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When Past Performance Is a Guide:
Using History to Make Sense of the Post-Crisis World
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Overview of past recessions in the U.S.
Duration from peak to trough of the business cycle
Source: NBER.
0
10
20
30
40
50
60
70
1858 1868 1878 1888 1898 1908 1918 1928 1938 1948 1958 1968 1978 1988 1998 2008
Month1879: 65 months
2009: 18 months
Note: Recessions are assumed to start at the peak of a business cycle and end at the trough.
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U.S. saw negative GDP growth for the first time
in more than 70 years
Source: The White House - Office of Management and Budget.
-30
-20
-10
0
10
20
30
1931 1941 1951 1961 1971 1981 1991 2001 2011
Percent
1942: 26.5%
2009: -2.8%
Note: Projections are shaded.
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Source: Natixis Global Asset Management.
.
Stock market volatility has increased dramatically during the
past decade
0
20
40
60
80
100
120
140
1950-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2011
Number of 3% daily S&P 500 moves
More volatile days than in the previous 50 years combined
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Ten-year U.S. Treasury yield reached historical low
Source: Federal Reserve Board.
0
2
4
6
8
10
12
14
16
18
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Average since 1964: 6.7 percent
Ten-year Treasuryyield, percent
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Federal debt expected to continue increasing Gross federal debt as percent of GDP
Source: The White House - Office of Management and Budget.
0
20
40
60
80
100
120
140
1940 1950 1960 1970 1980 1990 2000 2010
Percent of GDP
1946: 121.7%
Note: Projections are shaded.
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Source: Bloomberg.
Central bank target interest rates remained low
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013
Policy interest rates, percent
Eurozone
United Kingdom
United States
Bank of Japan
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Public debt in advanced economies approached
another record high
Gross public debt as percent of GDP
Source: IMF WEO.
0
20
40
60
80
100
120
140
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Percent of GDP1944: 117.8%
2011: 104.8%
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Sources: OECD, Bloomberg.
Household deleveraging process diverged
across major countries
80
100
120
140
160
2001 2003 2005 2007 2009 2011
Household gross debt (% of net disposable income)
Canada
U.S.
Japan
Euro area
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Gold price at record high
Source: World Gold Council,
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan-1970 Jan-1980 Jan-1990 Jan-2000 Jan-2010
US$ per troy ounce
Sep 1980: $666.8
Aug 2011: $1813.5
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Source: J.P. Morgan.
0
2
4
6
8
10
12
REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes Average investor
Percent
20-year annualized returns
1992-2012
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Returns of major asset classes over a century
1900-2011
Source: Credit Suisse.
0
1
2
3
4
5
6
7
Equities Bonds U.S. Bills
Percent
U.S.World
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A two speed recovery
GDP growth
Source: IMF WEO.
-6
-4
-2
0
2
4
6
8
10
1980 1985 1990 1995 2000 2005 2010 2015
Percent
Advanced economies
Emerging market and developing economies
World
Note: Projections are shaded.
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Daniel Arbess
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Note: Payroll employment adjusted for Trend employment growth.
This Time is Different.
Index, NBER peak = 100
1973-75recession
1981-82 recession
1990-91 recession
2001 recession
2007-09 recession
92
94
96
98
100
102
92
94
96
98
100
102
Quarters since NBER peak
0 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 201
Source: Yellen, Janet. “A Painfully Slow Recovery for America’s Workers: Causes, Implications, and The Federal Reserve’s Response”. “A Trans-Atlantic Agenda for Shared Prosperity”. February 11, 2013.
Nonfarm Payroll Employment in Selected Recessions and Recoveries
GEC triggered the deepest and longest
employment drawdown on record.
Households lost $17 trillion of wealth in
balance sheet recession ($10T stocks,
$7T housing), leaving excess capacity
and employment globally.
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Fiscal Policy Could be a Headwind or a Tailwind. Really?
4 quarters since start of recovery (left bars)
12 quarters since start of recovery (right bars)
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
Average contribution to GDP growth, percentage points (annual rate)
8 quarters since start of recovery (center bars)
Recovery from 1981-82 recession Recovery from 2001 recession Average recovery from
postwar recessions
Current recovery
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
Estimated Effect of Discretionary Fiscal Policy on the Economy during Recoveries
Note: Average recovery from postwar recessions excludes recovery after 2007-2009 recession; because of data limitations, average also excludes recovery after 1948-49 recession.
Source: Yellen, Janet. “A Painfully Slow Recovery for America’s Workers: Causes, Implications, and The Federal Reserve’s Response”. “A Trans-Atlantic Agenda for Shared Prosperity”. February 11, 2013.
Household income losses offset when taxes are reduced or government spending increases. Opposite case when governments cut spending or raise taxes in response to recession. Normal times, easy monetary policy can offset fiscal tightening. But not when economy is depressed and rates are already zero. Summers & DeLong. No surprise then, higher payroll taxes and sequestration negatively impacting ’13 GDP by 1.3%.
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This Time Is Different…But Not for the Reasons you Think.
Source: Bianco Research.
