Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 111 views

    To The Point, No.3, 31 March 2011

    Uploaded by

    Swedbank AB (publ)
    Don´t ignore the white swans. The March version of To the Point acknowledges the black swans of the Japanese disaster and the Middle East political turbulence, but at the same time it is argued that we tend to forget the white swans with perhaps even larger negative consequences for the world economy. One such white swan, is the sovereign debt crisis in the euro-zone and the US. While the euro-zone is struggling to improve the situation, US politicians are too passive. Even if we can understand the risks to the whole world from the US letting debt piling up, there may still not be sufficient action taken.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    To The Point, No.3, 31 March 2011

    Uploaded by

    Swedbank AB (publ)
    111 views2 pages
    Don´t ignore the white swans. The March version of To the Point acknowledges the black swans of the Japanese disaster and the Middle East political turbulence, but at the same time it is argued that we tend to forget the white swans with perhaps even larger negative consequences for the world economy. One such white swan, is the sovereign debt crisis in the euro-zone and the US. While the euro-zone is struggling to improve the situation, US politicians are too passive. Even if we can understand the risks to the whole world from the US letting debt piling up, there may still not be sufficient action taken.

    Original Title

    To the Point, No.3, 31 March 2011

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Don´t ignore the white swans. The March version of To the Point acknowledges the black swans of the Japanese disaster and the Middle East political turbulence, but at the same time it is argued that we tend to forget the white swans with perhaps even larger negative consequences for the world economy. One such white swan, is the sovereign debt crisis in the euro-zone and the US. While the euro-zone is struggling to improve the situation, US politicians are too passive. Even if we can understand the risks to the whole world from the US letting debt piling up, there may still not be sufficient action taken.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    111 views2 pages

    To The Point, No.3, 31 March 2011

    Uploaded by

    Swedbank AB (publ)
    Don´t ignore the white swans. The March version of To the Point acknowledges the black swans of the Japanese disaster and the Middle East political turbulence, but at the same time it is argued that we tend to forget the white swans with perhaps even larger negative consequences for the world economy. One such white swan, is the sovereign debt crisis in the euro-zone and the US. While the euro-zone is struggling to improve the situation, US politicians are too passive. Even if we can understand the risks to the whole world from the US letting debt piling up, there may still not be sufficient action taken.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    To the Point

    Discussion on the economy, by the Chief Economist March 31, 2011

    Don’t ignore the white swans!


    There has been great focus on black swans lately. The Japanese earthquake, the
    tsunami and nuclear power plant accidents could have been foreseen, but not
    their exact timing and perhaps not all of the events at the same time. The
    democratisation wave in the Middle East was also expected, but how could one
    know exactly when it would start, where, and with what force? In that sense,
    these events could be characterized as black swans, or as Nassim Nicholas Taleb
    writes in his book The Black Swan – the Impact of the Highly Improbable: “A
    Cecilia Hermansson black swan is a highly improbable event with three principal characteristics: It is
    Group Chief Economist unpredictable; it carries a massive impact; and, after the fact, we concoct an
    Economic Research Department
    explanation that makes it appear less random, and more predictable, than it was.”
    +46-8-5859 7720
    cecilia.hermansson@swedbank.se This version of To the Point is about white swans instead. Why? Because I
    believe they will have a greater impact on the world economy. The black swans
    mentioned above, or the unknown unknowns, i.e. the things that we don’t know
    that we don’t know, may not cause new recessions and financial crises this time.
    The impact of both the Japanese disaster and the democratisation process in the
    Middle East will prevail for many years; meanwhile, the world economy will
    move on. The focus is of course on oil prices, but there are also other factors
    driving commodity prices at the moment, such as the higher demand from
    emerging markets, which may become even greater over time.
    The white swans, on the other hand, are the known knowns, i.e things that we
    know that we know, and the known unknowns, i.e the things that we know that we
    don’t know, and they could potentially have a much greater impact on global
    developments. I am thinking about the sovereign debt crisis in the advanced
    economies, and the links to fragile banking systems and a leveraged private
    sector. We know about these and in that sense they are clearly white swans. In
    Europe, measures are being taken, albeit not always the most optimal ones, but
    developments are going in the right direction. In the US, however, there is a
    greater ingredient of neglect or ignorance. Everyone knows that debt is building
    up like a snowball rolling down a mountain, but few take responsibility for it.

