Global Economic Watch

A Brief History of International Banking

02-08-2012 7:28 AM with no comments

At Liberty Street Economics, New York Federal Reserve economist Linda Goldberg provides the most succinct history of international banking we've seen.  Here it is:

Actually, she has a series of charts and explanations of key changes in banking since the 1800s.  The above chart gives the broad overview.  Goldberg calls the rise from 1860 to 1914 "the First Age of Globalization," in which increasing connectivity between nations brought about "large-scale capital investments (such as in railways), a deepening of global finance, and expanded prosperity."  The start of the First World War brought that all to a halt.  Goldberg:

World War I marks the onset of the second period—what economists Raghu Rajan and Luigi Zingales call “The Great Reversal of 1914 through 1939.” This period is characterized by financial collapse and the Great Depression. They forcefully argue that this episode shows that globalization is not an immutable economic force, and a backlash against it can be disastrous. Indeed, as the previous chart shows, after restarting briefly, financial integration again collapsed with World War II and recovered slowly thereafter.

Recognizing the importance of avoiding the mistakes of the interwar period, the Allies met in Bretton Woods, New Hampshire, in 1944 to create institutions to oversee the repair of the international financial system and to ensure trade and recovery among nations. This effort gave rise to the International Monetary Fund and the World Bank, and in 1947 to the General Agreement on Tariffs and Trade (in Geneva), which evolved into the World Trade Organization. The policy focus of these organizations was institution-building, recovery, and the financing of at least temporary balance-of-payment difficulties that arose at the sovereign level.

The last period—the “Second Age of Globalization”—spans roughly 1960 through the end of the twentieth century. The era is characterized by intense financial integration. One of the most frequently used metrics of international financial integration, depicted in the chart below, demonstrates this point. Constructed using data on international assets plus international liabilities relative to GDP, the metric shows a number of periods of accelerating financial integration.

How would you define the era from 2000 to 2008, and then the period we are in now?

Read How Has the Business of International Banking Changed? here.

Posted by Graham Griffith

Marketplace Whiteboard: IPOs Explained

02-08-2012 7:21 AM with no comments

With all the excitement over the pending Facebook IPO, Paddy Hirsch takes a step back to explain exactly what an IPO is.  And as only he can, he turns to some interesting characters to explain why companies turn to offering shares to the public.  In this case, he uses the three little pigs: 

Posted by Graham Griffith

IMF Lowering Expectations for Growth in China

02-06-2012 10:43 AM with no comments

The IMF released its economic outlook for China this morning, and the big takeaway is that IMF economists have lowered their expectations for economic growth. 

The Chinese economy has, once again, shown its resilience in the midst of a difficult external environment, buoyed by robust corporate profitability and rising household incomes. However, net exports will prove to be a significant drag on growth in the coming two years, with the current account surplus remaining at 3–4 percent of GDP. As a result, growth is expected to fall to 81⁄4 percent this year (from 9.2 percent in 2011), gathering speed in the latter part of this year and rising to 83⁄4 percent in 2013.

Here is a look at the IMF's GDP growth projections for China this year:

And here is one look at the importance of exports to China's economy:

While China weathered the Global Economic Recession of 2008-2009 relatively well, the big concern is that Europe's economic woes will hit China harder this time around.  Read the IMF's China Economic Outlook here.

(Hat tip Reuters)

Posted by Graham Griffith

Facebook Focuses on China for Future Growth

02-06-2012 8:43 AM with no comments

In case anyone was still wondering about Facebook's financial strength, last week's filing with the SEC in advance of the company's IPO revealed some staggering figures.  Here, from Statista, is a look at the company's revenue and net income over the last five years:

The SEC filing also reveals some of Facebook's plans for future growth.  And China is a big part of the future of Facebook.  Mark Zuckerberg and Facebook COO Sheryl Sandberg discussed Facebook's China goals with Charlie Rose back in November.  Here is an excerpt from that interview:

Watch the full interview here.

