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Are You Feeling Repressed?
Citation preview
August 2012
Are you feeling repressed?
US public debt
0
20
40
60
80
100
120
140
1791
1800
1809
1818
1827
1836
1845
1854
1863
1872
1881
1890
1899
1908
1917
1926
1935
1944
1953
1962
1971
1980
1989
1998
2007
% G
DP
Source: IMF
Great Depression
World War II
It’s HEAVY!!
Indeed growth in DM has been sliding for decades
0
2
4
6
8
10
12
0
1
2
3
4
5
6
1900-50 50s 60s 70s 80s 90s 00s
%yr
%yr
US (lhs) France (lhs) UK (lhs) Japan (rhs) Germany (rhs)
Source: HSBC
US new home sales index
200
400
600
800
1000
1200
1400
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Inde
x
Source: Bloomberg
US median house price – existing home sales
-20
-15
-10
-5
0
5
10
15
20
01 02 03 04 05 06 07 08 09 10 11 12
%yr
Median house price
Source: Bloomberg
US long-term unemployment
05
101520253035404550
Jan-
48Ja
n-50
Jan-
52Ja
n-54
Jan-
56Ja
n-58
Jan-
60Ja
n-62
Jan-
64Ja
n-66
Jan-
68Ja
n-70
Jan-
72Ja
n-74
Jan-
76Ja
n-78
Jan-
80Ja
n-82
Jan-
84Ja
n-86
Jan-
88Ja
n-90
Jan-
92Ja
n-94
Jan-
96Ja
n-98
Jan-
00Ja
n-02
Jan-
04Ja
n-06
Jan-
08Ja
n-10
Jan-
12
%
Long term unemployment rate
Source: Bureau of Labor Statistics, USA
Fiscal cliff!!
Do we need
a helicopter drop?
Why governments need growth
Debt dynamics
Change in debt/GDP =(D (t-1) ) x (r-g) – primary balance
Primary surplus required to keep debt level stable:
Primary balance = Debt (t-1) x (r-g)
Euro area is running lower budget deficits than rest of DM
-14
-12
-10
-8
-6
-4
-2
0
2007 2008 2009 2010 2011
% G
DP
Fiscal balance
United States United Kingdom Euro Area Japan
Source: IMF, January 2012
In aggregate Europe’s govt. debt ratio is lower than the US
0
50
100
150
200
250
0
20
40
60
80
100
120
2007 2008 2009 2010 2011
% G
DP
% G
DP
United States United Kingdom Euro Area Japan
Source: IMF, January 2012
Why the fiscal maths did not add up in Greece
-10
-8
-6
-4
-2
0
2
4
6
83/1
/2000
10/1
/2000
5/1
/2001
12/1
/2001
7/1
/2002
2/1
/2003
9/1
/2003
4/1
/2004
11/1
/2004
6/1
/2005
1/1
/2006
8/1
/2006
3/1
/2007
10/1
/2007
5/1
/2008
12/1
/2008
7/1
/2009
2/1
/2010
9/1
/2010
%yr
Source: Bloomberg
Greece real GDP
Lack of competitiveness requires economic restructuring
Source: Bloomberg
80
90
100
110
120
130
140
150
00 01 02 03 04 05 06 07 08 09 10 11
Unit labour cost
France Greece Germany Italy Spain Ireland
Debt in the UK and Spain
0
10
20
30
40
50
60
70
80
90
1001980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% G
DP
Spain public debt UK public debt
Source: Bloomberg
Spain’s austerity plans no less stringent than the UK
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
2006 2007 2008 2009 2010 2011 2012 2013
GD
P
United Kingdom Spain
Cyclically adjusted primary balance
Source: Bloomberg
10yr bond yields – UK and Spain
0
2
4
6
8
10
12
14
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
%Spain UK
Source: Bloomberg
The difference between Spain and UK
Sterling less likely to break up
Bank of England is the gilts buyer of last resort
Spain waits on the ECB
The UK and US can tax companies and households It’s harder to make this argument when it comes to
Europe’s periphery
What did the French monarchs do in the 16th -19th centuries
when they could not pay their debts?
