James Glassman - Global Renewal Presentation

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JAMES GLASSMAN ([email protected], Office 212–270–0778, Trading Desk 212-834-5093, Mobile 609-510-3723 ) 1

Global RenewalHappy one-year anniversary …

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The rhythm of the economy … it’s a familiar story …GDP gap (deviation of real GDP from potential as a percent of potential real GDP)

Source: NBER Macroeconomics Database

-30

-25

-20

-15

-10

-5

0

5

1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 2019-30

-25

-20

-15

-10

-5

0

5

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… and it seems the economic tide is coming back inUS real GDP (chained 2000 dollars)

Sources: US Department of Commerce; Macroeconomic Advisers LLC

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 207,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

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The (abstract) drivers of recovery …

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Four biggies …

Potential growth

Pent-up demand (economic slack)

Fed policy

Fiscal policy

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Caveat … financial shocks may be more challengingMarket value of all publicly traded stocks (Wilshire 5000 index)

Source: Dow Jones

Actual Growth Factors contributing to growth over the first two years of economic recovery:First 2 years Predicted Pent-up Demand Natural Growth Monetary Stimulus Fiscal policy Other

Fed fundsGDP Gap Potential growth less 10-year(% of GDP) Impact Treasury yieldImpact % of GDP Impact

(pct. pts.) (pct. pts.) (pct. pts.) (pct. pts.) (pct. pts.)

February 1961 5.6 5.9 4.0 1.0 4.0 4.0 -2.3 0.9 -0.5 0.8 -0.3

November 1970 5.7 4.9 3.1 0.8 3.2 3.2 -2.2 0.9 -0.6 0.9 0.8

March 1975 4.7 6.0 5.0 1.3 3.6 3.6 -2.9 1.2 -0.5 0.8 -1.3

November 1982 6.6 5.9 7.4 1.9 3.1 3.1 -2.3 0.9 -1.7 2.6 0.7

March 1991 3.0 5.3 3.3 0.8 3.0 3.0 -3.7 1.5 0.0 0.0 -2.3

November 2001 2.9 4.6 2.1 0.5 2.7 2.7 -3.4 1.4 -2.1 3.2 -1.7

June 2009 3.7 6.2 7.3 1.8 2.9 2.9 -3.7 1.5 -5.5 8.3 -2.5

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It’s the “dust off the projects” that drives the accelerators Business investment (ratio to GDP)

Source: US Department of Commerce

0

3

6

9

12

15

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070

3

6

9

12

15

Total business investment

Equipment

Business structures

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Demographics have something to say tooEmployment status by age (ratio of employment to population of selected age cohorts)

Source: US Department of Labor

0.60

0.70

0.80

0.90

1.00

1.10

2007 2008 2009 20100.60

0.70

0.80

0.90

1.00

1.10

Blue shaded region is the overall employment-to-population ratio

55+

45-5435-4425-34

20-24

18-19

16-17

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An industry where “pent-up” has a lot of room to runUS light vehicle sales and domestic production (millions of units annualized)

Sources: US Department of Commerce; Federal Reserve Board

4

6

8

10

12

14

16

18

20

22

1993 1995 1997 1999 2001 2003 2005 2007 20094

6

8

10

12

14

16

18

20

22

Vehicle sales

Domestic vehicle output

Implied production if US operations produce 65% of all vehicle sales

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So far, so good …

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Over there …Real GDP in selected regions (percent change from four quarters earlier)

Sources: US Department of Commerce; JPMorgan Chase & Co.

