Introduction to the Courseand Main Issues in the Global

Economy 

by  

Nouriel Roubini

Stern School of BusinessNew York University

 September 2017

International Macroeconomic Policy: Theory and Evidence from Recent

Financial Crises• We study macroeconomic developments: growth,

unemployment, consumption, investment, inflation, trade balances, exchange rates, etc.

• Macroeconomics is an international discipline as most economies are not closed but open to trade in goods, services, labor, capital, technology, information (globalization).

• Most countries are small open economies; some (U.S.) are large open economies. The world economy is interdependent and interconnected thanks to globalization

International Macroeconomic Policy

• Macroeconomic developments depend on macro policies:– Conventional (the policy rate tool, the money supply)

and unconventional monetary policy such as, ZIRP (Zero Interest Rate Policy), QE (Quantitative Easing), CE (credit easing), FG (Forward Guidance), Negative Interest Rates, Liquidity Support of Banks and Non-Banks

– Conventional (tax and government spending) and unconventional fiscal policy (bailouts and backstop of banks, households, corporations and other state guarantees for economic agents)

International Macroeconomic Policy

• Macroeconomic developments depend on macro policies:– Exchange rate policies: choice of the exchange rate regime

(fixed, flexible, etc.), forex intervention, capital controls– Supervision and regulation of the banks and other financial

sector intermediaries (capital regulation, liquidity regulation, macro-prudential supervision, counter-cyclical credit policy)

– International economic policies such as coordinated macro policies as well as international bailouts (by the IMF or the “Troika”) of countries or bail-in of countries (coercive restructuring of public and/or external debt)

The nexus between macro news, policy reactions and markets/asset prices

• Macro Triangle: macro developments/news, policy reaction, markets and asset prices

• Macro developments/news lead to policy reactions• Those policy reactions affect the evolution of the macro

variables• Macro news and macro policies affect markets and asset

prices (stocks, bonds, currencies, commodities, credit)• Asset prices react to macro news and policy news, ie

unexpected rather than expected changes.• Asset price changes lead to policy reactions and affect

macro variables (through wealth effects and price effects)

Theory and Evidence from Recent Financial Crises

• Financial crises have become more frequent and severe in both developed markets (DM) and emerging markets (EM)

• Recent developed markets crises– US housing and sub-prime crisis in 2006-2008– Global Financial Crisis (GFC) of 2008-2009– Sovereign debt crises and economic crisis in the Eurozone (2010-

2013): Greece, Ireland, Portugal, Spain, Italy, Cyprus, Slovenia. Grexit Risk.

– Brexit: a shock rather than a crisis

• Recent emerging market crises:– Mexico (1994), East Asia (1997-98), Russia (1998), Brazil (1999),

Turkey and Argentina (2001)– EM mini-crisis in 2013-15 and China’s 2015-16 turmoil

Nature of Financial Crises

• There are many types of financial crises:– Currency crisis when a fixed exchange rate regime collapses or

a currency goes into a free fall– Balance of Payments (BoP) or external debt crisis– Sovereign debt crisis– Banking crisis– Corporate debt crisis– Household debt crisis– Broad financial crisis that combines many elements of the above

crises (Argentina 2001 for example)

Types of financial crises: liquidity versus solvency crises

• Financial Crises can be distinguished into two broad types:– Solvency crises– Liquidity crises

• Insolvency: An agent is insolvent when its debt relative to its income is so high that in most states of the world it will not be able to pay back its debt and the interest on it (unsustainable debt)

• Illiquidity: An agent is solvent but illiquid when its debt is not unsustainable but it has large amounts of this debt coming to maturity (short term debt) and it is not able to roll it over (liquidity crisis, rollover/run crisis)

Liquidity versus Solvency Crises

• Many combinations of liquidity/illiquidity and solvency/insolvency

• Illiquidity can lead to insolvency as illiquidity can trigger default

• Illiquidity can be resolved via:– Domestic or international lender of last resort support

(bailouts) to stop rollover/run crises– Orderly but coercive restructuring (maturity extension) of

debts (bail-in of creditors policies)• Insolvency is resolved via:

– Orderly debt restructuring before default– Disorderly debt restructuring (default and debt reduction)

Course Structure• Syllabus:

http://people.stern.nyu.edu/nroubini/MACRO5.HTM • Textbooks• Reading List:

http://pages.stern.nyu.edu/~nroubini/Readingl3.html • Assignments:

http://people.stern.nyu.edu/nroubini/ASSIGN01x.HTM • Requirements (assignments, mid-term exam, final exam)• Other online and offline tools for the course

Current Global Economic Outlook and Uncertainties (Known Unknowns)

• Former U.S. Defense Secretary spoke during the Iraq War of “known knowns, known unknowns and unknown unknowns”.

• Known unknowns are known risk/uncertainty factors that will materialize in the future in one way or another

• The world economy is characterized today by many “known unknowns”, for example which who will be the next Fed Chairman.

Known Unknowns: Fed Chair

• Known Known: Yellen first term expires at the beginning of 2018

• Known Unknown: Who will be the next Fed Chairman? Yellen, Cohn, Warsh, Taylor, Hubbard, etc?

• Unknown unknown: Would Trump choose someone highly incompetent as Fed Chair such a real economic populist? Unlikely

Known Unknown: Economy, Tax policy and the Fed

• Will economic growth finally accelerate above potential?

• Will wage and price inflation remain contained or accelerate?

• Is the US in a secular stagnation with low potential growth?

• Will Congress pass tax reform this year?• Will the next Fed Chair me more or less

dovish than Yellen?

Known Unknown: Fed Policy Normalization

• When will the Fed hike again?– In December 2017– Not in December 2017

• How many times will the Fed hike rates in 2018? Three times as the “dots” suggest or less as the market predicts?

• When will the Fed finish normalizing the policy rate to a neutral level and what this level will be (2%, 2.75%, or 3% or 4%, etc)?

• What could stop the Fed from running down its balance sheet?

Known Unknown: U.S. Fall Fiscal Fistfights

• Fiscal known unknowns in 2017-18 in the U.S.:– Which will be the fiscal policies of Trump?– Will Republicans start another fight on the debt

ceiling as in 2013?– Will there be a government shutdown in

December?– Will Congress pass tax reform this year and what

will be the new corporate tax rate compared to today’s 35%?

Macro and market implications of these known unknowns

• The resolution of these known unknowns (growth and inflation, Fed policy rate normalization pace, U.S. fiscal policy) will affect:– The real economy through demand and

confidence (consumer, business) effects – The financial markets and asset prices in the

U.S. and globally: bond yields, stock market, credit spreads, U.S. credit rating, U.S. dollar value, commodities, emerging markets.