Posted by Graham Griffith

Christie's and Sotheby's are Booming

02-06-2012 8:12 AM with no comments

Many investors of all levels are looking for places to put whatever flexible income they have.  Other than the banks, that is, where the return on investment seems non-existent.  So where are the super wealthy putting their money during uncertain times?  According to The Guardian's Sarah Thornton, they are turning more and more to the high risk world of contemporary art, and high end auction houses are booming:

Fifteen years ago financial advisers were not in the practice of recommending that rich people diversify their portfolios by buying art. Now it is the norm. While buying emergent art is high-risk, speculative investment, acquiring established masterpieces is perceived as the opposite – a back-up in hard times. If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan, that rare, portable 1964 Marilyn by Andy Warhol will still be worth something.

The auction houses are fostering a globalisation of taste with the help of galleries with international outposts such as Gagosian, Hauser & Wirth and now White Cube. While wealthy Belgians used to spend their money differently from wealthy Indonesians, this is decreasingly the case.

During the contemporary sales that will take place in London on 14 and 15 February, bidders from four continents are likely to converge on many lots, including a classic red squeegee-blurred abstract painting by Gerhard Richter (estimated at £2.5m-£3.5m at Sotheby's) and a black and white canvas by Christopher Wool emblazoned with the giant word "FOOL" (expected to fetch £2.9m-£3.9m at Christie's). Both works are tipped to exceed their estimates. Christie's and Sotheby's are superlative marketers who are getting better at funnelling demand for objects by a small group of well-tested artist brands.

Read The art of recession-dodging here.

Posted by Graham Griffith

Unemployment Rate now 8.3%

02-03-2012 9:18 AM with no comments

The unemployment rate continues to edge downward.  The US economy added 243,000 jobs in January, dropping the unemployment rate to 8.3 percent, according to the Department of Labor.  The private sector added 257,000 jobs during the month.  Here's a look at the unemployment trends from the Bureau of Labor Statistics:

Here are some of the key data from other areas we like to track in the monthly jobs report:

The number of persons employed part time for economic reasons, at 8.2 million, changed little in January. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

In January, 2.8 million persons were marginally attached to the labor force, essentially unchanged from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 1.1 million discouraged workers in January, little different from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.7 million persons marginally attached to the labor force in January had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Read the full report from the BLS here.

Posted by Graham Griffith

OECD's Better Life Initiative and Moving Beyond GDP

02-02-2012 9:30 AM with no comments

Last year, the OECD launched a new initiative with the aim of moving beyond GDP as the key measurement of a nation's economic strength.  The Better Life Initiative is designed to come up with new ways of evaluating the overall economic health of a nation and its citizens.  OECD Secretary-General Angel Gurría narrates a short video to describe the progress of the initiative over the last 6 months:

The OECD now has an interactive chart that allows you to see where member countries rank in various categories:

Read more about the Better Life Initiative here.

Posted by Graham Griffith

Econbrowser: Rise in Capital Good Exports, and Overall Manufacturing Output, Since 2009

02-02-2012 8:46 AM with no comments

Menzie Chinn has a collection of useful charts at Econbrowser illustrating the state of manufacturing in the US.  Here's one, showing "cumulative changes in real exports vis a vis 2009Q2."

Chinn writes:

Clearly, export growth is decelerating -- not surprising given the collapse in trade volumes that took place during the great recession. Nonetheless, I find it interesting how much capital goods exports have increased. Now, as I mentioned in an earlier post, vertical specialization means that it’s unclear how much value added is incorporated in particularly the goods exports. Still, I think there is evidence for a manufactured exports rebound.

Finally, there has been substantial skepticism that manufacturing employment will rebound strongly, even if the President’s initiatives outlined in the State of the Union are implemented. [4] I think that skepticism is largely warranted, given rapid productivity growth in that sector. However, that doesn’t mean that manufacturing value added won’t necessarily rebound. BEA only released data up to 2010 last month, so one can’t be sure.

