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In the Aftermath of Global Financial Crisis: Implications of a New Economic Order with the G20. Jeffrey Frankel Harpel Professor, Harvard University 25 th anniversary of the KAEA Allied Social Science Association Meetings Atlanta, January 4, 2010.

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In the Aftermath of Global Financial Crisis:

Implications of a New Economic Order with the G20

Jeffrey FrankelHarpel Professor, Harvard University

25th anniversary of the KAEAAllied Social Science Association Meetings

Atlanta, January 4, 2010


Congratulations to the korea america economic association on its 25 th anniversary l.jpg
Congratulations to the Korea-America Economic Associationon its 25th anniversary

  • Where were we 25 years ago?

    • Korea

    • US

  • What has changed?

  • Where are we headed now, after the 2007-09 crisis,

    and with Korea chairing the G20?


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25 years ago in Korea: January 1985

  • The Korean economic miracle was well under way,

  • although income was still far below that of industrialized countries.

  • After decades of dictatorship, the country was taking its first major steps to democracy,

    • including toward a two-party system in the National Assembly elections in Feb.1985.


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25 years ago in the US: January 1985

  • Pres. Reagan was starting his 2nd term

    • proclaiming “Morning in America”

  • The $ was about to peak at its all-time high;

    • the G-7 had not yet agreed on a managed depreciation.

  • The current account was hitting record deficits.

  • The Treasury’s interpretation of the deficits: capital was flowing into the US because it was a wonderful place to invest.


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Others interpreted the US trade deficit much more negatively

  • The US was said to be in decline

    • The “hollowing out” of manufacturing.

    • Paul Kennedy’s The Rise and Fall of the Great Powers.

  • Japan was thought a juggernaut, taking over the world economy.

    • Ezra Vogel’s Japan as Number One

    • Chalmers Johnson’s MITI and the Japanese Miracle, etc.


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Japan (and the Asian NIEs) were said to have a superior model of capitalism

  • “Asian values”

  • Long horizons

  • Keiretsu / chaebol

  • Low cost of capital

  • Relationship banking

  • Government guidance

  • Pro-saving financial system

  • Lifetime employment (in the case of Japan)

  • Firms maximize size (capacity or market share)


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In between “US in decline” and “Morning in America” was a reasonable middle position:

  • The US trade deficit and Japanese surplus were problems, but they resulted from National Saving patterns:

    • Low NS in the US (<= budget deficits) and

    • High NS in Japan (<= budget surplus & aging-driven household saving).

  • US global leadership was not exhausted.

    • Joe Nye’s Bound to Lead


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As soon as the 1990s started, was a reasonable middle position:1980s assumptions were proven wrong

  • The US triumphed militarily in the Gulf War (1991).

  • The US triumphed politically with the fall of the Soviet Union (1991).

  • The Japanese model burst,

    • along with its land-stock-market bubble (1990)

    • and economy (1991-…) .


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And as the 1990s progressed, was a reasonable middle position:

  • the US experienced the longest economic expansion of its history;

  • America was declared to have a New Economy.

  • Currency crises hit Korea, and Southeast Asian countries in 1997-98.

  • And Asians were told to emulate the US model, especially its financial system:

    • corporate governance, accounting standards,

    • consumer finance, innovative products,

    • securities markets, rating agencies, and

    • Anglo-American style banking (market-oriented & arms-length)


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But as soon as the 2000s started, was a reasonable middle position:the 1990s assumptions were proven wrong

  • Bursting of the US dot-com bubble (2000).

  • Failure of US electoral institutions (Nov.2000).

  • Failures of Sept.11(2001) & US response (Iraq, Guantanamo)

  • Failure of US corporate governance in scandals of Enron, etc. (2001).

  • Decade of flat median income and rising debt.


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Financial crisis (2007-2009) was a reasonable middle position:

  • Bursting of US housing bubble (2006)

  • inevitably led to sub-prime mortgage crisis (2007).

  • Less predictably, failures of US financial system led to disappearance of liquidity (2008)

  • and the 2nd recession of the decade,

    • the worst since the 1930s.

    • The rest of the world followed.


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Who got pieces of it right, beforehand? was a reasonable middle position:

  • Krugman: If a Depression can happen in Japan, it can happen in any modern economy.