Current Known Unknowns in the Global Economy

• U.S. economic, political, geopolitical, monetary, fiscal and trade uncertainties given the Trump administration

• Prospects for growth in developed markets (DM: US, Europe, Japan, etc.) and emerging markets (EM)

• Will DM return to strong growth or will the recovery remain anemic and sub-par? Expansion or Slowdown?

• Is the recent slowdown in EM cyclical or structural?• Will some EM experience a full crisis and which ones are

most at risk? • China: hard or soft or bumpy landing?• Will oil/commodity prices go higher or lower?

Current Known Unknowns:Brexit and EU-Disintegration

• Will the UK truly exit the EU or eventually back-pedal?• Which deal between UK and EU if Brexit occurs? How much

of a loss of market access for the UK? Soft or Hard Brexit?• Will the EU/Eurozone continue to integrate or will gradually

dis-integrate over time?• Which are the main political risks in the EU: Italy, Greece, and

now Germany?• Will Germany accept greater EZ integration and risk sharing

or will bailout fatigue dominate?• Will the migration crisis be contained or widen so as to

threaten the free borders within the EU (the Schengen agreement)?

Current Known Unknowns in the Global Economy: Eurozone

• Will the recovery of growth in the Eurozone be robust or weak/anemic/uneven?

• Is the EZ still at risk of deflation?• Will anti-Euro parties win the 2018 Italian elections?• How fast will the ECB taper its QE and for how long

it will keep negative policy rates?• Will EZ fiscal policy become more flexible?• Will structural reforms accelerate and where?• Will the Euro currency value rise or fall?

Current Known Unknowns in the Global Economy: Japan

• Will Abenomics work in Japan?– Stronger growth and inflation increase or relapse?– Will structural reforms and trade liberalization be

implemented?– Will Abe win the snap elections?– Will the BoJ do additional QE in 2018 and go more

negative with it policy rates?– What is the risk of a public debt crisis in the next

few years? When will the VAT be raised?– Will the Yen weaken and equities rally?

Current Known Unknowns in the Global Economy: China

• Will Xi try stay in power more than 10 years?• Will China experience a soft landing or a hard landing or

a bumpy?• Will China rebalance growth away from too much

savings, investment and exports towards consumption and labor intensive growth?

• Which structural reforms will be implemented in 2018 and beyond after the Party Congress?

• Will China do another round of policy easing if growth slows again or accept lower growth?

• Will the RMB and stock market rally or fall?

Current Known Unknowns in the Global Economy: EM

• Is the recent slowdown of EM growth in 2013-16 cyclical or structural? What are its causes?

• Will financial pressures intensify to the point of a crisis in some EM or will they diminish?

• Which EM are most at risk and why?• What policy options are available for these EM at risk?• What are the medium term prospects for the BRICS

and other EM?• How robust and resilient is the recovery of EM growth

and markets since mid 2016?

Current Known Unknowns in the World: Geopolitical Risks

• US and the Trump political/geopolitical uncertainties• Is a military conflict with North Korea likely?• Will the Russia-Ukraine conflict escalate or not?• Syria-Iraq-ISIS: further destabilization or stabilization?• Political risks in Europe in Italy, Greece, Germany, etc• Asian territorial issues (as in the case of Japan-China dispute on some

islands)• Geo-political implications of the rise of China: “peaceful rise”?• Which other unknown unknowns (like a 9/11 event or other terrorist

attacks)?• Will markets keep on ignoring geopolitical risks and why?• Populist backlash against globalization, trade, migration, supra-national

authorities, technological disruption.• Rise of income/wealth inequality feeds populism

Current known unknowns: Global Tail Risk Episodes

• Three episodes of global tail risk in the last year: summer 2015, Jan-Feb 2016, post-Brexit short term volatility

• Will another one occur this year or next?• What will trigger it?• Would the market correction be reversed or

lead to a full bear market?• What could reverse the correction: central

bank policies or better fundamentals?

Current known unknowns: Unconventional monetary

policies• In the last decade very unconventional monetary policies in

advanced economies that didn’t even exist before (ZIRP, QE, CE, FG, NIRP)

• Will these policies continue or phased out and how fast?• Are these policies desirable or having unintended consequences

and costs?• Will they eventually cause inflation or deflation/lowflation remain

more likely?• What will central banks do during the next recession?• Will the baton be passed from monetary to fiscal policy?• Which policies for Fed, ECB, BoJ, BoE, PBoC, SNB?

Current state of the global economy

• New Mediocre (IMF); New Normal (China, PIMCO), Secular Stagnation (Larry Summers), Great Deleveraging (Ray Dalio), New Abnormal (Roubini)

• Lower potential growth in developed markets (DM) and emerging markets (EM)

• Till recently actual growth below potential in DM & EM• Low productivity growth in DM: productivity puzzle in spite of

technological innovations• Global economy swinging between periods of Acceleration

(positive growth that is increasing) and Slowdown (positive growth that is slowing down)

• Since mid 2016 we have global acceleration/expansion led by accommodative policies and better confidence

Mystery of the missing inflation

• In spite of stronger growth in DM inflation is still low if not falling relative to a 2% target. This is odd if stronger growth comes from stronger aggregate demand

• So, maybe supply shocks (temporary or permanent) keep inflation low:– Globalization– Weaker workers and unions– More competition– Technological innovations– Still low oil and commodity prices– Temporary factors

• What should be the central banks’ response to this inflation shortfall? Keep on normalizing policy as labor market is tighter or try to fight the low inflation?

• Answer depends on whether the shocks are temporary or permanent• But even if the shocks are permanent, some believe that policy normalization

should continue as there is the risk of financial instability (asset and credit bubbles)

Causes of lower potential growth

• Demographics: ageing in DM and EM• High debt ratios that slow spending• Fall in corporate capital spending (global

investment slump)• Hysteresis: the cycle affects the trend• Rise in income/wealth inequality• Slow structural reforms• Persistent global savings glut

Causes of actual growth below potential

• Great deleveraging high private and public debt and deficits: first US/UK, then Europe/Eurozone, now emerging markets

• Wrong policy mix: too much monetary policy, too little fiscal policy

• Asymmetric adjustment between creditors/savers and debtors/borrowers in a way that creates a global savings glut and a global investment slump

Explanations of the low productivity puzzle

• Technological pessimism (Gordon)• Ongoing deleveraging (Rogoff)• Lag between innovations and their spread from tech to

other sectors (B2B, B2C)• Mismeasurement of productivity as many

goods/services/apps are free and as true prices of software is not properly measured

• Firms that shed work after the GFC are ramping up hiring now for a while

• Low skills and human capital of many workers who are not prepared for this globalized digital economy

Trump policies• Trump’s election led initially to a rally in US equities, a rise in long rates and

the dollar based on expectations that his policies (tax cuts, infrastructure spending, deregulation) will lead to higher growth and more profits for the corporate sector

• But some of his policies may hurt economic growth (protectionism, restrictions to migration, micro-managing the corporate sector, excessive fiscal stimulus)

• Markets overestimated initially the potential positives and underestimated the negatives.