-9-8-7-6-5-4-3-2-10123456789

1011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-9-8-7-6-5-4-3-2-101234567891011

US (blue-gray, dashed line is forecast)EU-11 (black)Japan (red)

Emerging economies in Asia, Eastern Europe and Latin America (blue)

Global (shaded region)

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… and over hereUS real GDP (annualized percent change from the previous quarter)


2.9

0.4

1.9

3.8

3.12.7

2.4

0.2

3.7

2.6

3.7

-2.8

2.3

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8Forecast ofquarter-to-quarter realGDP growth

Quarter-to-quarteractual realGDP growth

Annualgrowth ofreal GDP(Q4 to Q4)

Change inreal GDPfrom fourquartersearlier

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Layoffs are ending …Real GDP (% ch from four quarters earlier) Initial claims for unemployment benefits (thousands weekly)

Sources: US Department of Labor; US Department of Commerce

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

50

100

150

200

250

300

350

400

450

500

550

600

650

700

Real GDP growth (left)

Jobless claims (right, scale is reversed)

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… they’re normal … it’s now up to hiringLayoffs and new hires (percent of private employment)


4

5

6

7

8

9

10

11

12

13

14

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20104

5

6

7

8

9

10

11

12

13

14

15

Net hiring rate

Net layoff rate

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Jobs are coming back …Real GDP and nonfarm payrolls (% ch from 3 months earlier, annual rate*)

* Based on the 3-month average of the most recent three months.


-14-13-12-11-10-9-8-7-6-5-4-3-2-1012345678

2007 2008 2009 2010-14-13-12-11-10-9-8-7-6-5-4-3-2-1012345678

Nonfarm payrolls excluding temporary Census jobs

Real GDP growth (shaded area)

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… but jobs are only part of the picture …Real GDP, nonfarm payrolls and total private hours worked (% ch from 3 months earlier, annual rate*)



-14-13-12-11-10-9-8-7-6-5-4-3-2-1012345678

2007 2008 2009 2010-14-13-12-11-10-9-8-7-6-5-4-3-2-1012345678

Non-Census jobs

Real GDP growth (shaded area)

Private-sector hours

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… in fact, it’s what’s in the paycheck that counts …Real GDP, payrolls total private hours, and compensation (% ch from 3 months earlier, annual rate*)



-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8Real GDP growth (shaded area)

Pay

Non-Census jobs Private-

sector hours

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… for consumersReal consumer spending, disposable income, and wages and salaries (% change from 12 months earlier)


-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

Real consumer spendingReal disposable personal incomeReal wages and salaries

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Profits have lots of stories to tell …After-tax GDP profits (percent of nominal Gross Domestic Income)


0

1

2

3

4

5

6

7

8

9

10

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070

1

2

3

4

5

6

7

8

9

10

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… and one of them is about the world …Global and US real GDP (2000 dollars)


13,000

18,000

23,000

28,000

33,000

38,000

43,000

48,000

53,000

58,000

63,000

68,000

1990 1995 2000 2005 20105,000

10,000

15,000

20,000

25,000

Global real GDP ex. the US

US real GDP

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… cap X is anotherBusiness investment for capital goods and software (percent change from a year earlier)


-30

-25

-20

-15

-10

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-30

-25

-20

-15

-10

-5

0

5

10

15

20Shaded area denotes real business spending for equipment & software

Industrial output of business equipmentOrders for capital goods excluding civilian aircraft and defenseNonauto capital goods importsShipments of nondefense capital goods

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‘Low-for-really long’ Fed rates …

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The Fed will have little reason to let off the gas for a whileFederal funds rate and the 10-year Treasury yield (percent)

Source: Federal Reserve Board

0

4

8

12

16

20

60 65 70 75 80 85 90 95 00 05 100

4

8

12

16

20

Federal funds rate

10-year Treasury yield

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Unemployment is too high …US unemployment rate (percent of the labor force)

¹ Range of FOMC members’ viewsSources: NBER recession bars; US Department of Labor; Federal Reserve Board

0

1

2

3

4

5

6

7

8

9

10

11

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150

1

2

3

4

5

6

7

8

9

10

11

12

The Fed's view about the near-term and sustainable (Nairu) unemployment level¹

Note: thin line represents forecast

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… inflation’s tame …Selected consumer price indexes (percent change from 12 months earlier)

