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INBC and DABS meeting August 26, 2009'

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Prospects for the Global Economy in an Asian context. Joergen Oerstroem Moeller ... A fundamental imbalance of the US and consequently global economy. ... – PowerPoint PPT presentation

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Title: INBC and DABS meeting August 26, 2009'


1
INBC and DABS meeting August 26, 2009.
  • Prospects for the Global Economy in an Asian
    context.
  • Joergen Oerstroem Moeller
  • Visiting Senior Research Fellow, Institute of
    Southeast Asian Studies, Singapore and Adjunct
    Professor Singapore Management University
    Copenhagen Business School.

2
Topics to be discussed.
  • Figures, how does it look? Close your eyes?
  • Diagnosis, keypoints.
  • Financial Crisis. Light at the end of the tunnel,
    but a long one.
  • Economic crisis The worst is behind us,
    unfortunately we are moving backwards.
  • How will the new world look like?
  • - Lower global growth
  • - Asia in the drivers seat
  • - The Debt problem
  • - Inflation or deflation?
  • - The future of the USD?
  • - Oil, Trade, and supply chains incl
    outsourcing.
  • Conclusion.
  • Oh by the way. Robert Redford Brad Pitt.

3
I. Diagnosis.
  • Forget everything about sophisticated diagnosis,
    derivatives etc etc.
  • This is about one thing only. A fundamental
    imbalance of the US and consequently global
    economy.
  • Can only be solved by rebalancing the US and the
    global economy.
  • Transforming reduced US wealth into reality by
    transferring purchasing power from the US to
    Asia, A poorer relatively US and richer
    relatively Asia.
  • Europe is spectator, India does not yet count,
    Russia in difficulties (BRIC or BIC or BIIC) and
    Japan heading downwards. Africa, maybe Latin
    America. Morocco to Pakistan growth 3.2 in 2009.
  • FSP a) US model loses allure, b) Financial
    system shot down as instrument for projection of
    US power, c) US lacking money.

4
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5
Recent figures.
  • Growth from quarter to quarter.
  • 1st Q 09 2nd Q 09
  • EUROzone - 2.5 - 0.1
  • Germany - 3.5 0.3
  • France - 1.3 0.3
  • UK - 2.4 - 0.8
  • US - 1.6 - 0.3
  • China 6.1 7.9
  • India 5.9 4.7

6
II. Financial Crisis. (1/2).
  • Financial crisis.
  • Why and how, leveraging. Sharing of risk or
    contagious risk?
  • Basically correct what has been done, prevent
    banktrupcies.
  • Not certain that we are out of the tunnel,
    hopefully yes.
  • Investment funds having bought public utilities,
    ex. Macquarie.
  • The bond market, what is happening? Big
    corporations have borrowed on the bond market.
  • But who is going to pay and who is going to
    benefit?
  • Spill over to the real economy. a) Debt
    repayment, b) Banks stop lending, c) Balance
    sheet recovery, not economic recovery.
  • Asian banks? China npl ratio was in 1997 40-50,
    but now 6

7
II. Financial Crisis. (2/2).
8
III. Economic Crisis. (1/2).
  • Overconsumption in the US. From 62 of GDP to
    72. Roll back at least partly. Underconsumption
    in China.
  • We are not going to see that model again.
  • Challenge To realign global demand and supply
    without reducing supply too much.
  • Recession in US expected, the question was
    whether Asia would be strong enough to fill the
    gap. Now, we know the answer. Floor.
  • Business cycle not global anymore.

9
III. Economic Crisis. (2/2).
10
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • For some years the world was running ahead with
    global growth of 5. Unprecedented.
  • The model is changing. US consumption, rising
    labor force in Asia, low commodity prices, high
    propensity to save in Asia not any longer.
  • Lower US consumption, labor force in Asia, China
    versus Southasia plus Indonesia, Vietnam, the
    Philippines, propensity to save ? Higher
    commodity prices reflecting scarcities (Rio Tinto
    etc), environment (global warming)
  • Global growth may be 4, may be lower.

11
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • Before 2000 the larger share of global growth was
    US and US private consumption (almost 15 of
    globla GDP). Then it started to change.
  • From now on it will be Asia. In 2000 emerging
    economies primarily in Asia accounted for 20 of
    global growth, in 2010 more than 50 and in 2020
    the share will be even higher.
  • This triggers off a whole range of structural
    changes for the global economy demand supply,
    trade, currency rates. The figures are colossal.
  • It could be foreseen.