  • Rajan: Failures of corporate governance.

  • BIS (Borio & White): Too-easy credit, via asset prices, leads to crises -- with no inflation in between.

  • Shiller: US housing price bubble.

  • Gramlich: Homeowners are taking mortgages that they can’t repay.

  • Rogoff: “This Time Is Not Different.”

  • Roubini: The recession will be severe.


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The US has lost its claim was a reasonable middle position:as an exclusive model for others to emulate

The desirable principles haven’t changed, only the claim that the US uniquely embodies them

  • Open democracy, rule of law

  • Competition in goods markets

  • Corporate governance focused on long-term shareholder value,

    • not executives’ options prices

    • nor empire-building.

  • Government intervention to address market failure

    • E.g., tax pollution (don’t subsidize fossil fuels).

    • Supervise banks, under rules (don’t take them over).


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The US is in a hole was a reasonable middle position:

  • Adroit monetary & fiscal management has succeeded in limiting the length & severity of the recession.

    • The turning point was probably early summer, 2009

    • => we have avoided the mistakes of

      • the Depression,

      • or Japan’s lost decades.

  • But the long-term fiscal outlook – already bad – has gotten worse.


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The same with other major industrialized economies. was a reasonable middle position:

  • A remarkable role-reversal:

    • Debt/GDP of the top 20 rich countries

    • (≈ 80%) is already twice that of the top 20 emerging markets;

    • and rising rapidly.

    • By 2014 (at ≈ 120%), it could be triple.


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The US financial position was a reasonable middle position:has deteriorated internationally

  • The twin deficits

  • China is now our largest creditor

  • The dollar appears in long-term decline.


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Exorbitant Privilege of $ was a reasonable middle position:

  • Among those who argue that the US current account deficit is sustainable are some who believe that the US will continue to enjoy the unique privilege of being able to borrow virtually unlimited amounts in its own currency.


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When does the “privilege” become “exorbitant?” was a reasonable middle position:

  • if it accrues solely because of size & history, without the US having done anything to earn the benefit by virtuous policies such as budget discipline, price stability & a stable exchange rate.

  • Since 1973, the US has racked up $10 trillion in debt and the $ has experienced a 30% loss in value compared to other major currencies.

  • It seems unlikely that macroeconomic policy discipline is what has earned the US its privilege !


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The “Bretton Woods II” hypothesis was a reasonable middle position:

  • Dooley, Folkerts-Landau, & Garber (2003) :

    • today’s system is a new Bretton Woods,

      • with Asia playing the role that Europe played in the 1960s—buying up $ to prevent their own currencies from appreciating.

    • More provocatively: China is piling up dollars not because of myopic mercantilism, but as part of an export-led development strategy that is rational given China’s need to import workable systems of finance & corporate governance.


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My own view on “Bretton Woods II”: was a reasonable middle position:

  • The 1960s analogy is indeed apt,

  • but we are closer to 1971 than to 1944 or 1958.

  • Why did the BW system collapse in 1971?

    • The Triffin dilemma could have taken decades to work itself out.

    • But the Johnson & Nixon administrations accelerated the processby fiscal & monetary expansion (driven by the Vietnam War & Arthur Burns, respectively).

    • These policies produced: declining external balances, $ devaluation, & the end of Bretton Woods.


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There is no reason to expect better today: was a reasonable middle position:

  • Capital mobilityis much higher now than in the 1960s.

  • The US can no longer necessarily rely on support of foreign central banks:

    • neither on economic grounds(they are not now, as they were then, organized into a cooperative framework where each agrees explicitly to hold $ if the others do),

    • nor on political grounds(China & OPEC are not the staunch allies the US had in the 1960s).

      3) A possible rival currency to the $ exists.


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Central banks’ reserve holdings was a reasonable middle position:Frankel & Chinn (2007)estimated effects of country size, market depth, ability to hold value, and network effects

Simulation suggests € could overtake $ by 2022.


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When will the day of reckoning come? was a reasonable middle position:

  • Not in 2008: In the short run, the financial crisis caused a flight to quality which evidently still meant a flight to US $.

  • Chinese warnings in 2009 may have marked a turning point:

    • Premier Wen worried US T bills will lose value.On Nov. 10 he urged the US to keep its deficit at an “appropriate size” to ensure the “basic stability” of the $.

