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US Crisis And The Dollar
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US Crisis And The Dollar

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    US Crisis And The Dollar US Crisis And The Dollar Presentation Transcript

    • US CRISIS AND THE DOLLAR
      PRESENTED BY
      AKHIL CHAWLA
      AMAN ANAND
      DIPANNITA SEN
      DIPIKA TOSHINWAL
      MEGHA JAGGI
    • OUTLINE
      US CRISIS- REASONS.
      CURRENCY – US DOLLAR AND THE EURO.
      STEPS TAKEN BY THE CENTRAL BANK.
      MULTILATERALISM AND SUGGESTIONS
      GLOBAL IMBALANCES AND COCLUSIONS.
    • HOW IT ALL HAPPENED??
      Printing of money for deficit financing
      Home Loans
      Mortgage backed securities
      Credit Default Swaps
      Collateral Market Obligation
      Collateralized Debt Obligation
    • TO RECAP, BY THE BEGINNING OF 2007:
      Home prices were at unprecedented levels.
      Home owners had more leverage than ever before.
      Mortgage quality had declined substantially.
      Asset-backed securitizations had spread well beyond the GSES.
      This sets the stage for the crisis.
    • US DOLLAR AND THE EURO
    • Crisis has broken the close correlation between differences in expected interest rates and the euro-dollar exchange rate.
      Sharp increase in risk aversion.
    • FLIGHT OF CAPITAL CAUSED BY:
      • Interest Rate Risk
      • Exchange Rate Risk
      • Default Risk
    • CENTRAL BANKS-RUNNING THE SHOW
    • ENDLESS SUPPLY OF MONEY
      End of the Bretton wood system in 1971
      New paper standard
      TARP agreement
      Creating assets out of thin air
    • PRINTING CURRENCY A GLOBAL TREND
    • MISTAKES MADE BY FED
      lowered the interest rates to 1% in 2001 to soak the liquidity of the world after the dotcom bubble.
      The second is they tighten the rates too timidly in 2004 to 2006
      first mistake again as they have lowered the fed funds rate again to 1% to get a solution for present day financial panic
    • DEBT TO GDP RATIO
    • OTHER FACTORS
      Rise in savings of emerging economies
    • BANK FOR INTERNATIONAL SETTLEMENTS
      Outstanding global contracts at the end of 07 $600 trillion
      Approximately 11 times the global GDP
      in 2005 it was merely 2.5 times
      Credit DEFALUT swaps alone had reached to 60 trillion dollars in a span of 12-15 years
    • SUGGESTIONS
    • MULTILATERALISM:
      The world needs coordinated policy that reaches beyond the financial system alone.
      The Fed, the ECB and Bank of England are flooding financial markets with the liquidity, lending heavy sums against all sorts of securities.
      Unfortunately, the central bankers alone can’t sort out this mess with the injections of liquidity.
    • QUANTITATIVE EASING:
      Lowering long and short term interest rates.
      Buying private asset.
      Fiscal authorities can run a deficit of any size they wish and then finance it by issuing short-term paper that the central bank would have to buy.
      Once inflation returns, the central bank will need to sell assets into the market, to mop up the excess money it has created in fighting deflation.
    • Restructure and Shrink the banking system.
      Governments must continue to facilitate the enormous task of sustaining credit flows and restructuring debt.
      The full force of fiscal policy needs to be deployed to contain the depth of the recession and credit losses and the impact on jobs and incomes.
    • GLOBAL IMBALANCES AND CONCLUSION
    • GLOBAL IMBALANCES
      • Imbalance between lending and borrowing between different countries
      • Temporary solution -government will replace private sectors as borrowers
      • Permanent solution- global economy will have to rebalance
      • If the surplus countries don’t expand the domestic consumption, the world economy may even break down.
      • Big Surplus countries are - China, Germany and Japan
      • Deficit countries are -US, Spain, UK, France, Italy and Australia
    • GLOBAL IMBALANCES CONT….
      In 2008, according to IMF the aggregate excess of savings over investment in surplus countries will be just over $2 trillion
      In the entire world has surplus of $350 billion.
      Global Imbalance Crisis
      The world economy is to get through this crisis in reasonable shape if creditworthy surplus countries expand their domestic demand relative to the potential output
    • CONCLUSION : WHAT LIES AHEAD
      $8 trillion sufficient for debt contraction ?
      Solvency crisis not liquidity
      Rare crisis is the evident mispricing of convertible bonds
      The wide spreads prevailing at present between Treasury’s and corporate claims.
      No investment asset is considered as “Safe”- Government securities have become “toxic” like mortgages and corporate bonds
    • SOMETHING TO THINK ABOUT???
      The entire world today has a surplus of $350 billion how is it possible?