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QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
QE2, PIIGs, €, Bailouts Community
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QE2, PIIGs, €, Bailouts Community

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Presentation on the financial crisis in Europe and the United States. Includes predictions regarding Portugal and Spain's financial futures.

Presentation on the financial crisis in Europe and the United States. Includes predictions regarding Portugal and Spain's financial futures.

Published in: Economy & Finance
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  • 1. QE2, PIIGS, €, Bailouts Community Session Arturo Bris
  • 2. President Obama’s Problems <ul><li>Excessive Savings Rate </li></ul><ul><li>Unemployment </li></ul><ul><li>Deflation </li></ul><ul><li>Monetary Policy useless – Interest Rates practically 0% </li></ul><ul><li>Stock Market Recovery mild </li></ul><ul><li>Firms recovery mostly through cost cutting, but not real investment </li></ul>
  • 3. Problem 1: Money stays hidden under the mattress
  • 4. Problem 2: Unemployment at Historical Records United States – Unemployment Rate October 2008 – October 2010 Seasonality Adjusted Source: Bureau of Labor Statistics 
  • 5. Problem 3: US Public Debt
  • 6. Guess which country <ul><li>Argentina 2001 </li></ul><ul><li>Greece 2010 </li></ul><ul><li>United States 2010 </li></ul><ul><li>Spain 2010 </li></ul><ul><li>Japan 2009 </li></ul><ul><li>United States 1945 </li></ul>190% 126% 120% 110% 65% 55%
  • 7. Problem 4: Deflation
  • 8. Look at the problem <ul><li>When interest rates are low, I can get extremely cheap financing to buy a house, build a farm, buy a business school… </li></ul><ul><li>Therefore, lowering interest rates is the best response to a recession: it spurs economic growth </li></ul>
  • 9. Look at the problem <ul><li>Interest rate is the price of money (a price like any other) </li></ul><ul><li>Thus, by lowering interest rates, inflation may turn into deflation </li></ul><ul><li>This is particularly true if, despite / because the low interest rates, financial institutions are not much eager to lend money </li></ul><ul><li>But with deflation, there is no consumption  no investment  no growth </li></ul><ul><li>… And this is a death spiral, because the lack of growth results in unemployment  no savings  no investment  … </li></ul>
  • 10. Abricotine – Red Bull The worst possible combination <ul><li>How would you like to have: </li></ul><ul><ul><li>Deflation – prices actually falling, not going up </li></ul></ul><ul><ul><ul><li>If you wait and consume next year, your money will be worth more </li></ul></ul></ul><ul><ul><li>Zero-interest rates </li></ul></ul><ul><ul><ul><li>Borrow today, consume tomorrow </li></ul></ul></ul><ul><ul><ul><li>… Party time ? </li></ul></ul></ul>
  • 11. Abricotine – Red Bull The worst possible combination <ul><li>Inflation is great for borrowers if interest rates are low: </li></ul><ul><ul><ul><li>If I take a one-year loan of CHF100,000 from UBS @ 5% interest rates, and prices increase by 10% (inflation = 10%), in one year I repay CHF105,000 </li></ul></ul></ul><ul><ul><ul><li>UBS losses money on me, because as prices have risen by 10%, the purchasing power of 105 in one year is less than the purchasing power of 100 today. </li></ul></ul></ul><ul><ul><ul><li>Unfortunately UBS does not want to lend money under these conditions </li></ul></ul></ul>
  • 12. Abricotine – Red Bull Real Interest Rates <ul><li>Deflation is great for lenders if interest rates are low: </li></ul><ul><ul><li>If I take a one-year loan of CHF100,000 from UBS @ 5% interest rates, and prices drop by 10% (deflation = 10%), in one year I repay </li></ul></ul><ul><ul><li>CHF105,000 </li></ul></ul><ul><ul><li>UBS parties like there is no tomorrow, because as prices have dropped by 10%, the purchasing power of 105 in one year is huge compared to the purchasing power of 100 today. </li></ul></ul><ul><ul><li>Unfortunately nobody wants to borrow money under these conditions </li></ul></ul><ul><li>In technical terms, with deflation, nominal interest rates of zero become positive real rates: </li></ul><ul><ul><ul><ul><li>Real Interest Rate = Nominal Interest Rate - Inflation </li></ul></ul></ul></ul>