    • PBoC Gov. Zhou in March proposed replacing $ as international currency, with the SDR.


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The global monetary system was a reasonable middle position:may move from dollar-based to multiple international reserve currencies

  • The € could challenge the $.

  • The SDR is again part of the system.

  • Gold in2009 made a comeback as an international reserve too.

  • Someday the RMB will join the roster with ¥ & ₤.

  • = a multiple international reserve asset system.

SDR


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Lessons from the global financial crisis of 2008-09 was a reasonable middle position:

  • For emerging markets

    • Decoupling?

    • What characteristics suited countries to weather the storm of 2008-09 better than others?

  • For the field of macroeconomics:

    • phylloxera analogy.

  • For global governance: the G20.


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Decoupling? was a reasonable middle position:

  • Initial hopes of decoupling succumbed at the height of the crisis:

    • Financial contagion

    • Asian exports were especially hard-hit.


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Asian exports plummeted was a reasonable middle position:

via RGE Monitor 2009 Global Outlook


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  • But, in the end, there was was a reasonable middle position:a measure of decoupling after all.

    • Asia has come roaring back.

    • Asia now constitutes an independent “growth pole” in the world.


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Which bystanders got hit the worst by the global liquidity crisis of 2008?

  • Most emerging markets had followed the lessons of the 1990s crises:

    • small or no current account deficits

    • more flexible exchange rates

    • more reserves

    • less short-term & $-denominated loans

  • Those that didn’t are those that got into worse trouble: Central & Eastern Europe.


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The Early Warning Indicators literature, updated crisis of 2008?

  • Reserves

    • Economists wondered if emerging market reserves had gotten too high by 2007 –

      • Jeanne (2007), Summers (2006), Rodrik (2006)

  • But high reserves appear to have paid off in 2008.

    • Aizenman (2009) and Obstfeld, Shambaugh & Taylor (2009, 2010)

  • Low short-term foreign debt

    • Sachs, Tornell & Velasco (1996), Frankel-Rose (1996), Guidotti Rule,

    • Bussiere, Frankel & Matthieu (2010)

  • Other leading signals

    • Equity prices: Kaminsky, Lizondo & Reinhart (1998); Rose & Spiegel (2009)

    • See also Wei & Tong (2010)


  • Where should mainstream macro go in light of the 2007 09 global financial crisis l.jpg
    “Where should mainstream macro go, crisis of 2008?inlightofthe2007-09 globalfinancialcrisis?”

    • Some models that had been thriving in an emerging markets context may now help answer this question.

    • Some were applications of models originally designed for advanced-country financial markets, but never fully incorporated into the mainstream macro core.

    • A possible explanation why they had been transplanted to emerging markets: assumptions of imperfections in financial markets were considered more acceptable there, than in the context of advanced economies.


    Financial crises not just for emerging markets anymore an analogy l.jpg
    Financial crises: crisis of 2008?Not just for emerging markets anymore.An analogy

    • In the latter part of the 19th century most of the vineyards of France were destroyed by Phylloxera.

    • Eventually a desperate last resort was tried: grafting susceptible European vines onto resistant American root stock.

    • Purist French vintners initially disdained what the considered compromising the refined tastes of their grape varieties.

    • But it saved the European vineyards, and did not impair the quality of the wine.

    • The New World had come to the rescue of the Old.


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    Implications of the 2008 financial crisis for macroeconomics?

    • In 2007-08, the global financial system was grievously infected by “toxic assets” originating in the United States.

    • Many ask what fundamental rethinking is necessary to save orthodox macroeconomic theory.

    • Some answers may lie with models that have been applied to the realities of emerging markets.

    • Purists may be reluctant to seek help from this direction.

    • But they should not fear that the hardy root stock of emerging market models is incompatible with fine taste.


    What are some of these models l.jpg
    What are some of these models? macroeconomics?