1. Reduce excessive debt
… BUT, growth is weak
2. Default
3. Live with it!
The choice for governments today
Living with high government debt levels
Divert supply of funds to public sector
AND / OR
Keep borrowing rates low
It’s not different this time…. it’s the same
Anchoring policy rates at extraordinarily low levels
0
2
4
6
8
10
12
14
16
18
1694
1847
1855
1859
1862
1864
1866
1870
1872
1873
1876
1879
1884
1888
1891
1893
1900
1906
1910
1921
1931
1960
1972
1975
1977
1979
1982
1983
1986
1989
1996
2003
%
UK policy rate
Source: IMF
Central bank claims on gross debt (% GDP)
Close interaction of central banks and the state in a repression scenario
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011
% G
DP
United States United Kingdom Japan Euro area
Source: NBER
What can go wrong?
2
7
12
17
22
27
32
37
42Jan-
07
Mar-0
7M
ay-
07
Jul-0
7S
ep-
07
No
v-07
Jan-
08
Mar-0
8M
ay-
08
Jul-0
8S
ep-
08
No
v-08
Jan-
09
Mar-0
9M
ay-
09
Jul-0
9S
ep-
09
No
v-09
Jan-
10
Mar-1
0M
ay-
10
Jul-1
0S
ep-
10
No
v-10
Jan-
11
Mar-1
1M
ay-
11
Jul-1
1S
ep-
11
No
v-11
Jan-
12
Mar-1
2M
ay-
12
%
Source: Bloomberg
Greece 10yr bond yield
Primary budget balance and gross govt. debt
Source: South African National Treasury
-5
-4
-3
-2
-1
0
1
2
3
4
5
20
25
30
35
40
45
50
55
1989
/90
1990
/91
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
% G
DP
% G
DP
Gross debt (lhs) Primary budget balance (rhs)
Consumer price inflation
-7
-2
3
8
13
18
1923
1927
1931
1935
1939
1943
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
%yr
Source: SA Reserve Bank
Corporate tax rate
25
30
35
40
45
50
55
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
Source: JP Morgan, National Treasury
Investment boom mid-1990s to mid-2000s
5
7
9
11
13
15
17
60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
% G
DP
Private investment/GDP
Source: SA Reserve Bank
August 2012
Sou
thA
frica
Terms of trade highest in decades, but peaking
Source: Reserve Bank
70
80
90
100
110
120
130
140
Mar
-60
Mar
-63
Mar
-66
Mar
-69
Mar
-72
Mar
-75
Mar
-78
Mar
-81
Mar
-84
Mar
-87
Mar
-90
Mar
-93
Mar
-96
Mar
-99
Mar
-02
Mar
-05
Mar
-08
Mar
-11
Ind
ex 2
005
= 1
00
Terms of trade
Mining and quarrying profits boomGross operating surplus
2.5
3
3.5
4
4.5
5
5.5
6
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000
4Q
199
33Q
199
42Q
199
51Q
199
64Q
199
63Q
199
72Q
199
81Q
199
94Q
199
93Q
200
02Q
200
11Q
200
24Q
200
23Q
200
32Q
200
41Q
200
54Q
200
53Q
200
62Q
200
71Q
200
84Q
200
83Q
200
92Q
201
01Q
201
14Q
201
1
4Q
movi
ng a
vera
ge
4Q
movi
ng a
vera
ge
Rm (lhs) % GDP (rhs)
Current account adjustment to larger deficit in 2011 mainly reflected savings decline
Source: Reserve Bank
10
12
14
16
18
20
22M
ar-
90
Ma
r-9
2
Ma
r-9
4
Ma
r-9
6
Ma
r-9
8
Ma
r-0
0
Ma
r-0
2
Ma
r-0
4
Ma
r-0
6
Ma
r-0
8
Ma
r-1
0
Ma
r-1
2
% G
DP
Savings ratio Investment ratio
Household wealth and debt
40
45
50
55
60
65
70
75
80
85
250
270
290
310
330
350
370
390
81 84 87 90 93 96 99 02 05 08 11
%p
ers
onal d
isp
osab
le in
co
me
%p
ers
onal d
isp
osab
le in
co
me Household net wealth/disposable income(lhs)
Household debt/personal disposable income (rhs)
Source: Reserve Bank
Household net wealth versus savings
200
220
240
260
280
300
320
340
360
380
-3
-2
-1
0
1
2
3
4
5
6
7
90 93 96 99 02 05 08 11
%p
ers
onal d
isp
osab
le in
co
me
%p
ers
onal d
isp
osab
le in
co
me Household savings ratio (lhs)
Household wealth (rhs)
Source: Reserve Bank
GFCF lags FCE households
Source: Reserve Bank
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
-25
-20
-15
-10
-5
0
5
10
15
20
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
% y
r
%yr
GFCF (lhs) Household FCE (rhs)
Marginal rate of return on capital relative to real interest rate Consistent with moderate growth only
Source: Reserve Bank
-25
-15
-5
5
15
25
85 87 89 91 93 95 97 99 01 03 05 07 09 11
GFCF - private (%yr)
Marginal rate of return on capital less real after tax interest rate (%)
SA GDP and global growth
-3
-2
-1
0
1
2
3
4
5
6
7
8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
%yr
World SA
Source: IMF, Reserve Bank, SIM
August 2012
SAVER
What about SAin a
low real interest rateworld?