• Now a market re-assessment: fixed income and currency markets are now more skeptical about the stimulus and the rise in US growth

• While the stock market is still moving higher as his expected policies appear to be supportive of the business and corporate sector.

• But US equity valuations may be stretched (based on the Shiller CAPE criterion)

The global economy after the global financial crisis (GFC)

• The economic recovery after the GFC was two-speed:• Anemic, sub-par, below trend in DM (US, EZ, UK,

Japan): U-shaped• Strong with return to potential or above trend in most

EM: V-shaped• Why V-shaped in EM?

– Less balance sheet problems of too much private and public debts. Cleanup after EM crises of the 1990s

– Higher potential growth (5% in EM vs 1-2% in DM)– More room for policy response

Why U-shaped Recovery in DM?

• The 2008-09 crisis was not a plain vanilla recession• It was a recession caused by a financial crisis. And a

financial crisis caused initially by too much debt and leverage in the private sector (households, banks and some corporates); and then during the crisis by a surge in public debt and deficits

• History and theory suggests that recovery from balance sheet crises is anemic for up to a decade: you need to spend less and save more (dissave less) to reduce debt and leverage over time. Thus, an anemic recovery.

• Actually, a double dip recession in some DM (EZ, UK, Japan)

How did we avoid a Great Depression 2.0?

• During the GFC (btw the collapse of Lehman and mid-2009) global economic activity was falling at a speed similar to the beginning of the Great Depression

• The Great Recession of 2008-09 could have ended up into Great Depression 2.0.

• What avoided that? Learning the lessons of the Great Depression and avoiding policy mistakes– Large conventional/unconventional monetary easing– Massive fiscal stimulus for a while– Backstop and bailout of the private sector (financial system,

households, corporations)

Side effects of the massive policy response during the GFC

• The massive monetary/fiscal/bailout response during the GFC was necessary to avoid another depression

• But it has led to lingering problems:– How to exit from ZIRP, QE, CE, FG?– How and how fast to reduce fiscal deficits and

debts that may be unsustainable?– How to deal with the moral hazard that bailouts

have induced?

Do you want to be Keynesian or Austrian following a financial crisis?

• Keynesian approach: provide monetary & fiscal stimulus and bailout the private sector as otherwise the recession can lead to a depression as self-fulfilling panics and runs occur while private demand is collapsing

• Austrian approach (“Austerian”): front-load the adjustment/reform and restructure balance sheets and P&Ls. Don’t bailout as you postpone financial and operational restructuring and you cause moral hazard: zombie banks, households, governments

• Austrian approach was tried in the 1930s (no monetary/fiscal stimulus and allow banks to collapse) and led to Great Depression. “Liquidate liquidate!”

• Bernanke learned the lessons of the Great Depression

Do you want to be Keynesian or Austrian following a financial crisis?

• In the short run you want to be Keynesian as you want to avoid panic, animal spirits, runs and illiquidity to lead to a collapse of the private sector. Public demand has to substitute for collapsing private demand. Rescue illiquid but solvent agents.

• In the medium-long term you want to be more Austrian and do true economic and financial restructuring as, otherwise, you can zombify the economy and reduce long term growth

• Are problems of illiquidity or insolvency?

These debates – Keynesian vs Austrian- are still ongoing today

• Growth versus austerity debate• Front load fiscal austerity (as in EZ and

UK) or back load it (US, Japan)?• Be very aggressive in monetary easing

(US and Japan) or less aggressive (UK, EZ)?

• Bailout banks and recapitalize them fast (US) or go slow (EZ, UK)?

Empirical evidence on appropriate policy response

• US avoided a double dip recession and is growing at a 2%+ rate (output above pre-crisis level). Now even Japan is growing better

• UK grew more strongly after anemic recovery• EZ had a double dip recession and is now weakly

growing:GDP still close to pre-crisis level• What explains this relative performance?

– Relative monetary easing stronger in US/Japan/UK– Front load or back load of fiscal consolidation– Backstopping the financial system and recapitalizing the

banks early on to avoid a severe credit crunch

Recent Reversal of DM vs EM Growth Fortunes

• In 2010-2012 slow, anemic growth in DM (U-shaped), strong growth in EM (V-shaped)

• In 2013-16:– Signs of somewhat stronger growth in DM

(US, UK, less so in EZ and Japan)– Sharp slowdown of growth in EM and financial

pressures on EM markets

Why growth is recovering in DM?

• Deleveraging of private and public sector balance sheets has been ongoing for 7 years.

• New rounds of unconventional monetary policies in the U.S., Japan (QE and FG) and even in the EZ and UK (QE, CE and FG)

• Bailouts of banks and sovereigns in the EZ avoided a worse crisis and EZ break-up.

• Global tail risks are now lower• The massive monetary stimulus has led to asset

reflation (equity, housing, lower bond yields) that boosts confidence and increases demand

Why DM recovery could remain uneven?

• Deleveraging not over as debt ratios remain high

• Slow structural reforms• Risk of a secular stagnation• Easy monetary policies are becoming less

effective and some are phased out• Lack of proper fiscal policy stimulus• Policy, political and regulatory uncertainties

DM outlook

• Differential in growth rates are now lower between US, EU, Japan and UK

• Inflation below 2% target in DM given still slack in goods and labor markets

• But inflation weaker in EZ and Japan relative to US/UK given differential growth recovery

• Risk of asset/credit inflation/bubbles?• Exit from zero rates faster in US/UK than in

EZ/Japan where QE continues

Why slowdown of Growth in EM and Financial Pressures?

• Strong growth in EM in the last decade (2003-2013) was due to structural factors and cyclical/luck ones

• Structural:– 1st generation structural reforms (trade liberalization,

openness to FDI, privatizations, opening of the economy)– Sounder monetary and fiscal policy and stronger balance

sheets after the EM crises of the 1990s• Cyclical:

– China boom (10-11% growth)– Commodity super-cycle (partly because of China)– Super-easy monetary policies in DM after 2009. Zero rates and wall

liquidity searching for yield

Why slowdown of Growth in EM and Financial Pressures?

• Why slowdown in 2013-16 then?• 2nd generation reforms did not occur (micro ones that increase

competition and productivity)• Move away from market oriented policies towards state

capitalism• Some laxity in monetary and fiscal policy as liquidity was

abundant, interest rates too low and credit excesses• End of luck as:

– China is slowing and becoming less resource oriented– The commodity super-cycle is over– However, gradually the Fed is exiting 0% rates. US bond

yields up from 1.6% to 2.9% after May 2013 taper tantrum

Which EM will suffer the most?