Sources: NBER recession bars; US Department of Commerce; US Department of Labor

-2

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020-2

0

2

4

6

8

10

12

14

16

CPI

Chain PCE price index

The Federal Reserve's long-run inflation

target (for chain PCE

price inflation)¹

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… too low …Selected core consumer price indexes (percent change from 12 months earlier)

Sources: NBER recession bars; US Department of Commerce; US Department of Labor

-2

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020-2

0

2

4

6

8

10

12

14

16

Core CPI

Core chain PCE price index

The Federal Reserve's long-run

inflation target (for chain core PCE

price inflation)¹

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Two added and unprecedented challenges …

(1) Weaning from fiscal stimulus

(2) Regulatory reform and the cost of credit

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Have demand, will create jobs …The private sector, not economists, knows where they will be …

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Manufacturing’s transformation is stabilizingUS factory jobs (millions of jobs)


11

12

13

14

15

16

17

18

19

20

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 200711

12

13

14

15

16

17

18

19

20

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Construction won’t be what she used to be …Real construction outlays (ratio to 2006 Q1)


0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

2006 2007 2008 2009 20100.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50Public construction

Nonresidential construction

Residential construction

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Home building will be a little subdued for a while …Starts of new houses (millions annualized) Months supply of unsold new homes


200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 120

2

4

6

8

10

12

14

16

Total housing starts (left)

Unsold single family houses (right)

Forecast

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This won’t be the employer it was for a whileNominal residential construction (billions of dollars) Housing-related employment (thousands)


120

220

320

420

520

620

720

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 126,000

7,000

8,000

9,000

10,000

11,000

All real estate-related employment (right)

Dollar value of residential construction (left)

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The big story …

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An un-flat world feeds the drive to develop …US real GDP per capita (ratio to 2009 level) (chained 2000 dollars)

Sources: US Department of Commerce; NBER

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1877 1887 1897 1907 1917 1927 1937 1947 1957 1967 1977 1987 1997 20070

7,000

14,000

21,000

28,000

35,000

42,000

Chin

a's p

er c

apita

real

GDP

Indi

a's p

er c

apita

real

GDP

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… that will remap global GDP …Real GDP in selected regions (percent change from four quarters earlier)


0

100,000

200,000

300,000

400,000

500,000

600,000

1990 2000 2010 2020 2030 2040 2050

OtherIndiaChinaCurrent developed (North America, Japan, Western Europe)

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… to look more like the distribution of the populationDistribution of real GDP (percent of global output)

Sources: NBER recession bars; US Department of Commerce; various academic sources

0.00

0.20

0.40

0.60

0.80

1.00

2007 2017 2027 2037 2047

Other

India

China

Current developed (North America, Japan, Western Europe)

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Conclusion … what it means

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Recovery puts the focus on high-tide for asset values …Market value of all publicly traded stocks (Wilshire 5000 index)

Source: Dow Jones

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 100

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

NO

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… and that makes the market look cheap …Equity P-E Wilshire 5000 index


6

8

10

12

14

16

18

20

22

24

26

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Price-earnings ratio (left scale)

Wilshire 5000 (right scale)

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… and for bonds, the market has been too bearish …Nominal and real 10-year Treasury yield (percent)

Sources: NBER recession bars; Federal Reserve Board; US Department of Labor

0

2

4

6

8

10

12

14

16

50 55 60 65 70 75 80 85 90 95 00 05 100

2

4

6

8

10

12

14

16

Real 10-year Treasury yield (nominal less 1-year trailing chain PCE inflation rate)

Nominal 10-year Treasury yield

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… especially when businesses have optionsMarket value of all publicly traded stocks (Wilshire 5000 index)

Source: Dow Jones

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 120

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

Total internal funds plus the IVA

Capital expenditures

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The retail sector faces the biggest challenge …Consumer spending share of GDP (percentage of GDP )


