 percent.
This is a total collapse of financial globalisation
It is unclear how quickly capital flows will revive or whether financial markets will become less globally integrated.
Some global imbalances may be receding. The U.S. current account deficit—and the surpluses in China, Germany, and Japan that helped fund it—has narrowed. However, this may be a temporary effect of the crisis rather than a long-term structural shift.

Mature financial markets may be headed for slower growth in the years to come. Private debt and equity are likely to grow more slowly as households and businesses reduce their debt burdens and as corporate earnings fall back to long-term trends. In contrast, large fiscal deficits will cause government debt to soar.

For emerging markets, the current crisis is likely to be no more than a temporary interruption in their financial market development, because the underlying sources of growth remain strong. For investors and financial intermediaries alike, emerging markets will become more important as their share of global capital markets continues to expand.

This is a big call given the preceding stats ...
What really matters for the world economy over the next year or so is a sustained (and sustainable) recovery in demand, especially in the US, Europe and Japan. Remember that consumer spending in the US accounts for just less than 20 per cent of the global economy.

Thursday, September 24, 2009

The US Bailout

These are big numbers.

The really interesting question is what happens when the stimulus and guarantees are withdrawn.

Editorial NYT 
"Calculations compiled for The New York Times show that the government has collected profits of $4 billion from eight of the biggest banks that have fully repaid their obligations under the Treasury’s main bailout program — a return of about 15 percent annually. Calculations reported in The Wall Street Journal showed that the Treasury made $5 billion from 34 firms that repaid bailout money, for a 7 percent annualized rate of return. [TC: sounds like a lot but compared to the 'investment'!!!!]

That’s better than losing money on any given transaction. But the big picture is bleak. Estimates by Moody’s , presented in recent Congressional testimony, suggest that of the $12 trillion the government has committed to fight the financial crisis and recession, the final tab to taxpayers will approach $US1.2 trillion [TC: Aus yearly GDP is about $A1.1 trillion]. That is equal to about 8 percent of the size of the economy. For comparison, the savings-and-loan crisis of the early 1990s ultimately cost taxpayers some $250 billion in today’s dollars, or about 3 percent of the size of the economy.

Worse, there is still much that the public does not know about the rescues. The Treasury still does not require banks to specify how they are using their bailout dollars, despite recommendations from the bailout’s special inspector general that the government demand a periodic accounting. Lawmakers and the public have no precise information about the roughly $300 billion in Citigroup assets that the government has guaranteed. Nor has there been an airing of the terms of the derivatives contracts that the government paid off in the bailout of the American International Group."

Inequality in Australia

It's always interesting the way inequality figures are reported.
After 18 years without a technical recession it's not surprising that outcomes have improved but perhaps they should have been even better.
The richest 20 % have done best.


“"The proportion of households reliant on government pensions and allowances was 23.2 per cent in 2007-08, down from 26.1 per cent in 2005-06 and 28.5 per cent in 1994-95," says the ABS report, titled Household Income and Income Distribution, released yesterday.

The fall is more remarkable given that more people are moving on to age pensions as the baby boomers begin to retire.”

Average wealth has risen sharply since 1994 … rapidly since 2005, but top 20 per cent of earners have done best … more in their hands than before

“"In 2007-08, average equivalised disposable household income for all persons living in private dwellings ... was $811 per week," the report says.

"The net increase (in average household income) was 13 per cent between 2005-06 and 2007-08, and 50 per cent between 1994-95 and 2007-08."

But the increases were not uniform across incomes, with high income-earners increasing their household income by an average 16 per cent since 2005, middle income-earners rising 11 per cent, and low income-earners up only 10 per cent.

"A major contributor to some of the change in the income distribution measures in 2007-08 when compared with 2005-06 was the strong rise in wage and salary incomes (up 28 per cent)," the report says.

“Melbourne Institute deputy director of research Roger Wilkins said the Howard government's tightening of the pension eligibility criteria for single parents and the disabled would have played a part in the heavy drop in households no longer dependent on welfare as their primary source of income.

"I would say it's about half and half -- half the change could be put down to economic growth over the period, and the other half due to welfare policy changes," Dr Wilkins said.

"Certainly the figures show a large decline since 2005-06, and there was no substantive policy change during that period, so that must be attributable to the strong economic conditions."”

Whither Coal?

Future demand for coal and iron ore will be very significant for the Australian economy.
What will happen to Chinese demand over the next few months, the next year?
My suspicion is that the rebuild in inventories and stockpiling will lead to a sustained decline in demand if final demand from the US and Europe does not pick up.
Nevertheless there is still considerable scope for the Chinese to build infrastructure.

See Back In The Black by Kishori Krishnan 23 September 2009
In China though, no one expected the financial crisis to be the end of Chinese steel demand, and the Chinese government, as well as many private producers, have used the low international commodities prices as an opportunity to restock after years of high costs.

"Many domestic producers have arbitraged the low offshore prices [with higher onshore prices]," says Ben Simpfendorfer, head China economist at Royal Bank of Scotland. "This has made demand look stronger than it was in China," he added, warning that he expects a correction in the next one or two months, both due to the end of restocking, and to the regular slowdown in commodities demand that comes every summer.

For students of 2016IBA

On the topic of Democrat receptivity to the union agenda