Bond yields
Source: Bloomberg, INet
3456789
101112
Jan-
08M
ar-
08
Ma
y-0
8Ju
l-08
Sep
-08
No
v-08
Jan-
09M
ar-
09
Ma
y-0
9Ju
l-09
Sep
-09
No
v-09
Jan-
10M
ar-
10
Ma
y-1
0Ju
l-10
Sep
-10
No
v-10
Jan-
11M
ar-
11
Ma
y-1
1Ju
l-11
Sep
-11
No
v-11
Jan-
12M
ar-
12
Ma
y-1
2Ju
l-12
%
Spain (rhs) SA (rhs)
Rand underpins domestic final demand recovery
EUR
Rand actual and fair value
0
2
4
6
8
10
12
14Ja
n-80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
Jan-
12
US
DZ
AR
USDZAR PPP USDZAR actual
Source: I Net, SIM PPP calculation
Food inflation
-30
-20
-10
0
10
20
30
40Ja
n/01
Jul/0
1Ja
n/02
Jul/0
2Ja
n/03
Jul/0
3Ja
n/04
Jul/0
4Ja
n/05
Jul/0
5Ja
n/06
Jul/0
6Ja
n/07
Jul/0
7Ja
n/08
Jul/0
8Ja
n/09
Jul/0
9Ja
n/10
Jul/1
0Ja
n/11
Jul/1
1Ja
n/12
Jul/1
2
%yr
Food at agriculture Food at manufacturing CPI food
Source: Statistics SA
Global and domestic food prices
-5
0
5
10
15
20
25
-40
-20
0
20
40
60
80
10095/0
8/0
1
96/0
5/0
1
97/0
2/0
1
97/1
1/0
1
98/0
8/0
1
99/0
5/0
1
00/0
2/0
1
00/1
1/0
1
01/0
8/0
1
02/0
5/0
1
03/0
2/0
1
03/1
1/0
1
04/0
8/0
1
05/0
5/0
1
06/0
2/0
1
06/1
1/0
1
07/0
8/0
1
08/0
5/0
1
09/0
2/0
1
09/1
1/0
1
10/0
8/0
1
11/0
5/0
1
12/0
2/0
1
y/r
%
Global -food index in ZAR(lhs) lagged 3 months CPI- food(rhs)
y/r%
Source: Statistics SA
Fertilizer and diesel - PPI
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
Jan-
01
Aug
-01
Ma
r-0
2
Oct
-02
Ma
y-0
3
De
c-03
Jul-0
4
Feb
-05
Sep
-05
Apr
-06
No
v-06
Jun-
07
Jan-
08
Aug
-08
Ma
r-0
9
Oct
-09
Ma
y-1
0
De
c-10
Jul-1
1
Feb
-12
yr%
Chemicals Basic: fertilizers Diesel
Source: Statistics SA
Electricity prices - CPI
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
yr%
Electricity
Source: Statistics SA
Rents CPI
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jan-
09
May
-09
Sep-0
9
Jan-
10
May
-10
Sep-1
0
Jan-
11
May
-11
Sep-1
1
Jan-
12
May
-12
yr%
Actual rentals
Actual rentals-Houses
Actual rentals-Flats
Actual rentals-Town houses
Source: Statistics SA
Inflation – back to the 60s
Source: SA Reserve Bank
-10
-5
0
5
10
15
20
25
Jan-
23F
eb-2
7M
ar-
31
Apr
-35
Ma
y-3
9Ju
n-43
Jul-4
7A
ug-5
1S
ep-5
5O
ct-5
9N
ov-
63D
ec-
67Ja
n-72
Feb
-76
Ma
r-8
0A
pr-8
4M
ay-
88
Jun-
92Ju
l-96
Aug
-00
Sep
-04
Oct
-08
%yr
Headline CPI Mean 5.73
Mean 5.7%
Recessions and subsequent recoveries: PSCENot your run of the mill credit cycle
90
100
110
120
130
140
150
160
170
180
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12Q13 Q14Q15 Q16