0.55

0.60

0.65

0.70

0.75

47 52 57 62 67 72 77 82 87 92 97 02 070.55

0.60

0.65

0.70

0.75

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix I. The runs of August (2007)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The unsustainable can’t be sustainedNominal gross income per household and house prices (ratio to 1970 Q1 level)

Sources: Loan Performance Corporation; US Department of Commerce

0

1

2

3

4

5

6

7

8

9

10

11

12

13

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120

1

2

3

4

5

6

7

8

9

10

11

12

13LoanPerformance Corporation

Gross nominal income per household

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The home building correction was manageableContribution of new home building to quarterly real GDP growth (percentage points annualized)


-1.50

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-1.50

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

Bars are the contribution of new home building to

quarterly real GDP growth

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


0

1

2

3

4

5

6

2007 2008 2009 20100

1

2

3

4

5

6

3-month dollar-based Libor

3-month overnight indexed swap rate (OIS)

When the cure became the problemSelected rates in the interbank funding markets (percent)

Sources: BBA; Federal Reserve Board

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The weakest links were shut downLong-term yield on noninvestment grade debt less 10-year Treasury yield (basis points)

Sources: JPMorgan Chase & Co.; Bloomberg

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Ibbotson Associates JPMorgan Securities Inc.

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix II. Inflation … R.I.P.

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


“Low levels of resource utilization”, the big ideaUS unemployment rate (percent of the labor force)

¹ Range of FOMC members’ viewsSources: NBER recession bars; US Department of Labor; Federal Reserve Board

0

1

2

3

4

5

6

7

8

9

10

11

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150

1

2

3

4

5

6

7

8

9

10

11

12

The Fed's view about the near-term and sustainable (Nairu) unemployment level¹

Note: thin line represents forecast

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Unemployment … but what you don’t see counts too …Ratio of selected worker status to the population


0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 20080.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

Working part time because can't find full time work

Actively looking for a job and unemployed

Working full time or by choice, if part time

Gave up and dropped out

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… deviations from a normal economyStatus of selected people in the labor pool (thousands)


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20100

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Working part time because can't find full-time work

Actively looking for a job and unemployed

Gave up looking and are doing other things

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Remember how recessions work on inflation … slowlyCore chain PCE inflation (annualized percent change)


0

1

2

3

4

5

6

7

8

9

10

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20100

1

2

3

4

5

6

7

8

9

10% change from 12 months earlier% change at an annual rate from six months earlier (thin line)

when the recessions are believed to have ended

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Working with the cycle, the Fed’s long-run strategyCore chain PCE inflation (annualized percent change)

Actual unemployment less NairuSource: US Department of Commerce

0

1

2

3

4

5

6

7

8

9

10

11

-6 -5 -4 -3 -2 -1 0 1 2 3

80

78

77

76

75

74

9596

92

84

83

82

81

98 99

90

87

93

86

79

97

85

94

91

00

04

03

02 01

05

06

0807

09

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix III. The monetary base(less)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The textbook story about money creation …Federal Reserve assets (billions of dollars outstanding)


0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

Aug 2007 Dec 2007 Apr 2008 Aug 2008 Dec 2008 Apr 2009 Aug 2009 Dec 2009

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

Fed loans

MBS holdings

GSE holdings

Treasuries

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… doesn’t apply in today’s case …Federal Reserve liabilities (billions of dollars outstanding)


0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

Aug 2007 Dec 2007 Apr 2008 Aug 2008 Dec 2008 Apr 2009 Aug 2009 Dec 2009

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500 Deposits at the Fed other than those ofdepository institutions, including theTreasury's supplementary financingaccountReverse RPs, Treasury cash, and otherliabilities and capital

Excess reserves

Required reserves (includes vault cashused to satisfy reserve requirements)

Currency in circulation excluding surplusvault cash held by depository institutions

