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The World Economy in 2009, 2010, 2011
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The World Economy in 2009, 2010, 2011


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A review of what will happen with the US economy, public debt, banks, credit default swaps, interest rate swaps, Europe, Japan, China and others.

A review of what will happen with the US economy, public debt, banks, credit default swaps, interest rate swaps, Europe, Japan, China and others.

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  • 1. A US-centric economic view of what’s happening in 22 slides March 2009
  • 2. US national debt ($11 trillion) • Annual interest payments $400 billion • FY2009 US projected budget deficit= ($2 trillion) • [stimulus waste, bailouts, bank backstops, Fannie/Freddie] • FY2010 US deficit = ($1.5 trillion) • FY2009 US tax receipts $1.5-$2 trillion
  • 3. $2 trillion of debt is short-term • That’s an interest rate time bomb; for now we pay 0.7%/yr • Assume $2 trillion of the $3.5 trillion in bonds the next few years are short-term • $2 + $2 = $4 trillion • If interest rates spike to even 10% due to inflation risks, that would mean…
  • 4. $400 billion MORE in interest/yr • With decreased tax revenues, Defense, Education, Health, Social Security, Transportation would all have to be cut, some by as much as 50%
  • 5. March 2009 • Fed announces that they’re going to print $300 billion and buy US Treasury bonds • Robbing Peter to pay Paul • What about the remaining $1.7 trillion in bonds they’ll have to sell? Who will buy those? • What about the $1.5 trillion in FY2010?
  • 6. Foreign Govts hold $3 trillion • The 2 leading holders of US federal debt are Japan and China • But Japan’s exports are down 50% in Feb 2009 • China’s exports were down 25% in Feb 2009 • They no longer have the trade surplus with the US to put into US gov’t debt, and are plowing their remaining money back into their own economies
  • 7. Who else? • Federal employees, state and local governments and others have around $4 trillion of US govt debt • But they’re net sellers: State governments have a $300 billion budget shortfall in the next 2 years, for example • Maybe IRAs and 401ks could be taken over, which was the Argentine solution
  • 8. Trick or Treat • Printing money was one of the last tricks that the Fed had left to use, and they used it
  • 9. The Money Supply • Current US dollars in circulation: $1 trillion • In circulation in the US: $300 billion • In circulation outside the US: $700 billion • One of the main reasons why US dollars are held outside the US? Oil. • World oil exports per year: 25 billion barrels • At $40 a barrel = $1 trillion in transactions per year
  • 10. April 2, 2009 • The G20 meeting TODAY might be the most important currency meeting of this whole financial mess • New currency possibilities? IMF involvement? • Russia and China are talking about a global basket of currencies instead of using the US dollar to settle trades • UN Panel also suggested a basket • Gulf nations (Dubai, Abu Dhabi, Saudi Arabia, et al) talking about a local currency for oil trades
  • 11. Inflation • If there’s less of a demand for dollars overseas, countries dump dollars • If we print money to monetize our debts • If the US, UK, Switzerland, Japan, China, Europe all race to depreciate their currencies against each other to try to boost their exports
  • 12. Wages, Stock Market, Real Estate • Dollar depreciation through various methods means inflation in some aspects of our economy • $100 oil, $5 gas, those things will be back • Wages don’t react as quickly • People are already in a deflationary mindset, if their comp doesn’t keep pace, they cut back • You could see the stock market react favorably to inflation, real estate react favorably, but the underlying businesses not doing as well
  • 13. But…. • But…if interest rates have to be jacked up to react to the inflation, everything comes tumbling back down again • But…if real estate dropped considerably, what is left of foreign capital, if it’s allowed in the US, might start picking up cheap commercial and residential property
  • 14. Let’s talk Interest Rate Swaps • Bank of America, JP Morgan and Citigroup alone have around $130 trillion of these on their books • For example, if someone has a variable rate, they might swap it for a fixed rate, with the bank taking on the interest rate risk • If interest rates shoot up like I think they may due to the profligate spending of the US government, interest rate swaps blow up • And even if the US government hasn’t nationalized the banks by that point, they will have to clean up the $trillion mess
  • 15. Let’s talk Credit Default Swaps • The US has 2 choices: continuing to put money into AIG and other writers of credit default swaps so they can pay these bets off at face value, OR • Start tearing them up and say they’re either voidable or will be paid off at pennies on the dollar
  • 16. CDS and Europe • One problem with pennies on the dollar is that hundreds of $billions of them are covering Western European banks, which are… • Already precarious because of their investments in Eastern European countries that are going bad (mortgages in Poland denominated in Euros, for example) • CDSs to me are a European issue more than a US issue, as European banks are way more leveraged than US banks, in some cases 10 to 1.
  • 17. $8 trillion • European banks own $8 trillion in US- denominated assets (govt debt, mortgages, consumer loans, etc.) • If they have to start selling, it will further depreciate the dollar against the Euro • They’d have to start selling if some of the CDS are ripped up, because of their crazy leverage.
  • 18. Life & annuity insurers • Residential and commercial mortgages: if these continue to blow up, and further unemployment, decreased spending, potential increased interest rates would suggest a further blowing up, life insurers are especially vulnerable • Technical indicators: if the current market run doesn’t reach Dow 11000, some guess it’ll come back down to hit 5500, with a potential low of 4000. That would hit annuity writers hard.
  • 19. Short-term gain = long-term pain? • What governments, banks, insurers, hedge funds are doing now are short-term inflationary and papering-over things that don’t let the economy fix itself • Mark-to-market accounting may be suspended = short-term gain = puts off until later fixing things • Non-financials credit debt / GDP = 350%, the highest it has ever been. In the Depression, it spiked at 250%.
  • 20. Bank deposits • FDIC has very little money left, so they arranged to borrow (in other words, more printing) $500 billion for potential bank failures • Insured US bank deposits represent $4 trillion • Banks only have $300 billion on hand for that $4 trillion
  • 21. Japan bankruptcy • The good news? Japan would probably go bankrupt before we would, so would serve as a warning that we’re doing the wrong things. • Japan’s debt / GDP ratio is 200% • US’s debt / GDP ratio is 75% • Japan’s savings rate is now as sickly as the US’s • Japan has already printed money, it didn’t work, asset values kept falling through 2003
  • 22. What do we do? • How this plays out is almost entirely out of our control ; we’re still very early in this whole process • Hope that governments stop wasting money and time • Put your head between your knees, grab a paper bag and hurl • Got commodities and precious metals?