So while we have seen some marked improvement in U.S. exports and a a trimming of the trade imbalance, the question remains whether we will see sustained growth, and the sort of recovery-driving rebound of the manufacturing sector that President Obama has been calling for. 

Read Net Exports, Exports, Real Exchange Rates and Manufacturing here.

Posted by Graham Griffith

More Choices, Fewer Decisions: Sheena Iyengar on the Choice Overload Problem

02-01-2012 9:22 AM with no comments

Sheena Iyengar believes the choice overload problem is "one of the biggest modern day choosing problems that we have."  The more options we have, the less likely we are to choose any one of the options. Iyengar says this is true for buying jam, and for putting money away for retirement. She discussed some techniques for handling the choice overload problem in a recent talk at TEDSalon NY2011:

Posted by Graham Griffith

CBO Budget and Economic Outlook: Fiscal Years 2012-2022

02-01-2012 8:29 AM with no comments

The Congressional Budget Office has released its Budget and Economic Outlook for the next 10 years.  For 2012, the CBO is projecting a deficit of $1.1 trillion.  But over the next 10 years, the CBO projects that figure to drop to  "under $200 billion and averaging 1.5 percent of GDP."  This projection is based on current laws, including the scheduled expiration of some tax cuts:

Much of the projected decline in the deficit occurs because, under current law, revenues are projected to shoot up by almost $800 billion, or more than 30 percent, between 2012 and 2014—from 16.3 percent of GDP in 2012 to 20.0 percent in 2014. That increase is mostly the result of of the recent or scheduled expirations of tax provisions, such as those initially enacted in 2001, 2003, and 2009 that lower income tax rates and those that limit the number of people subject to the alternative minimum tax (AMT).

Under current law, CBO projects that revenues will continue to rise relative to GDP after 2014 largely because increases in taxpayers’ inflation-adjusted income will push more income into higher tax brackets and subject more of it to the AMT.

Other important projections from the report are illustrated in the following slides from the CBO:

Read the full report here.

Posted by Graham Griffith

Case-Shiller: Housing Prices Dropped in 19 of 20 Metros in November

01-31-2012 4:45 PM with no comments

Just as it was in October, Phoenix was the only city among the twenty top US metro areas where home prices went up in November, according to the latest S&P/Case-Shiller Home Price Indices release.  The indices showed a 1.3 percent drop in both the 10-city  and 20-city composites. Washington, DC and Detroit remain the only two metro areas where home prices for November 2011 were higher than November 2010. "Atlanta, Las Vegas, Seattle and Tampa all reached new lows in November," according to the Case-Shiller report, with Atlanta looking particularly bad with an annual drop of 11.8 percent.  Here's a look at the long term trend:

From the release:

““Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall. Weakness was seen as 19 of 20 cities saw average home prices decline in November over October,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “The only positive for the month was Phoenix, one of the hardest hit in recent years. Annual rates were little better as 18 cities and both Composites were negative. Nationally, home prices are lower than a year ago. The 10-City Composite was down 3.6% and the 20-City was down 3.7% compared to November 2010. The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.

The crisis low for the 10-City Composite was April 2009; for the 20-City Composite the more recent low was March 2011. The 10-City Composite is now about 1.0% above its low, and the 20-City Composite is only 0.6% above its low. From their 2006 peaks, both Composites are down close to 33% through November.

Multi-family homes are showing more positive signs than single family homes.  Otherwise there just isn't much positive coming through in these Case-Shiller reports of late.  Read the full release here.

Posted by Graham Griffith

Carnegie Council Slide-show Raises Key Questions About the Revival of U.S. Manufacturing Sector

01-31-2012 9:44 AM with no comments

This Global Ethics Corner from the Carnegie Council does a nice job of laying out the core questions we should be asking about the bipartisan push in Washington for a revival of manufacturing in the U.S.:

"Is the rebirth of America's manufacturing industry necessarily a good thing?"