  • 13. Abricotine – Red Bull Real Interest rates <ul><li>Obama’s problem is that the US is drinking Abricotine with Red Bull: tastes horrible + you cannot fall asleep in two days </li></ul><ul><li>That is, monetary policy went too far: they pushed interest rates so low, that they have created deflation, and now real interest rates are positive. </li></ul><ul><li>Therefore, banks do not want to lend, and people do not want to borrow </li></ul><ul><li>Ideally, President Obama would like to have low interest rates + mild inflation </li></ul><ul><li>On top of that, with deflation but positive real rates, the stock market stays low, … </li></ul>
  • 14. Dollar and Euro on November 2, 2010
  • 15. Interest Rates on November 2, 2010
  • 16. Solution “Quantitative Easing 2” <ul><li>Ben Bernanke </li></ul><ul><ul><li>Econ Professor at Princeton </li></ul></ul><ul><ul><li>Harvard Ph.D. </li></ul></ul><ul><ul><li>Thesis Title: “ Long-term commitments, </li></ul></ul><ul><ul><li>dynamic optimization, and the business cycle” </li></ul></ul>
  • 17. Solution “Quantitative Easing 2” <ul><li>QE2: Quantitative Easing 2 </li></ul><ul><li>QE2 is a brilliant idea: </li></ul><ul><li>Print money and dump it into the financial system </li></ul><ul><li>With more money out there: </li></ul><ul><li> Inflation </li></ul><ul><li>Why? </li></ul><ul><li> More lending </li></ul><ul><li>That is not clear </li></ul>
  • 18. How it works
  • 19. QE2 Why more inflation <ul><li>Several reasons: </li></ul><ul><ul><li>Demand effect: more money, more consumption, prices go up (“No Money Illusion”) </li></ul></ul><ul><ul><li>Supply effect: more lending  firms invest  employment  consumption  inflation </li></ul></ul><ul><ul><li>As real rates drop, money flow from debt markets to stock markets, so stock prices go up  mutual funds are worth more  people are richer  consumption increases </li></ul></ul><ul><ul><li>As real rates drop, the dollar is a less interesting currency (versus say the euro), so money flows from dollars and into euros, and the dollar depreciates  now buying in the US is cheap  let’s all go shopping!!! </li></ul></ul>
  • 20. How Is QE2 Implemented? <ul><li>Basically the Treasury buys $600bn worth of Treasury securities held in banks balance sheets </li></ul><ul><li>The purchase of the bonds is financed by printing out new dollars </li></ul><ul><li>The plan to be completed by the end of 2011 (about $75bn per month) </li></ul>
  • 21. What is good for McDonalds is good for America <ul><li>What is good about QE2? </li></ul><ul><ul><li>It spurs consumption </li></ul></ul><ul><ul><li>Consumption is the best way out of a recession </li></ul></ul><ul><ul><li>It leads to employment and growth </li></ul></ul><ul><ul><li>It allows the US to export more </li></ul></ul>
  • 22. What is good for McDonalds is good for America <ul><li>What is bad about QE2? </li></ul><ul><ul><li>As it makes the dollar extremely cheap, it makes any other currency relatively more expensive. This means that what the US imports (VWs, BMWs, OWP seats) becomes more expensive </li></ul></ul><ul><ul><li>All in all, the US balance of payments deteriorates, because the US imports way more than what it imports </li></ul></ul><ul><ul><li>Obama does not care anyway, because he needs to help the domestic economy, not those stiff Germans. </li></ul></ul><ul><ul><li>Overall result: the euro becomes extremely expensive: this is bad for Germany, and good for the PIIGS !!! </li></ul></ul>
  • 23. QE2 Impact
  • 24. QE2 Impact
  • 25. What Does Germany Want? <ul><li>A cheap Euro !!!! </li></ul><ul><li>QE2 is the worst possible thing that could happen to Germany </li></ul><ul><li>… Unless something happens that weakens the Euro itself </li></ul>
  • 26. What Does Germany Want?
  • 27. The Cost of Public Debt in PIIGS
  • 28. What do they have in common? We are all PIIGS!!!