4Q1974 4Q1976 1Q1982
1Q1985 2Q1990 4Q2008
Currentrecovery
Source: Reserve Bank
Residential mortgages / total household credit
56
58
60
62
64
66
68
70
72
Jan-
1999
Sep
-19
99
Ma
y-2
000
Jan-
2001
Sep
-20
01
Ma
y-2
002
Jan-
2003
Sep
-20
03
Ma
y-2
004
Jan-
2005
Sep
-20
05
Ma
y-2
006
Jan-
2007
Sep
-20
07
Ma
y-2
008
Jan-
2009
Sep
-20
09
Ma
y-2
010
Jan-
2011
Sep
-20
11
Ma
y-2
012
%
Source: SA Reserve Bank
Is housing affordable? Probably not
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
4Q
1969
1Q
1971
2Q
1972
3Q
1973
4Q
1974
1Q
1976
2Q
1977
3Q
1978
4Q
1979
1Q
1981
2Q
1982
3Q
1983
4Q
1984
1Q
1986
2Q
1987
3Q
1988
4Q
1989
1Q
1991
2Q
1992
3Q
1993
4Q
1994
1Q
1996
2Q
1997
3Q
1998
4Q
1999
1Q
2001
2Q
2002
3Q
2003
4Q
2004
1Q
2006
2Q
2007
3Q
2008
4Q
2009
1Q
2011
Loan amortisation / PDY per capita
Ratio
Source: I Net, SIM
Unsecured lending
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
4000000
4500000
5000000
5500000
6000000
6500000
7000000
7500000
8000000D
ec-
07
Apr
-08
Aug
-08
De
c-08
Apr
-09
Aug
-09
De
c-09
Apr
-10
Aug
-10
De
c-10
Apr
-11
Aug
-11
De
c-11
R'm
Number of accounts (lhs)
Gross debtors Book - Unsecured Credit (rhs)
Source: National Credit Regulator
Households’ unsecured credit
0
10
20
30
40
50
60
De
c-07
Ma
r-0
8
Jun-
08
Sep
-08
De
c-08
Ma
r-0
9
Jun-
09
Sep
-09
De
c-09
Ma
r-1
0
Jun-
10
Sep
-10
De
c-10
Ma
r-1
1
Jun-
11
Sep
-11
De
c-11
Ma
r-1
2
% o
f to
tal n
ew lo
ans
Mortgages Short term Unsecured
Credit facilities Secured
Source: National Credit Regulator
SA real long bond yield
-6
-4
-2
0
2
4
6
8
10
12
14
1968/01/0
1
1970/01/0
1
1972/01/0
1
1974/01/0
1
1976/01/0
1
1978/01/0
1
1980/01/0
1
1982/01/0
1
1984/01/0
1
1986/01/0
1
1988/01/0
1
1990/01/0
1
1992/01/0
1
1994/01/0
1
1996/01/0
1
1998/01/0
1
2000/01/0
1
2002/01/0
1
2004/01/0
1
2006/01/0
1
2008/01/0
1
2010/01/0
1%
Source: I Net
Credit ceilings 1965-721976-80
1980 Interest rate controls removed Credit ceilings removedReserve requirements lowered
Foreign exchange and investmentcontrolled by government in 1970s
Capital controlstightened in 1985
Registrar of Co-operation(limited bank competition)removed in 1983
1990s• Trade liberalisation,
lower inflation and removal of controls on FDI
• Forex controls easing• Capital account
liberalised from 1991• Exchange controls on
non-residents eliminated in 1995
Financial Crisis
Bank crisis
Reinhart
Rogoff
AusterityThis tim
e it’s
different
THANK-YOU!!