This, and the other questions raised in the slide-show about factories and innovation, should be good conversation starters for a class discussion on the role of manufacturing in the U.S. economy today.

Posted by Graham Griffith

SF Fed: A Closer Look at Unemployment Duration

01-31-2012 9:09 AM with no comments

In a new Economic Letter for the San Francisco Fed, Rob Valletta and Katherine Kuang take a look at unemployment duration, which has been much longer following the Great Recession than following previous recessions.  Factors like the changing demographics of the workforce (age, mainly), and the extension of unemployment benefits may be factors, but the authors note that they have had only a small impact:

The limited impact of workforce characteristics and extended UI suggests that other factors bear primary responsibility for the recent spike in unemployment duration. The most obvious one is the severity and persistence of employment losses compared with past recessions. Figure 2 shows employment patterns during and after the last four U.S. recessions, in each case measured relative to the pre-recession employment peak. At the recent employment trough in early 2010, employment was down 6.3%, compared with a cumulative decline of less than half that during the early 1980s. Moreover, employment has recovered little following the trough, growing on net by less than two percentage points through late 2011. That’s about 10 percentage points below the growth path from the early 1980s recession.

It is likely that the recent pattern of massive job losses and a weak jobs recovery is the primary explanation for elevated unemployment duration. The contribution of these elements can be examined more formally by performing a regression, a standard statistical technique for measuring the relationships among variable factors. We follow the approach of Aaronson et al. (2010), who calculate the extent to which rising duration can be explained by changes in characteristics of the workforce. We extend their approach by incorporating measures of cumulative employment losses. For each month of CPS data on individual unemployment duration, we calculate the percentage change in payroll employment relative to the pre-recession peak and include it as an explanatory variable in our statistical exercise. We use payroll employment for each individual’s state of residence for this calculation (see Valletta 2011). The data used are for periods covering the latest recession and its aftermath, and the corresponding periods from the early 1980s recession. These are matched by counting months forward from the pre-recession employment peak. The recent duration data are adjusted for the 1994 and 2011 changes in survey measurement.

Read Why Is Unemployment Duration So Long? here.

Posted by Graham Griffith

Personal Income, Savings Rate up in December

01-30-2012 10:47 AM with no comments

The Commerce Department just released more data on personal income from December.  Americans saw a nice uptick in their incomes last month, and then resisted the holiday urge to spend, saving more of their new gains.  Here is a look at personal income and spending moves during the final quarter of 2011:

From the Bureau of Economic Analysis release:

Private wage and salary disbursements increased $29.1 billion in December, in contrast to a decrease of $1.4 billion in November. Goods-producing industries' payrolls increased $10.8 billion, in contrast to a decrease of $6.5 billion; manufacturing payrolls increased $7.4 billion, in contrast to a decrease of $6.2 billion. Services-producing industries' payrolls increased $18.3 billion, compared with an increase of $5.1 billion. Government wage and salary disbursements increased $0.4 billion in December; government wages and salaries were unchanged in November.

The other big takeaway from the report is the savings rate:

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- decreased $5.2 billion in December, in contrast to an increase of $8.2 billion in November. PCE decreased $2.0 billion, in contrast to an increase of $11.4 billion.
Personal saving -- DPI less personal outlays -- was $460.1 billion in December, compared with $407.8 billion in November. The personal saving rate -- personal saving as a percentage of disposable income -- was 4.0 percent in December, compared with 3.5 percent in November.

Read the full release here.

Posted by Graham Griffith

The Importance of Collateral, or the Difference Between Secured and Unsecured Bonds

01-30-2012 10:24 AM with no comments

In the latest edition of the Marketplace Whiteboard, Paddy Hirsch explains the difference between secured and unsecured bonds.  It is a lesson that may be coming a little too late to Irish taxpayers:

Posted by Graham Griffith