US Crisis And The Dollar

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US Crisis And The Dollar

  1. 1. US CRISIS AND THE DOLLAR<br />PRESENTED BY<br />AKHIL CHAWLA<br />AMAN ANAND<br />DIPANNITA SEN<br />DIPIKA TOSHINWAL<br />MEGHA JAGGI<br />
  2. 2. OUTLINE<br />US CRISIS- REASONS.<br />CURRENCY – US DOLLAR AND THE EURO.<br />STEPS TAKEN BY THE CENTRAL BANK.<br />MULTILATERALISM AND SUGGESTIONS<br />GLOBAL IMBALANCES AND COCLUSIONS.<br />
  3. 3. HOW IT ALL HAPPENED??<br />Printing of money for deficit financing<br />Home Loans<br />Mortgage backed securities<br />Credit Default Swaps<br />Collateral Market Obligation<br />Collateralized Debt Obligation<br />
  4. 4.
  5. 5. TO RECAP, BY THE BEGINNING OF 2007:<br />Home prices were at unprecedented levels.<br />Home owners had more leverage than ever before.<br />Mortgage quality had declined substantially.<br />Asset-backed securitizations had spread well beyond the GSES.<br />This sets the stage for the crisis.<br />
  6. 6. US DOLLAR AND THE EURO<br />
  7. 7. Crisis has broken the close correlation between differences in expected interest rates and the euro-dollar exchange rate.<br />Sharp increase in risk aversion.<br />
  8. 8. FLIGHT OF CAPITAL CAUSED BY:<br /><ul><li>Interest Rate Risk
  9. 9. Exchange Rate Risk
  10. 10. Default Risk</li></li></ul><li>
  11. 11.
  12. 12.
  13. 13. CENTRAL BANKS-RUNNING THE SHOW<br />
  14. 14. ENDLESS SUPPLY OF MONEY<br />End of the Bretton wood system in 1971<br />New paper standard<br />TARP agreement<br />Creating assets out of thin air<br />
  15. 15. PRINTING CURRENCY A GLOBAL TREND<br />
  16. 16. MISTAKES MADE BY FED<br /> lowered the interest rates to 1% in 2001 to soak the liquidity of the world after the dotcom bubble.<br />The second is they tighten the rates too timidly in 2004 to 2006 <br />first mistake again as they have lowered the fed funds rate again to 1% to get a solution for present day financial panic<br />
  17. 17. DEBT TO GDP RATIO<br />
  18. 18. OTHER FACTORS<br />Rise in savings of emerging economies<br />
  19. 19. BANK FOR INTERNATIONAL SETTLEMENTS<br />Outstanding global contracts at the end of 07 $600 trillion<br />Approximately 11 times the global GDP<br />in 2005 it was merely 2.5 times <br />Credit DEFALUT swaps alone had reached to 60 trillion dollars in a span of 12-15 years <br />
  20. 20.
  21. 21. SUGGESTIONS <br />
  22. 22. MULTILATERALISM:<br />The world needs coordinated policy that reaches beyond the financial system alone.<br /> The Fed, the ECB and Bank of England are flooding financial markets with the liquidity, lending heavy sums against all sorts of securities. <br /> Unfortunately, the central bankers alone can’t sort out this mess with the injections of liquidity.<br />
  23. 23. QUANTITATIVE EASING:<br />Lowering long and short term interest rates.<br /> Buying private asset.<br /> 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.<br /> 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.<br />
  24. 24. Restructure and Shrink the banking system.<br />Governments must continue to facilitate the enormous task of sustaining credit flows and restructuring debt.<br />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.<br />
  25. 25. GLOBAL IMBALANCES AND CONCLUSION<br />
  26. 26. GLOBAL IMBALANCES<br /><ul><li>Imbalance between lending and borrowing between different countries
  27. 27. Temporary solution -government will replace private sectors as borrowers
  28. 28. Permanent solution- global economy will have to rebalance
  29. 29. If the surplus countries don’t expand the domestic consumption, the world economy may even break down.
  30. 30. Big Surplus countries are - China, Germany and Japan
  31. 31. Deficit countries are -US, Spain, UK, France, Italy and Australia</li></li></ul><li>GLOBAL IMBALANCES CONT….<br />In 2008, according to IMF the aggregate excess of savings over investment in surplus countries will be just over $2 trillion<br />In the entire world has surplus of $350 billion. <br />Global Imbalance Crisis<br />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<br />
  32. 32. CONCLUSION : WHAT LIES AHEAD<br />$8 trillion sufficient for debt contraction ?<br />Solvency crisis not liquidity <br />Rare crisis is the evident mispricing of convertible bonds <br />The wide spreads prevailing at present between Treasury’s and corporate claims.<br />No investment asset is considered as “Safe”- Government securities have become “toxic” like mortgages and corporate bonds<br />
  33. 33. SOMETHING TO THINK ABOUT???<br /> The entire world today has a surplus of $350 billion how is it possible?<br />

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