Monetary Policy to the Rescue: ZIRP and unprecedented $15T global CB balance sheet expansion have offset deflation and repaired balance sheets:
Recovered $10T of lost equity wealth & $1.7T housing value. $5B in housing still to be recovered. Rich have benefitted most: Only top 13% saw their net worth gain between ’09-’11.
Even if Reinhart and Rogoff’s math were correct:
Are high debt levels a cause or consequence of slower growth? Is government debt as dangerous when funded by CBs? When nominal rates are < nominal GDP growth?
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Sources: Bloomberg.
The Persistent Risk is Deflation, not Inflation.
OECD US Velocity of Money: Estimates the rate at which money changes hands.
1.6
1.65
1.7
1.75
1.8
1.85
1.9
1.95
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
US Federal Reseve Balance Sheet OECD US Velocity of Money
Balance sheet recession = demand recession. Money is at the Fed, not in the system.
The multi-sector approach of MMT suggests that government demand can substitute for flagging private sector demand.
No inflation risk unless and until increased monetary base moves into economy via credit acceleration & deposits. Fed can withdraw.
Overt Monetary Finance (OMF)—Helicopter Money: the Final Frontier?
Bernanke to Japan ’03: “Cut taxes & fund shortfall with printed money”. OMF dispenses with Treasury issuance: CB funds Treasury directly. Theory is fiscal spending expands activity, revenues, restores surplus. Fed can then withdraw by increasing reserve requirements.
The Perfect Crime!
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Ben Funnell
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Source: US Census Bureau, Oriel Securities.
US 90/10 ratio – median income of the 90th percentile of
income / 10th percentile
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
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Source: US Census Bureau, Oriel Securities.
US share of total income by quintile (%)
3.9%
4.3%
3.2%
43.6%
42.6%
51.1%
38%
40%
42%
44%
46%
48%
50%
52%
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Lowest quintile (LHS) Top quintile (RHS)
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Source: Federal Reserve Bulletin, June 2012, referencing the Survey of Consumer Finances 2010 .
Debt Burden Disproportionately on the Lower Income Quintiles
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 9th Decile 10th Decile
Debt payment / income % debt service > 40%
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Source: Moody's, Bloomberg, GLG Partners .
Moody's BBB Corporate Bond Yield (%), 1920-2013
0
2
4
6
8
10
12
14
16
18
20
Jan
-20
Jan
-24
Jan
-28
Jan
-32
Jan
-36
Jan
-40
Jan
-44
Jan
-48
Jan
-52
Jan
-56
Jan
-60
Jan
-64
Jan
-68
Jan
-72
Jan
-76
Jan
-80
Jan
-84
Jan
-88
Jan
-92
Jan
-96
Jan
-00
Jan
-04
Jan
-08
Jan
-12
MOODCBAA Index
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Mitchell Julis
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Source: 2010 Dan Regan
Does Understanding History Help Us to Avoid Getting Left Behind?
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Source: Eric D. Beinhocker, The Origin of Wealth
The Big Bang of Wealth Creation – A Timeline
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Source: Eric D. Beinhocker, The Origin of Wealth
What Happened to Create This Explosion of Wealth at This Point
in History?
• In The Origin of Wealth, Eric Beinhocker argues, “wealth creation is
the product of a simple, but profoundly powerful, three-step formula –
differentiate, select, and amplify – the formula of evolution.”
• “The same process that led to an explosion of species diversity in the
Cambrian period led to an explosion in SKU diversity during the
Industrial Revolution.”
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A Basic Question on the Relevance of History: Is This Time
Different?
For example:
• Will Europe’s history of conflict drive the fate of the Euro?
• Has monetary policy evolved into something without historical
precedent?
• Are we in a unique political and policy gridlock bereft of great leaders or
great events to break us free?
• What is the role of Big Data in understanding our past and our future and
how does data gathering and analysis relate to the current Reinhart /
Rogoff controversy over their findings?
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History Drives the Euro According to Helmut Kohl
"The evil spirits of the past have by no means been banished, they can
always return. That means: Europe remains a question of war and peace and
the desire for peace remains the driving force behind European integration,"
- Former German Chancellor Helmut Kohl (February 2012)
Source: Bild, Helmut Kohl
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What Is the Appropriate Framework to Understand History and its
Relevance to the Economic Landscape of Today and the Future?
• Great People
• Great Ideas
• Great Institutions / Structures
• Great Forces of Nature
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The Law of Unintended Consequences
Source: Introduction to Systems Thinking by Jayendran Venkateswaran, Jan-Apr 2008
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The Law of Unintended Consequences
Source: Introduction to Systems Thinking by Jayendran Venkateswaran, Jan-Apr 2008
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Niall Ferguson
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Source: Maddison
Ratios of per capita GDP
1500-2008
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Source: Economagic
The U.S. stock market in Three Depressions
1872-2013
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Sources: Various
Debt / GNP ratios
1688-1999
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Sources: Global Financial Data
Real returns
1688-1999
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Sources: Global Financial Data
UK consumer price index
1209-2013