• Some EM have stronger macro, financial and policy fundamentals and some have weaker ones

• Weaker ones include countries with large current account deficits, large fiscal deficits, falling growth, commodity exporters, rising inflation, socio-political protest and upcoming elections

• Weaker group includes the Fragile Five: India, Indonesia, Brazil, Turkey, South Africa

• Other fragile EM include China, Russia, Argentina, Venezuela, Malaysia, Ukraine

Will some EM experience a severe financial crisis?

• Compared to the past even the weaker EM (fragile five) have some positives:– Flexible exchange rates rather than fixed ones that

could collapse– A war chest of forex reserves to avoid liquidity runs on

banks, currencies and governments– Less currency mismatches and liability dollarization– Lower private/public/external deficits and debts: less

solvency risk– Better regulated banks and financial systems

Will some EM experience a severe financial crisis?

• But the weaker EM have some negative risks• Ugly policy dilemma:

– If you tighten monetary policy to avoid currency free fall and inflation, you kill growth and damage banks/corporations. So tight money is not credible.

– If you loosen monetary policy to boost growth, there is the risk of an inflationary free fall of the currency and risk that foreigners will not finance your external deficit. If you thus loosen monetary policy you may lose the nominal anchor of the economy and thus cause a free fall

– So damned if you do and damned if you don’t.

Fragile EM in 2014-16• Jan-Feb 2014 EM pressures: Argentina, Turkey,

Thailand politics and China scare• Market pressure abated after February 2014 as many

fragile EM tightened monetary, credit and fiscal policy. Markets rally that year.

• But macro and structural adjustment was still partial in fragile EM

• New bout of severe EM volatility in EM in spring-summer 2015 as China hard landing risk rose and led to a fall in commodity prices while the Fed was signaling exit from ZIRP

Medium term optimism for EM in spite of short run pressures

• Medium term positive trends in EM:– Urbanization– Industrialization– Population growth– Per capita income growth– Rise of middle classes and consumer society

• A larger share of global GDP and growth in EM• High potential growth given by:

– Demographic dividend (high population growth)– 2nd generation reforms will boost competition and productivity– Ability to absorb existing and new technologies developed in DM– Technological innovation in some EM (Korea, China, India, etc)

Will the DM recovery soon lift the growth in EM?

• Optimistic viewpoint: the strong recovery of DM growth will soon lift – via trade channels – the growth rate of EM (recoupling)

• Three reasons to be partially skeptic:– The recovery of most DM will be somewhat anemic (EZ,

Japan, US, UK).– EM have some fundamental macro and structural problems

that will take time to resolve. So DM and EM may decouple – If the DM recovery will be stronger the Fed may exit zero

rates faster and that will hurt the weaker EM while benefitting the stronger ones via trade links

US growth is improving in 2017 after a rocky start

• U.S. economy is in a tentative improvement growth acceleration

• After a weak Q1, Q2 growth seems stronger (3%)• Latest data on GDP, labor market, consumption,

investment, net exports are better if mixed• Unemployment rate falling because of fall in labor force

participation rate and stronger job creation• Fiscal drag is modest now• The rise in long rates in 2013 given taper talk crimped

growth of interest sensitive sectors (housing, capex); but in 2014-17 long rates have fallen. Why?

Causes of US growth acceleration

• More advanced deleveraging, easy Fed policies, positive asset reflation, less global tail risks

• Shale gas and oil revolution• Re-shoring of energy intensive manufacturing• Stronger labor market with job creation• Strong P&L and balance sheet of corporate

sector and banks

Some lingering US risks• Structural reforms are not occurring• Gridlock in Congress and partisanship• Trump political and policy uncertainties• Some households and young are still fragile income-wise

and debt-wise• Could inflation rear its ugly head?• Implications of the rise in inequality• Can economy sustain the rise in short & long rates as the

Fed exits & debt ratios are still high?• Risk of credit/asset bubbles as Fed exit is slow. Will

macro-pru work?

The Macro-Pru Debate• After GFC central banks care both about economic stability (strong

growth with low inflation) and financial stability• Easy money justified by slow recovery has led to asset reflation that can

end up in asset bubbles• Fed view: two targets and two instruments: monetary policy for economic

stability and macro pru for financial stability/avoiding bubbles• But macro-pru may not work as untested and hasn’t worked in the past:

only instrument that enters in all cracks of the financial system is the interest rate instrument

• If macro pru doesn’t work: damn if you do and damn if you don’t as:– Slow exit given weak recovery could cause the mother of all boom/bubbles that will

eventually go into a bust/crush– OR:– If macro pru doesn’t work and monetary policy is then used to prick the bubble risk of

a bond market rout and hard landing of the real economy

Eurozone outlook: less tail risks but fundamental problems unresolved

• The recovery of the EZ after the GFC was weaker than in the US given weaker policy stimulus

• The EZ relapsed in a double dip recession in 2011-2013• The periphery of the EZ entered a severe financial crisis

with serious sovereign risks. Seven countries in trouble and five bailed out (Greece, Ireland, Portugal, Spain, Cyprus)

• Problems were initially in the private sector in Spain and Ireland; in the public sector in Greece, Portugal and Italy

• Doom loop between the EZ banks and the sovereigns• At the peak of the crisis in summer of 2012 risk of Grexit,

EZ break-up, loss of market access by Italy and Spain

EZ tail risks are lower today

• EZ tail risks are lower today thanks to:– Draghi’s “whatever it takes” committment– OMT program– ESM fund on top of EFSF and EFSM– Beginning of a banking and fiscal union– Start of ECB QE in 2015 and then NIRP– Germany realizing that EZ is also a political project

that requires patience: avoid Grexit– Austerity and reforms supported by bailout funds,

both fiscal and monetary (ECB)

Some Positives in the EZ Today

• Return to growth even if recovery is anemic/uneven• ECB’s QE, NIRP and Credit Easing; lower euro, lower

long rates, higher stock prices; lower oil price since 2015• A lot of fiscal adjustment is done and less fiscal drag

ahead. EU accepted fiscal flexibility• Beginning of structural reforms in periphery• Internal devaluation (fall in Unit Labor Costs to increase

competitiveness) in some periphery• Austerity/reforms in exchange of liquidity and bailout

funds holding politically.

The Negatives in the EZ

• Low potential growth given slow reforms• Recovery after recession is fragile/weak/uneven. • Public and private debts are still high and rising. Debt

sustainability issue• Loss of competitiveness has not been fully reversed.