All factors absorbing reserves

monetary base

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… because the Fed’s reserves remain it its vaultsMonetary base (billions of dollars) M2 (billions of dollars)


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

1970 1975 1980 1985 1990 1995 2000 2005 20100

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Monetary base (left scale)M2 (right scale)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix IV. Fiscal hysteria … get a grip

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Wanted … a new conversation about fiscal issues

The airwaves are full of nonsense (like global warming, it’s not about the seasonal shifts)

Tedious … we don’t need you to repeat the front pages

Pointless … we’re not going to cut the deficit in recession

Misdirected focus … the $1.5 trillion – $1 trillion due to recession – isn’t the issue

It’s the underlying (long-term) issue

Left on auto pilot, spending doubles as a share of the economy (CBO)

Five options:

(1) Double the tax burden … not happening

(2) Deficit finance … over the market’s (and economy’s) dead body

(3) Defer to an outsider (the government) to continually whittle health care spending

(4) Incentivize the industry to find the best solution … users need to be more involved

(5) Change the conversation about economics (raise economic literacy):

* Endogenize the retirement decision

* Spur national saving (eliminate the tax on saving, consumption-based income tax)

* Eliminate the corporate income tax (people pay taxes)

* Eliminate the employer deductibility of health care expenses

* Tort reform

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Bonds to pundits: it’s not about today’s red ink …Federal budget balance (percent of GDP) 10-year Treasury yield (percent)

Sources: NBER recession bars; Congressional Budget Office; Federal Reserve Board

-11-10-9-8-7-6-5-4-3-2-101234

1960 1970 1980 1990 2000 2010012345678910111213141516

Actual federal budget balance (% of GDP) on the left scale10-year Treasury yield on the right scale

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The red ink, scary of course, in absolute terms …Federal budget balance (billions of dollars over the most recent 12 months)

Sources: NBER recession bars; NBER Macroeconomic database

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… up closeFederal budget balance (billions of dollars over the most recent 12 months)


-1,500-1,400-1,300-1,200-1,100-1,000

-900-800-700-600-500-400-300-200-100

0100200300400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-1,500-1,400-1,300-1,200-1,100-1,000-900-800-700-600-500-400-300-200-1000100200300400

FY 2

010

FY 2

011

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Scaled to the size economy …Federal budget balance (percent of GDP)


-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… up closeFederal budget balance (percent of GDP)


-11-10-9-8-7-6-5-4-3-2-101234

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-11-10-9-8-7-6-5-4-3-2-101234

FY 2

010

FY 2

011

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… here’s how much …Actual budget balance and excluding the impact of the recession (percent of GDP)

Sources: NBER recession bars; Congressional Budget Office; JPMorgan Chase & Co.

-11-10-9-8-7-6-5-4-3-2-101234

1960 1970 1980 1990 2000 2010-11-10-9-8-7-6-5-4-3-2-101234

Actual federal deficit (% of potential GDP)Cyclically-adjusted federal deficit, net of fiscal initiatives (% of potential GDP)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… or, if you want the numbersCyclical (temporary) factors boosting the federal deficit (billions of dollars, fiscal year basis)

Sources: Congressional Budget Office; JPMorgan Chase & Co.

2007 2008 2009 2010 2011 2012 2013

Latest estimate of the fiscal budget (January 2010) -161 -459 -1,414 -1,349 -980 -650 -539

% of GDP -1.2% -3.2% -9.9% -9.2% -6.5% -4.1% -3.2%

Three cy clical (temporary ) factors boosting the deficit (cost in billions of dollars):

Financial rescues 0 0 424 106 36 26 17

GSE rescue 0 0 291 26 21 16 14TARP 0 0 133 80 15 10 3

Fiscal initiativ es 0 158 246 399 139 40 28

Fiscal stimulus (Economic Stimulus Act of 2008) 158 46 -5 -11 -10 -7Fiscal stimulus (ARRA of 2009) 200 404 150 50 35

