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Asia, the US, and the G20 in 2010. Jeffrey Frankel Harpel Professor, Harvard University Harvard Project for Asian & International Relations 2010 Conference February 19, 2010. Each decade gives rise to a new conventional wisdom.
Jeffrey FrankelHarpel Professor, Harvard University
Harvard Project for Asian &International Relations 2010 Conference
February 19, 2010
Imperial overstretch would be the downfall of the US, just as with its predecessor.
Vs. Anglo-American model
Corporate governance maximizes profits
& stock prices for shareholders.
Financing via securities markets .
Competition in goods
and labor markets.
Minority voices: Financial economics
carried the mantle of the Asian miracle,
until severe currency crises hit them in 1997-98.
10 years ago: Lessons from the 1990s
The desirable principles haven’t changed, only the claim that the US uniquely embodies them
3) A possible rival currency to the $ exists.
via RGE Monitor 2009 Global Outlook
Year-over-year growth rates. Source: IMF WEO Jan. 2010
2008 2009 2010 2011
World output 3.0 -0.8 3.9 4.3
Advanced economies 0.5 -3.2 2.1 2.4
Developing Asia 7.9 6.5 8.4 8.4
China 9.6 8.7 10.0 9.7
India 7.3 5.6 7.7 7.8
ASEAN-5 4.7 1.3 4.7 5.3
1. It is inevitable that more power go to large-GDP countries than small.
2. Conversation is not possible with more than 20 in the room.
negotiations under the GATT.
1. Proposal: target formulas designed pragmatically,based on what emissions paths are possible politically:
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:
◙ In one version, concentrations level off at 500 ppm 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.
Global peak date ≈ 2035
The reductions from BAU agreed to at Kyoto in 1997 were progressive with respect to income.
Predicted actual emissions exceed caps, by permit purchases.
Predicted actual emissions fall below caps, by permit sales.
rises slowly over 50 years, then rapidly.
Well before 2007, there were danger signals:
Real interest rates <0, 2003-04;
Early corporate scandals (Enron 2001…);
Risk was priced very low,
Source: Benn Steil, CFR, March 2009
Real interest rates <0
Source: “The EMBI in the Global Village,” 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.
1. UScorporate governance falls short
E.g., rating agencies;
executive compensation …
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
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.
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
Low national saving
Lower long-term econ.growth
Eventual loss of US hegemony
Oil price spike
Though arguments about the unique 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.
Central banks’ reserve holdingsFrankel & Chinn (2007)estimated effects of country size, market depth, ability to hold value, and network effects
Simulation suggests € could overtake $ by 2022.