    • Asymmetric information

      • Credit rationing (Stiglitz…)

      • Need for collateral (Kiyotaki & Moore, Caballero…)

    • The credit channel (Bernanke & Gertler… )

    • Balance sheet effects (Calvo…)

    • Bank runs & multiple equilibria (Diamond & Dybvyg; Velasco…)

    • Speculative attacks (Krugman; Obstfeld; Morris & Shin…)

    • Moral hazard & incentive incompatibility (Dooley; McKinnon & Pill…)


    Slide35 l.jpg

    Also newly relevant are some almost-forgotten macroeconomics?and less-formalized notions of cycles:

    • the credit cycle of von Hayek,

    • the bubbles & panics of Kindleberger,

    • the Minsky moment, and

    • Irving Fisher’s debt deflation.


    The g 20 l.jpg
    The G-20 macroeconomics?

    • G-20 meetings in 2009:

      • London in April

      • Pittsburg in October


    How successful were the measures supported by us korea at the g 20 meetings 2009 l.jpg
    How successful were the measures supported by US & Korea at the G-20 meetings (2009)?

    • Coordinated fiscal stimulus to fight the recession

      • as in the locomotive plan of G7’s Bonn Summit of 1978:

      • no formal agreement, but it seemed to happen anyway.

    • Unexpected revival of the SDR and tripling IMF resources

    • The usual agreement for a standstill/rollback in trade barriers. Some backsliding followed, & little progress in Doha Round;

      • on the US side:

        • tariffs on Chinese tires,

        • inability to ratify FTAs.

      • But, so far, not a bad trade record, for a severe recession.

    SDR


    Whatever the causes of the great recession the policy response avoided 1930s mistakes l.jpg
    Whatever the causes of the great recession, the policy response avoided 1930s mistakes:

    • No Smoot-Hawley tariffs

    • No failed London Economic Summit

    • Aggressive monetary expansion rather than contraction.

    • Fiscal expansion too.


    The true significance of the g 20 in 2009 l.jpg
    The true significance of the G-20 in 2009 response avoided 1930s mistakes

    • The G-20 accounts for 85% of world GDP.

    • A turning point: The more inclusive group has suddenly become central to global governance, eclipsing the G-7, and thereby at last giving major developing/emerging countries some representation,

    • after decades of fruitless talk about raising emerging-market representation in IMF.


    The g 20 and korea l.jpg
    The G-20 and Korea response avoided 1930s mistakes

    • Korea has assumed the presidency

      • this week (Jan. 4, 2010)

    • The first non-G7 host of the G20.

    • Canada & Korea will host the meetings in June & November, respectively.


    Implications for korea l.jpg
    Implications for Korea response avoided 1930s mistakes

    • Korea is the bridge between the G-7 and developing countries.

      • Especially China & India

    • What can the G-20 accomplish for Korea?

    • What can the G-20 accomplish for the world?


    Opportunity burden for korea l.jpg
    Opportunity/burden for Korea response avoided 1930s mistakes

    • Will chairing the G-20 help consolidate Korea’s status as an advanced economy?

    • Yes, as did:

      • hosting the Olympics,

      • joining the OECD,

      • attaining the per capita income of some industrialized countries ($20,000 ≈ Portugal).

    • But Korea should now seize the chance to exercise substantive leadership.

      • Otherwise, the risk is Czech presidency of EU…


    Four items on g 20 agenda for 2010 l.jpg
    Four items on G-20 agenda for 2010 response avoided 1930s mistakes

    • Possible financial regulatory reform

      • Some steps underway in Basle, Financial Stability Forum

      • The Europeans would like more, but are unlikely to get it.

      • Personally, I might favor a small global tax on financial transactions.

    • Macroeconomic exit strategies

    • Global imbalances between developing countries and industrialized

      • US and China should both admit responsibility

        • US: the budget deficit is too big. Needs to be fixed.

        • China: RMB is too low. Needs to be unfixed.

    • Post-Copenhagen progress toward new agreement on climate change to take effect 2012.


    Two principles of multilateral institutions l.jpg
    Two principles of multilateral institutions response avoided 1930s mistakes

    1. It is inevitable that more power go to large-GDP countries than small.

    • This is why IMF works better than UN .

    • The problem is that China, India, Korea, Brazil, etc.,are larger than Canada, Netherlands… Hence the G-20.

    • The outcome must leave small countries better off, of course, or they will not go along.

    2. Conversation is not possible with more than 20 in the room.


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    Example: many rounds of trade response avoided 1930s mistakes

    negotiations under the GATT.