Improvement in trade balances is partly cyclical (recession)

• Still recovery of credit after credit crunch• Still fiscal drag even if if diminished• Political risks given rise of populism

The Negatives in the EZ

• EZ is still at risk of near deflation• A monetary union requires a banking, fiscal,

economic and political union to be viable in the long run

• Some limited progress on the banking union• Austerity fatigue in the periphery and bailout fatigue

in the core• Political risks in core & periphery still significant• ECB only game in town as fiscal policy is constrained• Brexit contagion to EU integration?

“Draghinomics” looks like Abenomics

• Draghi: Slow growth depends also on aggregate demand not only on supply constraints (slow reforms)

• Three arrows: QE and CE; fiscal stimulus in short run with continued medium term consolidation; structural reforms

• ECB does its share: QE, NIRP and CE• The fiscal stance will remain too restrictive• Asymmetric adjustment of EZ continues• Structural reforms are too slow

Abenomics is only partially working in Japan but many risks remain

• Abenomics has partially worked:– Deflation ending– Growth picking up– Yen weaker and stock market stronger

• Open issues:– Will Abe win the snap elections?– Will structural reforms and trade liberalization that increase

potential growth be implemented faster?– The rise of the consumption tax in 2014 led to Q2 negative

growth; now the 2017 hike has been delayed– Is Japan’s public debt sustainable in the long run?– For how long will the BoJ continue its QE and NIRP policies?

China: Hard landing or soft landing?

• Will China experience a soft landing or hard landing or a bumpy/rough landing?

• China’s growth is unbalanced/unsustainable: too much savings, investment & exports; too little consumption

• Will the structural reforms be implemented fast enough after the Party Congress to rebalance growth?

• Reforms are slower than optimal and desirable as leadership is divided and resistance to change

• Will the stock market and RMB crack again?• Growth may slow down to 5% by the end of the decade given

lower trend growth• Will Prez Xi try to stay in power longer than 10 years?

Major E’s in the global economy: The 2010-2016 period

• Economy• Energy and oil prices• Exchange rates and external imbalances• Euro/Eurozone/ECB• Emerging Markets• East as Middle East• East as East Asia• Earnings/Equity markets

Economy (global) during the Global Financial Crisis (GFC)

• The US and the global economy experienced in 2008-2009 their worst recession in decades

• The housing and mortgage bust led to an economy wide recession in the US as there were spillovers of the housing recession to other sectors of the economy (autos, manufacturing, consumer durables)

• The liquidity and credit crunch that started in the sub-prime mortgage market spread to all credit and financial markets as this was not just a sub-prime problem: sub-prime, near prime and prime mortgages, commercial real estate mortgages, credit cards, auto loans, student loans, leveraged loans

• Also the US consumers (consumption is 70% of aggregate demand) were shopped-out, saving-less and debt-burdened

Economy (in the GFC)• This was both a liquidity crunch and a credit crunch the driven by

serious solvency problems given over-leverage of households, financial institutions and parts of the corporate sector

• The myth that the rest of the world could decouple from the US recession was shattered in 2008: there was massive re-coupling first in financial markets and then in the real economy. Recession in most advanced economies (US, Eurozone, Japan); recession or massive growth slowdown in emerging market economies)

• The Great Recession of 2008-09 bottomed out in late 2009 when most economies started to recover. But the recovery in DM since then was been anemic, sub-par, below trend, a U-shaped recovery. Stronger in 2016 as deleveraging more advanced?

Causes of the housing/credit bubble and bust/crisis

• Easy monetary policy (the Fed tightened too little too late)

• Lax supervision and regulation of the financial system• Excessive risk taking and leverage of the financial sector

given distorted incentives• Global current account imbalances and global savings

glut• Irrational exuberance and animal spirits leading to

bubbles• Government subsidization of housing (tax benefits, role

of Fannie and Freddie, Community Reinvestment Act)• Distorted incentives of rating agencies

Energy• US/global recessions have been associated with oil price spikes

(1973-74, 1979-80, 1990-91, 2000-2001).• In 2008 oil prices spiked again. This increase in oil prices was not

driven by economic fundamentals but, in part, by speculation• The high oil prices were one of the factors that triggered the

global recession as they represented a negative terms of trade and real disposable income shock for oil importing economies (US, Eurozone, Japan, China, etc.)

• Once the global recession emerged oil, energy, commodity prices collapsed (oil down to $30).

• Later oil prices recovered and till 2013 they were around $100 as the global recovered.

• But in 2014-15 oil prices crashed given supply shock (shale revolution) and weak demand

• Impact of low oil on growth and inflation

Exchange rates and External imbalances

• The strength of the U.S. in the 1990s relative to Euro, Yen and other currencies led to a large a growing current account deficit in the US as the US lost competitiveness

• After 2000, the US current account deficit worsened further as the fiscal deficits mushroomed (“twin deficits”) and as the private savings rate sank close to zero

• This led to the debate on whether this current account deficit was sustainable or was going to lead to a crash in the value of the US dollar and/or a spike in US interest rates (dollar hard landing)?

• The dollar started to decline in 2002-2004, especially relative to the Euro, but then it sharply appreciated again in 2005 as interest rates and real growth differentials favored the $ relative to the euro and the yen.

• But the dollar resumed its fall in 2006-07 when the US had a growth slump, a financial crisis, and the Fed cut the Fed Funds rate starting in the fall of 2007

Exchanges rates and External imbalances

• The global current account imbalances were one of the causes of the global financial crisis

• The dollar started to appreciate during the financial crisis of 2008 as panicked investors were seeking the safety of dollar assets. When risk is off the dollar goes up

• The US trade deficit also started to shrink as the fall in consumption led to a fall in imports. But was this improvement mostly cyclical or structural? Is shale gas a game changer for the U.S. external balance?

• The risk of a dollar crash if foreign investors – who financed the US twin deficit & became concerned about the sustainability of such deficits – is now lower as the US twin deficits have been shrinking

• The dollar rose rapidly since mid 2014 as growth recovered and the Fed is expected to exit ZIRP. Impact on growth and inflation

• But since the election of Trump the dollar has weakened

Europe/Euro/ECB (2000-2012)• Growth was sluggish in Europe in the 1990s relative to the

U.S. given structural impediments to growth• Recovery of European growth after 2005• The Euro showed significant weakness relative to the US

dollar until mid 2002 as the Eurozone growth was weaker than US growth.

• The Euro then sharply appreciated until the end of 2004 (by about 40%), and again in 2006-07 (after a brief dollar rally in 2005)

• During 2008 not only Europe did not decouple from the US crisis but the recession in the Eurozone was more severe than in the US

• This was in part due to the fact that the policy easing in Europe (monetary and fiscal) was not as aggressive as in the US

Europe/Euro/ECB• Fiscal stimulus in Eurozone was weaker because many of the

member countries start from large fiscal deficits, large stocks of public debt and banks that are too big to fail and too big to be saved

• ECB easing during and after the GFC was weaker than the one of the Fed as the ECB has a single mandate of price stability.

