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SESSION TWO: The way forward. Lessons from Great Depression. THE ROARING TWENTIES. Lessons from Great Depression. THE ROARING TWENTIES 1 – Banks: - dynamic &lucrative - eager to make loans 2 – Consumers: - easy money and HP - household debt soared

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lessons from great depression
Lessons from Great Depression

THE ROARING TWENTIES

lessons from great depression3
Lessons from Great Depression

THE ROARING TWENTIES

1 – Banks:

- dynamic &lucrative

- eager to make loans

2 – Consumers:

- easy money and HP

- household debt soared

- speculated stock market

- high level of inequality

3 – Government:

- few rules and regulations

lessons from great depression4
Lessons from Great Depression

THE ROARING TWENTIES

lessons from great depression5
Lessons from Great Depression

THE GREAT DEPRESSION

lessons from great depression6
Lessons from Great Depression

THE AFTERMATH:

- Government REGULATION increased significantly

- BANKS tightly regulated and conservative

- BUT despite “boring banking”, living standards doubled

lessons from great depression7
Lessons from Great Depression

THE AFTERMATH:

- CONSUMERS reduced debt and spending frugal

- MIDDLE CLASS emerged as inequality declined

lessons from great depression8
Lessons from Great Depression

Historical excess wage in the financial sector

  • A SECOND GILDED ERA
  • 1980s political winds shift
  • Period renewed DEREGULATION
  • - BANKS dynamic and lucrative
  • - Financial sector doubles to 8% of GDP
  • - Households accumulate DEBT
  • Income INEQUALITY re-emerges
lessons from great depression9
Lessons from Great Depression

A SECOND GILDED ERA

CONSENSUS: dominant FINANCIAL sector critical for prosperity

the way forward scenarios
The way forward: scenarios

REPAY, RESTRUCTURE, REBUILD

60% - Stagnation: belated US bank rescue

30% - Gradual recovery: quick resolution US crisis

10% - Global depression: current trends continue

0% - Quick turnaround: business as usual

green shoots or weeds
Green shoots (or weeds?)
  • Clear signs activity stabilising:
  • impact of government stimulus plans
  • lower turning point in cycle?
major risks to emerging recovery
Major risks to emerging recovery

Adjustable rate mortgage reset schedule

major risks to emerging recovery13
Major risks to emerging recovery

“It is a triumph of hope over reality”

- Justin Urquhart Stewart,

Seven Investment Management

trend end of the retailing era
TREND: end of the retailing era

“If I wanted to destroy a nation, I would give it too much and I would have it on its knees, miserable, greedy and sick.”

– John Steinbeck, 1966

trend end of the wealth illusion
TREND: end of the wealth illusion

American household net wealth tumbles

Personal savings rises as wealth plunges

There are many reasons to cut spending but the most important is the destruction of wealth

trend the new normal
TREND: the new “normal”

Threat to wages will fade as economy recovers, but damage to housing and other assets will probably linger

Households likely to remain conservative ito borrowing,

lending and investing

trend return of the middle classes
TREND: return of the middle classes
  • 1. Slump in asset prices:
  • - housing & equities
  • 2. Government policy:
  • - notably taxes
  • 3. Education:
  • - more equitable distribution
  • of income
trend the persistence of thrift
TREND: the persistence of thrift

JAPAN: ‘01 to ‘07 per capita consumer spending +0.2%

trend subdued commodity prices
TREND: subdued commodity prices
  • China to the rescue?
  • boost from government stimulus package
  • securing resources to diversify out of dollars
  • BUT unlikely rebound without US recovery
trend return to protectionism
TREND: return to protectionism

World Bank: 17 of G20 nations violating promise to avoid

protectionist measures

Thus far, 78 measures have been implemented by G20

Threatens to worsen decline in trade, worst in 80 years

Hard to resist in face of domestic pressure: “Buy America” clause

trend rising social instability
TREND: rising social instability

US Director National Intelligence, Dennis Blair, warns Congress the global economic turmoil, and the instability it could ignite, has outpaced terrorism as the “most urgent threat facing America”

implications for south africa
Implications for South Africa?
  • Banking sector well regulated and
  • financially sound
  • National Credit Act halted debt-fuelled
  • consumer boom
  • Healthy state finances, scope for more
  • government spending
  • Conservative monetary policy, scope to
  • cut interest rates
south africa crisis dampens exports
South Africa: crisis dampens exports

European banking crisis: Europe at far greater risk than US

Protectionist measures in South Africa

sa heavily dependent on consumer
SA: heavily dependent on consumer

Consumer spending as % GDP

sa unemployment social instability
SA: unemployment & social instability

ESTIMATED JOB LOSSES:

South Africa: 400 000 (2.2%)

China: 20 million (2.5%)

USA: 6 million (3.9%)

global crisis brave new world
Global crisis: Brave New World

The force of a correction is equal and opposite to the deception that preceded it

- Daily Reckoning Australia

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