    • Worked well for years,

      • with small steering groups (US-EU, the Quad & G-7)

      • and few demands placed on developing countries.

    • Failed when developing countries had become big enough to matter,

      • but were not given enough role:

      • Doha Round


    Conversation is not possible with more than 20 people in the room l.jpg
    Conversation is not possible with more than 20 people in the room.

    • Delegates just read their talking points.

    • The latest evidence: The Climate Change CoP in Copenhagen

      • The UNFCCC proved an ineffectual vehicle

        • Incompetent management of logistics

        • Small countries repeatedly blocked progress

      • Obama was able to make more progress at the end with a small group of big emitters.

        • Korea is in a good position to build on this progress

          • As the 1st non-Annex I country to take on binding emission targets.

    • To be honest, the G-20 is too big.

      • My recommendation: an informal steering group within G-20.


    Addenda l.jpg
    Addenda room.

    • 1. Origins of the financial crisis.

    • 2. The US current account deficits

      • What about the economists who argue that they are sustainable?

    • 3. Global climate change negotiations.

      • A proposed new architecture.


    1 origins of the crisis in the us l.jpg
    1. Origins of the crisis in the US room.

    Well before 2007, there were danger signals:

    Real interest rates <0, 2003-04;

    Early corporate scandals (Enron 2001…);

    Risk was priced very low,

    • housing prices very high,

    • National Saving very low,

    • current account deficit big,

    • leverage high,

    • mortgages imprudent…


    Us real interest rate 0 2003 04 l.jpg
    US real interest rate < 0, 2003-04 room.

    Source: Benn Steil, CFR, March 2009

    Real interest rates <0


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    Source: “The EMBI in the Global Village,” room.Javier GomezMay 18, 2008 juanpablofernandez.wordpress.com/2008/05/

    In 2003-07, market-perceived volatility, as measured by options (VIX), plummeted.

    So did spreads on US junk & emerging market bonds.

    In 2008, it all reversed.


    Six root causes of financial crisis l.jpg
    Six root causes of financial crisis room.

    1. UScorporate governance falls short

    E.g., rating agencies;

    executive compensation …

    options;

    golden parachutes…

    2. US households save too little,borrow too much.

    3. Politicians slant excessively toward homeownership

    Tax-deductible mortgage interest, cap.gains;

    Fannie Mae & Freddie Mac;

    Allowing teasers, NINJA loans, liar loans…

    MSN Money & Forbes


    Six root causes of financial crisis cont l.jpg
    Six root causes of financial crisis, room.cont.

    4. Starting 2001, the federal budgetwas set on a reckless path,

    reminiscent of 1981-1990

    5. Monetary policy was too loose, during 2003-05,

    accommodating fiscal expansion,reminiscent of the Vietnam era.

    6. Financial market participants during this period grossly underpriced risk.


    Origins of the financial economic crisis l.jpg
    Origins of the financial/economic crisis room.

    Underestimated riskin financial mkts

    Failures of corporate governance

    Households saving too little, borrowing too much

    Federal budget deficits

    Monetary policy easy 2004-05

    Excessive leverage in financial institutions

    Housing

    bubble

    Low national saving

    Stock

    market

    bubble

    Stock market

    crash

    Housing

    crash

    China’s growth

    Financial crisis

    2007-08

    Lower long-term econ.growth

    Eventual loss of US hegemony

    Homeownershipbias

    Predatory lending

    Excessive complexity

    MBSs

    Foreigndebt

    CDSs

    CDOs

    Gulf

    insta-bility

    Oil price spike

    2007-08

    Recession

    2008-09


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    Addendum 2: room.The US current account deficits

    • Some economists argue they are sustainable


    Some argue that the privilege to incur liabilities has been earned in a different way l.jpg
    Some argue that the privilege to incur $ liabilities has been earned in a different way:

    • Global savings glut(Bernanke)

    • The US appropriately exploits its comparative advantage in supplying high-quality assets to the rest of the world.

      • “Intermediation rents…pay for the trade deficits.” -- Caballero, Farhi & Gourinchas(2008)

      • In one version, the United States has been operating as the World’s Venture Capitalist, accepting short-term liquid deposits and making long-term or risky investments -- Gourinchas & Rey(2008).