• The recovery of growth in the EZ was even more anemic than the one of the US given less easy monetary policy, early fiscal tightening and unresolved bank problems

• Sovereign debt problems in the EZ and the EZ crisis• Potential growth for the Eurozone is low – 0% to 1.5% in the

periphery - and possibly falling because of structural rigidities. EZ at risk of near deflation now.

• What are the prospects for structural reforms in Europe?• Will the recent EZ growth pick-up since 2016 continue?

Emerging market economies (2000-2013)

• Emerging market (EM) economies experienced many economic and financial crises in the 1994-2002 period

• 2001 was a dismal year for emerging market (EM) economies. The slowdown of growth in US and G7, the tech bust and the reduction of flows of capital to emerging markets led to a sharp slowdown of growth in many emerging markets.

• Outright currency and financial crises emerged in Turkey (February 2001) and Argentina (December 2001). In 2002, severe pressures mounted in Uruguay and Brazil; Uruguay experienced a severe financial crisis in 2002; Brazil barely escaped a financial crisis as elections loomed in late 2002 but then it recovered after Lula followed moderate policies.

Emerging market economies• Emerging market (EM) economies’ growth recovered sharply in 2004,

especially in Asia but also in Latin America. Important role of macro and financial reforms after the EM crises in this growth recovery

• 2004-2007 were excellent years for EMs as global conditions were ideal: global growth was high, global interest rates were low, commodity prices were high and global investors’ risk aversion low (search for yield).

• The financial crisis to a massive re-coupling – financial and real - of emerging markets with advanced economies: many emerging markets entered a recession and others had a massive growth slowdown.

• Financial and economic crises in Emerging Europe• The recovery of growth in some emerging markets – China, India,

some other parts of Asia, Brazil and parts of Latin America – was earlier and faster than advanced economies as their macro and financial fundamentals are robust. A V-shaped recovery

• But in 2013-15 many EM faced slowdown. • Recovery of growth and markets in EM since 2016. Resilient?

East as in Middle East• Oil prices are low today given the shale revolution.• But turmoil in the Middle East (the Syria and Iraq security

situation; the Arab Spring; tensions between Israel and its neighbors) could affect oil prices if the fear premium rises following threats to supply.

• The Middle East is an arc of instability that goes from the Maghreb all the way to Af-Pak.

• The Middle East and oil prices have been a major source of geo-political tension on global markets.

• Previous US and global recessions have been associated with stagflationary oil price shocks

• But so far markets have ignored the geopolitical risks in the Middle East? Why? Will this change or not?

• What is the outlook for oil prices? Will they remain low?

East as in East Asia• China experienced rapid economic growth and overheating in

the 2003-2008 period• The GFC led to a massive growth slowdown in China in the fall

of 2008. But the aggressive policy reaction of China led to a robust growth recovery. But China risks now a hard/rough landing unless it changes its growth model fast enough

• India’s dynamism in IT contributed to high growth in last decade. But India now faces severe fiscal problems and need for major structural reforms. Growth slowed down sharply after 2012. Will the new Modi government accelerate reforms to boost growth?

• East Asia growth strongly depends on China and the US. A number of Asian EM may be at risk given China

• Japan’s recession in 2008-09 was very severe and the recovery anemic. Will now Abenomics work or not?

• Asia geopolitical tensions: Will China rise peacefully?

Earnings/Equity markets (2004-2009)

• Equity markets in the US and globally did well in the 2006-2007 given high global economic growth

• High earnings growth, much improved corporate balance sheets, easy monetary conditions supported equities

• Profits sharply increased as a share of GDP • But during the recent global financial crisis US and global

equities sharply fell (by over 50% btw the fall of 2007 and March 2009) with a bear market that experienced a number of bear market rallies.

• Since March 2009 a massive rally in U.S. and global equity markets (over 150%). Is it excessive and at risk of a significant correction or bound to rise further?

• Some disconnect between slow recovery of the real economies and rapid rise in equity prices.

Earnings/Equity markets (2010-2017)

Background on US equity markets in the 2000-2017 period:• The U.S. and global economic slowdown in 2001 led to a sharp slowdown of earnings and

underperformance of equity markets (on top of the dotcom bust and Nasdaq collapse in 2000). • Equity markets also underperformed in 2002 as the stock market rally after the 9/11 drop was

excessive and based on overoptimistic expectations of growth. • Stock markets slumped again in the first quarter of 2003 as the concerns about a war with Iraq

led to renewed risk aversion. • But they then recovered sharply after the war in 2003 as markets started to expect a sustained

economic recovery and a sharp pick-up in profits and earnings. • But stock indexes remained mostly flat on average in 2004 and even in 2005 and 2006 (with

only a modest uptrend since 2004) even if corporate balance sheets have improved sharply (with debt de-leveraging) and earnings growth has been sustained in 2004-2006.

• Equity markets – in the US and abroad – rallied sharply in 2006-2007• Bear market in equities starting with the financial turmoil in the fall of 2007• Bottom of the bear market in March 2009 and then rapid recovery through 2014 with some

episodes of risk off followed again by risk on.• In 2013 sharp rally of US equities that continued at a slower pace in 2014. • Is the US stock market overvalued? Will a correction occur or will it continue to trend up and

by how much in 2017 and beyond?• Trump’s election led to another leg up in US equities as his policies are expected to be

business friendly; but valuations looks stretched

Linkages between the U.S. and the rest of the world occur via various channels

• Trade• Capital flows and FDI (Europe, Japan, Emerging

markets)• Value of the US dollar • US monetary and fiscal policy • Global stock markets and financial links • Developments in oil and commodity markets • Political shocks and risks• Global investors and corporate confidence

Fed policy: 2000-2017• The Fed reduced the Fed Funds rates 11 times in 2001, by

475pbs to a rate of 1.75% as the economy entered a recession. • Faltering in the US recovery in the fall of 2002 led the Fed to cut

the Fed Funds again, down to 1.25% in November 2002 and down to 1% in June 2003 as a jobless recovery emerged during the war with Iraq.

• In 2004, as growth of output and jobs picked up and inflation started to increase, the Fed started to increase the Fed Funds rate in 17 consecutive steps bringing it to 5.25% by June 2006 and then pausing in August 2006.

• The risk of a US hard landing and the market turmoil in the summer of 2007 led the Fed to cut rates starting in the fall of 2007 from 5.25% to effective 0% in 2008

• QE in 2008-13 during/after the financial crisis: unconventional monetary policy. QE tapering started in Degc 2013. ZIRP exit in 2016 and 3 hikes since then.