    Let’s focus more on the US


    The US has the advantage of being a fully fledged union of states, both from a
    monetary and a political perspective. The euro-zone, on the other hand, started
    with integration on the monetary side, where some countries (France) hope
    political integration will follow suit, and where others (Germany) hope such
    integration will never be needed.
    Today, the sovereign debt ratio to GDP is already higher in the US at close to
    100 % (85 % in the euro-zone), and the country also has more problems with
    private leveraging and a larger current account deficit. The US has states such as
    California, Nevada and Florida; where problems are immense, just like the euro-
    zone has Greece, Ireland and Portugal.
    The discourse in media and the financial markets is: If and when will the euro
    collapse? Which countries will leave the euro- zone, will it be Greece or Germany?
    We would never discuss the possibility of Texas breaking free from the troubled
    US, leaving with oil and better prospects on its own. When Texas became part of
    No. 3 the US, it actually got a provision in its Constitution allowing it to leave the Union.

    2011 03 31
    To the Point (continued)
    March 31, 2011

    Chart 1: The Euro/US dollar 1974-2011


    Debt is piling up
    1,6
    So, while the euro-zone is struggling to take care of its problems, the US has
    1,5 allowed the budget deficit to grow this year and remain in double digits. The
    1,4 medium-term budget plan presented by president Barak Obama is not
    1,3 ambitious, and relies too much on the US continuing to show high growth over
    1,2 the next decade. His appointed bi-partisan commission was much more
    USD/EUR

    1,1 ambitious, problem-oriented, and advocated more austerity.


    1,0
    The US has a history of cutting taxes and raising expenditures. During the
    0,9 Clinton era, however, the budget deficit was brought down, interest rates fell
    0,8 and the country benefited from more sound fiscal management. At this
    0,7 juncture, quantitative easing and low policy interest rates have created an
    0,6 environment with monetary stimulus that fosters a less need for fiscal
    74 77 80 83 86 89 92 95 98 01 04 07 10
    consolidation. Also other reforms, such as house financing, are lingering due to
    Source: Reuters EcoWin

    the high supply of liquidity. I have heard economists discussing the possibility
    of increasing fiscal stimulus even further since interest rates are so low anyway
    and it is easy to finance debt. It is important to ensure the recovery is robust,
    but by prolonging the plans for creating better fiscal positions in the medium
    term, risks are building up which could threaten the economy at a later stage.

    A change in sentiment would change a lot


    Chart 2: Total capital market debt/GDP and
    10 yr government nominal and real rates The US economy is expected to continue to grow, and gradually the
    quantitative easing and the monetary policy stance will become less
    4,00 17,5
    10-year government
    <--- Total capital market expansionary. Hopefully, the various markets and actors that have benefited
    3,75 debt/GDP
    15,0
    bond ---> from all the stimuli will handle the shift to being “on their own”. The US,
    3,50
    12,5 having a stronger momentum, will most likely see the US dollar strengthen
    3,25
    10-year government
    10,0 against the euro and the yen over the next year or so.
    3,00 bond (real) --->

    7,5 However, if the euro-zone moves into calmer waters, investors and other actors
    Percent

    2,75

    2,50 5,0 on the financial markets could start turning to the US. As the debt ratio moves
    2,25 higher and higher, the structural problems with labour, credit and housing
    2,5
    2,00 remain, and the growth rate will disappoint somewhat compared to
    0,0
    1,75 expectations. In addition, a stronger dollar will not help the US reduce its
    1,50 -2,5 current account deficit, and over time it may be increasingly harder to get
    1,25 -5,0 Europeans and Asians to finance it.
    55 60 65 70 75 80 85 90 95 00 05 10
    Source: Reuters EcoWin If and when sentiment towards the US changes, it will change a lot of other
    things as well. The dollar may fall more dramatically, interest rates will start to
    rise. Not only is the US affected by its lack of responsibility, other countries
    will also face more turbulence and large wealth effects. For Americans, the
    issue is also about income distribution now and over time, making it more
    difficult for future generations to create a similarly good living standard as their
    parents. With an ageing society and increased health costs, the debt ratio will
    continue to rise if no action is taken. This means that the US will need to start
    working on fiscal consolidation, and step up its ambition level with regard to
    the reform agenda. We can see what is coming, the white swan is clearly
    visible, and by not doing anything, the impact can be even greater than all the
    black swans together ...
    Cecilia Hermansson
    Economic Research Department
    SE-105 34 Stockholm, Sweden
    Telephone +46-8-5859 1000 To the Point is published as a service to our customers. We believe that we have used reliable
    ek.sekr@swedbank.com sources and methods in the preparation of the analyses reported in this publication. However, we
    www.swedbank.com cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any
    error or omission in the underlying material or its use. Readers are encouraged to base any
    Legally responsible publishers (investment) decisions on other material as well. Neither Swedbank nor its employees may be held
    Cecilia Hermansson responsible for losses or damages, direct or indirect, owing to any errors or omissions in To the
    +46-8-5859 7720 Point.

    You might also like