Recession impact on the budget 69 113 335 446 427 407 387

CBO's estimate of the cy clical contribution 29 73 295 406 387 367 347Adjustment assuming 4.5% unemploy ment 40 40 40 40 40 40 40

Excluding the cyclical/financial rescue costs -132 -228 -449 -438 -418 -217 -147

% of GDP -0.9% -1.6% -3.2% -3.0% -2.8% -1.4% -0.9%

Memoranda:Nominal GDP 13896.1 14439.1 14236 14595 14992 15730 16676Debt held by the public 5035 5803 7,544 8,893 9,873 10,523 11,062

% of GDP 36.2% 40.2% 53.0% 60.9% 65.9% 66.9% 66.3%

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix V. The healthcare challenge

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The health care expansion isn’t the real issue

PPACA morphs an inhumane, dysfunctional system to merely a dysfunctional one

Agnostic about the net impact of the health initiative on the amount of national resources consumed by health care:

Shifting from the ER model, a private/public-subsidized system to a federal-subsidized system, will raise the government’s health care costs by 8-10%, but could in theory lower the stealth private subsidy

Validating the present government/employer-provided health insurance model disengages users from health care decisions. A system that is financed by the public purse or taxes on investment income with users not accountable is economically dysfunctional (lesson of the ethanol mandate)

Most employers offer benefits and shouldn’t be affected. 70% of employees are at firms that employ 26 or more people and 87-98% of those firms offer benefits. 55-65% of employees are covered by those company plans, implying some take coverage in other (spousal) systems. Small businesses will benefit some.

Firms will continue to offer health care benefits, even if penalties are less than the cost of benefits, for the same reason they now offer benefits despite no penalty if not. The competitive advantage and federal subsidy remains.

85% of typical health care outlays for the average person occur after 65 years of age, implying that Medicare and Medicaid are the elephant in the room

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


CBO gives you the starting point …CBO’s government spending projections (billions of dollars, fiscal year basis)

Source: Congressional Budget Office

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 20800

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Debt service

Other

Medicare and Medicaid

Social Security

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… and they say spending will outstrip revenues*Long-term projections (billions of dollars, fiscal year basis)


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 20800

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Debt service

Other


Social Security

Revenues (historical average of 18.1% of GDP

and assuming CBO's GDP assumption)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The electorate won’t accept (1) a doubled tax burden …Long-term projections (percent of GDP)


0

5

10

15

20

25

30

35

40

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 20800

5

10

15

20

25

30

35

40

Debt service

Other


Social Security

Revenues (historical average of 18.1%)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The bond market won’t accept (2) a mounting debt service …Long-term projections (billions of dollars, fiscal year basis)


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 20800

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Debt service

Other


Social Security

Revenues (historical average of 18.1% of GDP

and assuming CBO's 2.2% long-run GDP growth

assumption)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The (3.5%) growth* option …Long-term projections (billions of dollars, fiscal year basis)


0

10,000

20,00030,000

40,000

50,000

60,00070,000

80,000

90,000

100,000

110,000120,000

130,000

140,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 20800

10,000

20,00030,000

40,000

50,000

60,00070,000

80,000

90,000

100,000

110,000120,000

130,000

140,000Revenues (if the economy grows 3.5%, just below the 3.75% historical average)

Debt service

Other


Social Security

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… keeps the spending share in line with revenuesLong-term projections (billions of dollars, fiscal year basis)


0

5

10

15

20

25

30

35

40

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 20800

5

10

15

20

25

30

35

40

Revenues

Debt service

Other

Medicare and MedicaidSocial Security

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The growth* option … why it’s an issueLong-term projections (billions of dollars, fiscal year basis)


-15

-10

-5

0

5

10

15

20

1851 1876 1901 1926 1951 1976 2001 2026 2051 2076-15

-10

-5

0

5

10

15

20

Average historical growth = 3.75% annually

CBO assumption

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


It’s a political (not a market) issue …

Deficit financing would be economic suicide

Two political choices

Allow federal spending to grow and come up with the revenues (hence the talk about a Value Added Tax)