12
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
13
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • The world has never seen such debt before in
    peacetime.
  • US Budget deficit for 2010 predicted to 1.2
    trillion US without the stimulus
  • With approx 1.75 trillion US, 15 GDP. (CBO says
    US 1.875). NEW 1.58 trillion US 11.2 of GDP.
  • Objective. Cut to half in 2013, but
  • Assumption minus 1.2 growth in 2009, plus 3.2
    in 2010 and 4 or more for 2011, 2012, and 2013.
  • And now 10-year budget deficit projection to
    approximately 9 trillion from 7.108 trillion.
  • Completely unrealistic. Contraction 3 4 and
    growth for following year(s) low.
  • US total debt closing in on 200 of GDP.
  • Japan public debt 170 of GDP.
  • Europe doing better.
  • A millstone around the neck of US consumers
    explaining why US private consumption will not
    rise. Household savings rate gone up from 0 in
    Oct 2008 to 7 of income in May 2009.

14
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
15
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • Most people will think that printing money means
    inflation, but
  • Not when we are operating with an output gap
    which means price deflation wittness the US,
    China, Japan and several European countries
    accompanied by asset inflation or rather asset
    prices out of step.
  • A new asymmetry is building up.
  • What are the effects of deflation?

16
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • Prepare for the USD collapse of ????? 2009, 2010
    or 2020?
  • It will come, unavoidable. But the timing!
  • It will come at the moment when foreign creditors
    lose confidence in the US willingness and
    capability to tax its citizens to serve the debt.
  • This is where we link US domestic policy health
    care etc to the global currency markets.
  • But if the USD falls it must fall against
    something? What is that?

17
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • The financial crisis turned into an economic
    crisis among other things because of the hike in
    oil prices. Correlation between US consumption
    and the oil price.
  • Oil price depends on global growth. A swing in
    one percentage point to 2030 affects energy
    demand with 16.
  • Therefore oil price continue to be low.
  • Good stimulate US consumption, but not
    suffcient.
  • Bad reduced incentive to invest in oil supply
    and may be even more important reinvest.
  • Bad reduced incentive to switch to alternative
    (renewable) sources.
  • Problem petro economies such as Russia, Nigeria
    and Britain in severe difficuties.
  • Question Why not cut production? Answer
    marginal petroeconomies cannot afford it. Major
    foreign policy problem, not failed states, but………

18
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
19
V. Trade (2/3). The cobweb.
20
IV. How will the new world look like? Lower
global growth, Asia drivers seat, Debt,
Deflation, USD, Oil-trade-supply
chain/outsourcing.
  • Supply chain will change, putting producers
    closer to consumers, production clusters.
  • Outsourcing of manufacturing will not continue
    from industrial to emerging economies, but shift
    to among emerging economies. China, India,
    Vietnam may be Indonesia.
  • Outsoursing of services continue from high costs
    to low costs countries.

21
V. Conclusion. The most likely outcome.
Timehorizon 2-3 years.
  • US, Europe, Japan Stagflation, DE not IN.
    Paradox.
  • First out China. Looks like the economy is
    picking up, but what about long term
    consequences? India. Probably.
  • China and India why? Not fully integrated in
    global economy and not fully liberalised
    economies.
  • Europe, but low growth.
  • US it will take time - lower trend growth.
    Demographics. 2-2,5 versus 3-3,5. Excess capacity
    risk.
  • The chock take as long time to get rid of the
    debt as it took to produce it.
  • Japan ? Russia ?
  • Time horizon? 2009 ?, 2010 ?, 2011 ?

22
V. Conclusion. The World.
  • Lower global growth. Maybe 4. Shift in global
    economic power.
  • Political power? Depends on US. Still by far the
    strongest power, BUT
  • - after end cold war, 911, and economic crisis
    not the same country.
  • - economics will inevitably lead to cut in
    military expenditure.
  • - not any longer money to oil foreign- and
    security policy. Reagan.
  • - we will never again see the America my
    generation knew, beningn and benevolent. What we
    will see is an America with America first.
  • World trade system not necessarily protectionist,
    but less liberal.
  • A gradual reform of the international monetary
    system. Creditor versus debtors. USD and US
    financial system.
  • What is already emerging One financial cycle,
    two global business cycles, one among
    industrialized countries, the other one among
    developed or emerging economies. Therefore watch
    out for Africa and Latin America.
  • This is not a blip on the curve, it is a seminal
    shift.

23
Hold your breath
  • Everybody was sure that
  • Somebody would do it.
  • Anybody could have done it, but
  • Nobody did it.
  • When Nobody did it,
  • Everybody got angry because it was
  • Everybody's job.
  • Everybody thought that
  • Somebody would do it,
  • but Nobody realized that
  • Nobody would do it.
  • So consequently Everybody blamed
  • Somebody when
  • Nobody did what
  • Anybody could have done in the first place.
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