  • 29. What Do the PIIGS Want?
  • 30. But not all PIIGS are the same!!! Eurovision Song Contest <ul><li>Votes Given to Germany by: </li></ul><ul><li>Portugal: 1 </li></ul><ul><li>Greece: 2 </li></ul>Points Given by Germany to: Portugal: 6 Greece: 8 Ireland: 2 Spain: 0 Ireland: 8 Spain: 10
  • 31.  
  • 32. The PIIGS <ul><li>First it was Greece: huge public deficit because nobody pays taxes </li></ul><ul><li>Then it was Ireland: huge public deficit because banks lent too much and too badly </li></ul><ul><li>Now it comes Portugal: government debt mounting (only once in the last 20 years has Portugal had a budged surplus) </li></ul><ul><li>And after that Spain: same, but bigger </li></ul>
  • 33.  
  • 34. The Euro under Attack!!! <ul><li>“ Do politicians have the courage to make those who earn money share in the risk as well?” </li></ul><ul><li>Angela Merkel in Bundestag, November 24 th </li></ul>
  • 35. The Cost of Angela’s Joke
  • 36. The Euro under Attack!!! <ul><li>Debt markets panic: difficult to finance PIIGS </li></ul><ul><li>Spain’s credit spreads jumps to 2.5% above German rates. Highest ever!!! </li></ul><ul><li>PIIGS default is not because of inability to repay, but because of inability to refinance </li></ul><ul><li>As there is no bankruptcy, the only solution is rescue packages </li></ul>
  • 37. What about Switzerland? <ul><li>Swizterland is a net exporter of goods and services, and a net importer of capital. </li></ul><ul><li>With low inflation (deflation) in Europe (US), imports are cheap </li></ul><ul><li>With low interest rates in Europe / US, more capital flows into the country </li></ul><ul><li>QE2 here and there will therefore have three effects: </li></ul><ul><ul><li>Our balance of trade deteriorates if prices increase abroad </li></ul></ul><ul><ul><li>We will import any inflationary shock </li></ul></ul><ul><ul><li>Currency volatility </li></ul></ul>
  • 38. What about Switzerland? Source: www.tradingeconomics.com
  • 39. The Swiss Franc Source: Datastream
  • 40. The Swiss Franc Source: Datastream The graph shows the price of CHF100 converted into Euros, then from Euros into Dollars, and from Dollars back into Swiss Francs. Red lines represent confidence intervals.
  • 41. What to do with our money <ul><li>Stay away from foreign currencies—if you plan to spend in CHF, stay in CHF </li></ul><ul><li>Do not expect amazing risk-adjusted returns in the coming years—there is fear out there </li></ul><ul><li>The coming years do not look very good for bonds (low interest rates, with or without inflation); whether equities perform well depend on the effectiveness of the recovery policies </li></ul>
  • 42. Potential Scenarios Scenario 1: Gloomy <ul><li>A covert rescue plan for Spain, financed by Germany </li></ul><ul><li>German institutions induced by the government to purchase / refinance Spanish needs </li></ul><ul><li>Spain does not need to publicly request a bailout </li></ul><ul><li>Cost: drastic savings plan for Spain, cost paid by the domestic economy </li></ul>
  • 43. Potential Scenarios Scenario 2: Scary <ul><li>A QE2 in Europe </li></ul><ul><li>Problem: European Central Bank mandate is to control inflation, not to control exchange rates </li></ul><ul><li>Germany would not mind, euro would become cheaper </li></ul><ul><li>Who would pay the cost? Importing countries  PIGS </li></ul>
  • 44. Potential Scenarios Scenario 2: Scary Financial Times, December 1, 2010
  • 45. Potential Scenarios Scenario 3: Armageddon <ul><li>Euro break-up </li></ul><ul><li>Not likely: </li></ul><ul><ul><li>Qui prodest? </li></ul></ul>
  • 46. <ul><li>Default without bailout </li></ul><ul><li>Iceland has not done so badly… </li></ul>Potential Scenarios Scenario 4: The Planet of the Apes Source: Icelandic Statistical Service
  • 47. Conclusion: Who is going to pay for the crisis? Stewart? Willem? Pepijn?

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