Control government health care spending and enhance incentives to grow

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix VI. US consumer myths

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


The consumer’s footprint may shrink in coming years …Consumer spending share of GDP (percentage of GDP )


0.55

0.60

0.65

0.70

0.75

47 52 57 62 67 72 77 82 87 92 97 02 070.55

0.60

0.65

0.70

0.75

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… as pressures build to save more …Selected measures of saving (percent of disposable personal income)


-4

-2

0

2

4

6

8

10

12

14

16

18

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010-4

-2

0

2

4

6

8

10

12

14

16

18

Flow of Funds measure (based on flows into financial accounts) of the NIPA concept

National Income and Product Account measure (income less outlays)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… with balance sheets down for now …Saving (% of income) Net worth (ratio to income)


-4

-2

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20103.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4Ratio of household net worth to income (right)

Household saving rate (left)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… depending on how we view our wealth …Household net worth(billions of dollars) (ratio to disposable personal income)


0

10

20

30

40

50

60

70

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20104.0

4.5

5.0

5.5

6.0

6.5Ratio of net worth to income (right)

Dollar magnitude of household net worth (left)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… [it’s mostly about stocks, not real estate]Household net worth (ratio to disposable personal income)


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Ratio of net worth to income (right)

Memo: value of real estate holdings (right)

Real estate net worth (right)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Household leverage is reversing …Household debt (ratio to disposable personal income)


0.0

0.1

0.20.3

0.4

0.5

0.60.7

0.8

0.9

1.0

1.11.2

1.3

1.4

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0

0.1

0.20.3

0.4

0.5

0.60.7

0.8

0.9

1.0

1.11.2

1.3

1.4

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… in the mortgage area … Interest rates (percent) Selected household debt measures (ratio to disposable income)


0

2

4

6

8

10

12

14

16

18

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0

0.1

0.20.3

0.4

0.5

0.60.7

0.8

0.9

1.0

1.11.2

1.3

1.430-year mortgage commitment rate (left)

Ratio of non-mortgage debt to disposable personal income (right)

Ratio of mortgage debt to disposable personal income (right)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… and mortgage debt service is kinda normal …Debt service (% of income) Household mortgage debt (ratio to income)


0

3

6

9

12

15

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

Homeowners' debt service on mortgage obligations (left)

Household mortgage debt (right)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… same for servicing credit card debt …Financial obligations of folks who rent (% of income) Non-mortgage debt level (ratio to income)


468

101214161820222426283032

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0

0.1

0.2

0.3

0.4

Renters' debt service burden (left)

Homeowners' debt service on non-mortgage obligations (left)

Household nonmortgage debt (right)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


… for homeowners and renters alikeFinancial obligations of folks who rent (% of income) Non-mortgage debt level (ratio to income)


18

20

22

24

26

28

30

32

34

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.0

0.1

0.2

0.3

0.4

Renters' debt service obligations (left)

Household non-mortgage debt (right)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


Appendix VII. Stealth energy revolution

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


New realities spur a quiet revolution for transportationPrices of petroleum and natural gas (dollars per barrel, thermally-equivalent basis)

Sources: American Petroleum Institute; Bloomberg

0

25

50

75

100

125

150

1994 1995 1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

25

50

75

100

125

150Petroleum price (WTI, $/barrel)

Natural gas price converted to thermal equivalent price of oil in terms of price per barrel (6 times the $/mmBTU)

NO

RTH

WES

T G

RO

WTH

FIN

AN

CIN

G C

ON

FER

ENC

E, A

CG

, SEA

TTLE

, JU

LY 2

9, 2

010


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James Glassman - Global Renewal Presentation

Economy & Finance

Transcript of James Glassman - Global Renewal Presentation