US fiscal policy since 2008• Fiscal stimulus in 2008 as the economy entered a recession• As second $900 billion fiscal stimulus legislated in early 2009• Deficit for 2009 rose to be $1.4 trillion but is now much lower ($450

bn) or 3% of GDP in 2015• Fiscal path – deficit and debt - is clearly unsustainable as over the

next decade deficits will rise again unless entitlement spending is reformed (Social Security and Medicare)

• Difficult issue of when to exit from the fiscal stimulus. The U.S. postponed till 2012 but serious fiscal drag in 2012-13 given spending cuts/sequester and rise in taxes

• 2013 showdown on government shutdown and debt ceiling• Will fiscal fights in Congress resume in late 2017 on debt ceileing and

government shutdown?• How large will the Trump fiscal stimulus be (tax cuts, infrastructure

and defense spending) and how much will it increase the deficit?

Global current account imbalances• Are the global current account imbalances (still large deficit in the US

and fragile EM, large surpluses in Europe, China and some emerging market economies) sustainable over time?  

• Is the US current account deficit and external debt accumulation sustainable? It is shrinking but maybe too slowly?

• Will the adjustment of global imbalances be orderly or disorderly?• Is the global current account adjustment to asymmetric as deficit

countries need to retrench while surplus countries aren’t reducing their surpluses? Is this deflationary for the world?

• How will the major currencies ($, Yen and Euro) perform? Will the dollar weaken or strengthen over time?

• Is the recent 2104 dollar strength sustainable and how will it affect the US external balance, growth and inflation?

• Is the risk of a hard landing of the US dollar - especially if the foreign creditors of the US get tired of financing the US twin fiscal and current account deficits – reduced as the twin deficits are now smaller?

• Will EM with external deficit experience a sudden stop/crisis?

Global deflation or inflation? and commodity prices

• Until 2007 and early 2008 there was concern about global inflation as global growth was robust, emerging market economies were overheating and experiencing double digit inflation (30 plus countries) and as commodity prices were rising

• But once the US recession became global in the second half of 2008 serious deflationary pressures emerged in the global economy because of slack in goods markets, slack in labor markets and sharply falling commodity prices

• By spring of 2009 economies experiencing actual deflations included US, Eurozone, Japan, China and a number of other advanced economies and emerging markets

• Will inflation return as the global economic recovery may accelerate in 2017 and beyond? Or are disinflationary forces stronger?

• Will inflation surprise to the upside in the US and cause the Fed to be behind the curve regarding exit from zero rates?

• Should we worry more about inflation or about deflation and over which time horizon should we worry more about one or the other?

• Is the commodity super-cycle really over and why?• Why is inflation still so low in US and other advanced economies?

Some of the cutting edge issues (and jargon terminology used) in international macro policy debates

• Why did the subprime crisis lead to a wider credit crunch?• Was the crisis due to a liquidity crunch or a credit crunch/solvency

crisis?• What is the risk of a another systemic crisis and what factors trigger

one?• What causes asset bubbles? What causes housing bubbles and bust?• How should monetary policy react to asset bubbles and asset bubbles

bursting? Should central banks address bubbles with a rise in interest rates or via macro-prudential supervision and regulation?

• Should we worry about deflation or inflation?• How will central bank exit unconventional monetary policies (ZIRP, QE,

CE, FG, NDR)?• What is the risk of sovereign debt crises in developed markets?• Why is income and wealth inequality rising and what is the impact of it?• Are advanced economies at risk of secular stagnation and why?

Some of the cutting edge issues in international macro policy debates

• Should we worry about stagflation or stag-deflation?• Are global external imbalances sustainable or not, and for how long?• Are twin fiscal and current account deficits sustainable in DM and EM?• Should we worry about asset protectionism and restrictions to FDI?• Should we worry about capital controls on inflows and outflows?• Should we worry about resource protectionism?• What is the future of offshore outsourcing?• Is the trade liberalization Doha round as dead as Dodo?• Is free trade compatible with flexible exchange rates or does greater

trade integration require managed or pegged exchange rates?• Is globalization at risk of reversal?• Should we be optimist or pessimist about the pace of future

technological innovation?• Will robots/automation replace most jobs?• What explains the rise in inequality and what can we do about it?

Some of the cutting edge issues in international macro policy debates

• Are highly-leveraged institutions and hedge funds a source of systemic risk?

• What is the risk of new asset and credit bubbles?• Is housing frothy and bubbly in some economies?• Will macro-pru be effective in ensuring financial stability or not?• Is offshore outsourcing a threat or a benefit for the global economy?• Will the BRICs dominate the world economy in the next decades?• Is the balance sheet approach the appropriate framework for

thinking about financial crises in emerging economies?• Are crises due to fundamentals or self-fulfilling liquidity runs?• What explains sudden stops and reversals of capital inflows?• What explains the joint eruption of currency, sovereign debt,

systemic banking and systemic corporate crises?      

Some of the cutting edge issues in international macro policy debates

• What is the appropriate form of PSI/bail-in/burden-sharing in crisis resolution?

• Do we need an international lender of last resort (ILOR)?• What explains international contagion?• How to deal with liability dollarization and original sin?• Do we need an international bankruptcy regime for sovereigns?• What is the most desirable sovereign debt restructuring mechanism?• Do emerging markets suffer of fear of floating and if so why?• Is unilateral dollarization the way of the future?• Are monetary unions feasible without broader banking, fiscal, economic and

political unions?• Is sterilization of excessive capital inflows feasible and desirable?• What is the desirable reform of the international financial architecture?• Will the US dollar remain the main global reserve currency?• Will the Chinese RMB emerge as a major global currency?

Sources of International Macroeconomic Interdependence

among Economies • “Macroeconomics” is “international” given the

increasing economic interdependence among countries and the increased globalization of trade and finance.