      • US supplies high-quality assets:Cooper (2005); Forbes (2008); Ju & Wei (2008); Hausmann & Sturzenegger (2006a, b);Mendoza, Quadrini & Rios-Rull (2007a, b)…


    Global savings glut l.jpg
    Global Savings Glut been earned in a different way:

    • Global Current Account Imbalances debate, 2001-07

    • On one side:those who argued that US current account deficits

      • had domestic origins (low National Saving),

      • were unsustainable, and

      • would eventually cause abrupt $ depreciation.

      • Obstfeld-Rogoff (2001, 05) ; Roubini (2004); Summers ( 2004); Chinn (2005) ; Blanchard, Giavazzi & Sa (2006) ; Frankel (2007b) …

    • On the other side (sustainability):

      • Global savings glut: Bernanke, Clarida…;

      • Other arguments, e.g.,exorbitant privilege, dark matter…


    Slide58 l.jpg

    • The 2007-09 crisis did not resolve been earned in a different way:the CA imbalances debate.

      • Reaction of the unsustainability side:this is the crisis they were warning of.

      • One response from the other side: the savings glut caused the crisis.


    Slide59 l.jpg

    • Regardless, been earned in a different way:

      • Saving will now fall globally.

        • In the short run, governments are responding to the recession by increasing their budget deficits.

        • In the long run, spending needs created by retiring population & rising medical costs will continue to reduce saving, both public & private.

      • In response, long-term real interest rates should rise, from the recent low levels.

    • Thus, I declare the savings glut dead. †


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    • The argument that the US supplies assets of superior quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08.

    • American financial institutions suffered a severe loss of credibility (corporate governance, accounting standards, rating agencies, derivatives, etc.).

    • Some banks & non-banks have ceased to operate.

    • How could sub-prime mortgages, CDOs, & CDSs be the superior type of assets that uniquely merit the respect of the world’s investors?


    Slide61 l.jpg

    • The events of 2008 also quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08. undermined the opposing interpretation, the unsustainability position:

    • Why did the $ not suffer the long-feared hard landing?

    • The $ appreciated after Lehman Brothers’ bankruptcy, & US T bill interest rates fell.

    • Clearly in 2008 the world still viewed

      • the US Treasury market as a safe haven and

      • the US $ as the premier international currency.


    Slide62 l.jpg

    Though arguments about the unique quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08. high quality of US private assets have been tarnished, the idea of America as World Banker is still alive: the $ is the world’s reserve currency, by virtue of US size & history.

    • Is the $’s unique role an eternal god-given constant? or

    • will a sufficiently long record of deficits & depreciation induce investors to turn elsewhere?


    Addendum 3 proposal for a global climate agreement l.jpg

    Addendum 3: quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08. Proposal for a Global Climate Agreement


    Slide64 l.jpg

    Proposal quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08.

    Stage 2:When the time comes for developing country cuts, targets are determined by a formula incorporating 3 elements, designed so each is asked only to take actions analogous to those already taken by others:

    • Stage 1:

      • Annex I countries commit to the post-2012 targets that their leaders have already announced.

      • Others commit immediately not to exceed BAU.

    • a Progressive Reduction Factor,

    • a Latecomer Catch-up Factor, and

    • a Gradual Equalization Factor.


    Slide65 l.jpg

    ◙ In one version, concentrations level off at 500 ppm quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08. in the latter part of the century.

    ◙ Constraints are satisfied: -- No country in any one period suffers a loss as large as 5% of GDP by participating. -- Present Discounted Value of loss < 1% GDP.

    Co-author: V.Bosetti

    Global peak date ≈ 2035


    What form should border measures take l.jpg
    What form should border measures take? quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08.

    • Best choice: multilateral sanctions under a new Copenhagen Protocol

    • Next-best choice: national import penalties adopted under multilateral guidelines

      • Measures can only be applied by participants-in-good standing

      • Judgments to be made by technical experts, not politicians

      • Interventions in only a ½ dozen of the most relevant sectors.

  • Third-best choice: no border measures.

  • Each country chooses trade barriers as it sees fit.

  • Worst choice: national measures are subsidies (bribes) to adversely affected firms.


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