• Trade links: – Income effects on imports and exports of goods

and services– Direct and indirect trade links– Exchange rate effects on trade

Financial channels of interdependence

•  Assets/Liabilities traded internationally– Stocks– Bonds– Derivative instruments (in the GFC)

•  International financial markets/intermediaries:– Banks– Capital markets (stock/bond/money markets)– Foreign exchange markets– Commodities markets

Interdependence channels via common shocks and FDI/MNCs

• Common sectoral/external shocks– Common oil and commodity shocks– Tech sector technology shock in the mid 1990s and

bust in 2000-2001– Housing bubbles in the US and other countries; and

their bust in 2007-09– Global credit crunch

• Foreign Direct Investment (FDI)/ Multinational Corporations (MNCs):– Real investment (FDI, M&A)– Output/production location decisions

Interdependence via Policy Links

• Domestic effects of macro policies• International effects of domestic policies if a country is large

(US, Europe, Japan)– Global financial contagion of 2008-2009– Financial contagion from China risks in 2015

• International effects of domestic policies even if a country is small (international contagion):– Mexico Tequila effect in 1995– The Asian fever/flu– The Russian virus (contagion to emerging markets – Brazil, LatAm -

and advanced markets – LTCM & US capital markets)– The Turkish influenza in 2001– Greece, Iceland, Cyprus in 2010-12– Grexit risk in 2015

 Many Financial Crises in Emerging Markets and G7 Economies in the last two decades

• Currency/Financial Crises in Emerging Markets:– 1980s debt crisis in Latin America– Mexico, East Asia, Russia, Brazil in the 1990s; – Turkey and Argentina in 2001; Uruguay in 2002; Brazil mini-

crisis in 2002; Dominican Republic in 2003– Market turmoil (mini-crisis) in EMs in May-June 2006– Massive contagion of US financial crisis of 2008-2009 to

emerging markets economies markets and economic growth. Avoidance of outright financial crises given stronger fundamentals

– EM mini crisis of 2013-15? Is China at risk of a hard landing?

Crises and financial stresses in Advanced/G7 Economies

• S&L crisis in US in early 1990s• Corporate/Banking crisis in Japan in 1990s after bursting

of the 1980s asset price bubble• European Monetary System (EMS) currency crisis in

Europe in 1992-93 (Italy, UK, France, Sweden)• Banking crisis in Finland and Sweden in early 1990s• Bond market crash in the US in 1994 as the Fed

unexpectedly tightened monetary policy.• Sharp fall of the value of the US dollar in 1994-1995• LTCM crisis in 1998 and seizure of U.S. capital markets

Crises and financial stresses in Advanced/G7 Economies

• Bursting of the US asset price bubble in equity markets in 2000-2002; IT and dot.com crash.

• US corporate and accounting scandals in 2002-2003 (Enron, Sarbox legislation, etc.)

• GM-Ford downgrade in 2005 and turmoil in credit derivatives markets

• Equity market turmoil in the spring of 2006 during the “inflation scare”

• Housing bust and sub-prime crisis in the US (2006-2008)• US and global financial markets turmoil and volatility starting in the

summer of 2007 • Global financial crisis and recession of 2008-2009• Eurozone crisis of 2010-2013• Risk of new asset/credit bubbles in 2014-17 & beyond?

Major macro and financial events of the last 30 years: Advanced Economies

• 1987: Greenspan becomes chairman of the Fed. Stock market crash in the US in 1987.

• S&L (Saving and Loans) financial crisis in the late 1980s; evidence of a “credit crunch” in the US.

• US and global recession in 1990-91 during the Gulf War.• Persistent stagnation of Japanese economy in the 1990s (4 recessions in the

1990s decade) after the bursting of the 1980s asset bubble• Currency crisis in the European Monetary System in1992-93• European Monetary Union (1999 introduction of Euro) and mediocre

economic/growth performance of Europe in the 1990s• Large swings in the value of G3 currencies ($, Yen, Euro)• Global financial crisis in 1998 following Russian crisis and LTCM collapse• “New Economy”, internet and technology boom: the U.S. boom years (1995-

2000): high growth, low inflation, high productivity growth, low unemployment rate, boom in equity markets, budget surpluses, strong dollar, large current account deficits.

• Bust of the IT bubble in 2000-2001; sharp fall of investment leading to economic slowdown in the US.

Major macro and financial events of the last 30 years: Advanced Economies

• The oil shock in 2000 contributing to the global slowdown• Fed tightening of monetary policy between mid 1999 and mid 2000 as the economy was

“overheating”.• US slowdown and recession and global slowdown in 2001; it started before 9/11 but was

exacerbated by it.• Third and final stage of EMU (“Euro” introduction) started in 2002. • A de facto “Bretton Woods II” regime since 2001 as China and Asia effectively pegged

their exchange rates to the U.S. dollar through aggressive foreign exchange intervention.• Tentative U.S./global recovery in early 2002 that slowed down in the spring and in the

fall. Slow growth in H1-2003 (given Iraq war uncertainty); U.S. and global recovery in second half of 2003 and Q1:2004 but with poor job growth (“jobless recovery”). Higher US and global growth in 2005-2006

• Bursting of the US housing bubble and a housing bust since mid 2006. Sub-prime mortgage crisis in the US (2007)

• US and global economic and financial crisis of 2008-2009• Anemic, sub-par, below trend U-shaped recovery in DM in 2010-2013• Double dip recession in Eurozone, UK and Japan in 2011-2012• Stronger recovery in some advanced economies in 2015. EZ recovery• Summer 2015 & early 2016 risk off shocks given China hard landing risks• Risk of new asset/credit bubbles as exit from ZIRP is too slow?

Major macro and financial events of the last 30 years: Emerging markets

• Latin American debt crisis (in the 1980s) and its solution (Brady Bonds) in the late 1980s and early 1990s

• Large capital flows to emerging markets in the 1990-95 period.• Transition to a market economy in Central and East European countries.• Mexican currency crisis in 1994-95• Asian currency and financial crisis (Thailand, Indonesia, Korea, Malaysia) in

1997-98• Russian financial and currency crisis (8/98) and its contagion to emerging

markets and advanced economies financial markets (LTCM)• Currency crisis in Brazil in 1/99• Financial turmoil and IMF rescue packages in Argentina and Turkey in

November-December 2000• Sovereign debt restructurings after partial/full default in Ecuador, Russia,

Ukraine and Pakistan in 2000-2001• Turkish currency and financial crisis in February 2001

Major macro and financial events of the last 30 years: Emerging markets

• Argentina currency and financial crisis and default of 2001-2002• Financial/currency crisis in Uruguay in 2002• Risk of a financial crisis in Brazil as October 2002 elections were looming.  Financial

recovery after the election. Weak economic performance of Latin America in 2003 with growth recovery in 2004-2005.

• Accession of 10 emerging markets (mostly transition economies) to the European Union in 2004.

• Rapid growth of emerging market economies in 2004-2006 on the back of macro/financial reforms and benign global conditions (high global growth, high commodity prices, low G7 interest rates). International investors rediscover emerging markets.

• Boom in commodity prices exported by EMs.• 2006-2007: Africa as the new EMs growth story and asset class?• Turmoil in EM financial markets in May-June 2006, especially for countries with external

vulnerabilities• Bubbly equity markets in EM especially in China, India and Gulf states• Contagion of the US financial crisis to emerging market economies in 2008-2009.• Strong V-shaped recovery of EM in 2010-2012 given stronger fundamentals• Slowdown and financial pressures in EM starting in 2013 and into 2014-15:slowdown of

China, end of commodity super-cycle, Fed talk about tapering, policies reducing potential growth

• Risks of financial crises in fragile EM in 2015-2017