Are you feeling repressed 2 september 2012 e
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August 2012
Are you feeling repressed?
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US public debt
0
20
40
60
80
100
120
140
1791
1800
1809
1818
1827
1836
1845
1854
1863
1872
1881
1890
1899
1908
1917
1926
1935
1944
1953
1962
1971
1980
1989
1998
2007
% G
DP
Source: IMF
Great Depression
World War II
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It’s HEAVY!!
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Indeed growth in DM has been sliding for decades
0
2
4
6
8
10
12
0
1
2
3
4
5
6
1900-50 50s 60s 70s 80s 90s 00s
%yr
%yr
US (lhs) France (lhs) UK (lhs) Japan (rhs) Germany (rhs)
Source: HSBC
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US new home sales index
200
400
600
800
1000
1200
1400
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Inde
x
Source: Bloomberg
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US median house price – existing home sales
-20
-15
-10
-5
0
5
10
15
20
01 02 03 04 05 06 07 08 09 10 11 12
%yr
Median house price
Source: Bloomberg
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US long-term unemployment
05
101520253035404550
Jan-
48Ja
n-50
Jan-
52Ja
n-54
Jan-
56Ja
n-58
Jan-
60Ja
n-62
Jan-
64Ja
n-66
Jan-
68Ja
n-70
Jan-
72Ja
n-74
Jan-
76Ja
n-78
Jan-
80Ja
n-82
Jan-
84Ja
n-86
Jan-
88Ja
n-90
Jan-
92Ja
n-94
Jan-
96Ja
n-98
Jan-
00Ja
n-02
Jan-
04Ja
n-06
Jan-
08Ja
n-10
Jan-
12
%
Long term unemployment rate
Source: Bureau of Labor Statistics, USA
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Fiscal cliff!!
Do we need
a helicopter drop?
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Why governments need growth
Debt dynamics
Change in debt/GDP =(D (t-1) ) x (r-g) – primary balance
Primary surplus required to keep debt level stable:
Primary balance = Debt (t-1) x (r-g)
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Euro area is running lower budget deficits than rest of DM
-14
-12
-10
-8
-6
-4
-2
0
2007 2008 2009 2010 2011
% G
DP
Fiscal balance
United States United Kingdom Euro Area Japan
Source: IMF, January 2012
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In aggregate Europe’s govt. debt ratio is lower than the US
0
50
100
150
200
250
0
20
40
60
80
100
120
2007 2008 2009 2010 2011
% G
DP
% G
DP
United States United Kingdom Euro Area Japan
Source: IMF, January 2012
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Why the fiscal maths did not add up in Greece
-10
-8-6
-4
-2
0
2
4
6
83/
1/20
0010
/1/2
000
5/1/
2001
12/1
/200
17/
1/20
022/
1/20
039/
1/20
034/
1/20
0411
/1/2
004
6/1/
2005
1/1/
2006
8/1/
2006
3/1/
2007
10/1
/200
75/
1/20
0812
/1/2
008
7/1/
2009
2/1/
2010
9/1/
2010
%yr
Source: Bloomberg
Greece real GDP
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Lack of competitiveness requires economic restructuring
Source: Bloomberg
80
90
100
110
120
130
140
150
00 01 02 03 04 05 06 07 08 09 10 11
Unit labour cost
France Greece Germany Italy Spain Ireland
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Debt in the UK and Spain
0
10
20
30
40
50
60
70
80
90
10019
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
12
% G
DP
Spain public debt UK public debt
Source: Bloomberg
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Spain’s austerity plans no less stringent than the UK
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
2006 2007 2008 2009 2010 2011 2012 2013
GD
P
United Kingdom Spain
Cyclically adjusted primary balance
Source: Bloomberg
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10yr bond yields – UK and Spain
0
2
4
6
8
10
12
14
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
%Spain UK
Source: Bloomberg
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The difference between Spain and UK
Sterling less likely to break up
Bank of England is the gilts buyer of last resort
Spain waits on the ECB
The UK and US can tax companies and households It’s harder to make this argument when it comes to
Europe’s periphery
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What did the French monarchs do in the 16th -19th centuries
when they could not pay their debts?
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1. Reduce excessive debt
… BUT, growth is weak
2. Default
3. Live with it!
The choice for governments today
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Living with high government debt levels
Divert supply of funds to public sector
AND / OR
Keep borrowing rates low
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It’s not different this time…. it’s the same
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Anchoring policy rates at extraordinarily low levels
0
2
4
6
8
10
12
14
16
18
1694
1847
1855
1859
1862
1864
18
66
1870
18
72
1873
18
76
1879
18
84
1888
18
91
1893
19
00
1906
19
10
1921
19
31
1960
19
72
1975
19
77
1979
19
82
1983
19
86
1989
19
96
2003
%UK policy rate
Source: IMF
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Central bank claims on gross debt (% GDP)
Close interaction of central banks and the state in a repression scenario
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011
% G
DP
United States United Kingdom Japan Euro area
Source: NBER
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What can go wrong?
2
7
12
17
22
27
32
37
42Ja
n-07
Mar
-07
May
-07
Jul-0
7S
ep-0
7N
ov-0
7Ja
n-08
Mar
-08
May
-08
Jul-0
8S
ep-0
8N
ov-0
8Ja
n-09
Mar
-09
May
-09
Jul-0
9S
ep-0
9N
ov-0
9Ja
n-10
Mar
-10
May
-10
Jul-1
0S
ep-1
0N
ov-1
0Ja
n-11
Mar
-11
May
-11
Jul-1
1S
ep-1
1N
ov-1
1Ja
n-12
Mar
-12
May
-12
%
Source: Bloomberg
Greece 10yr bond yield
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Primary budget balance and gross govt. debt
Source: South African National Treasury
-5
-4
-3
-2
-1
0
1
2
3
4
5
20
25
30
35
40
45
50
55
1989
/90
1990
/91
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
% G
DP
% G
DP
Gross debt (lhs) Primary budget balance (rhs)
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Consumer price inflation
-7
-2
3
8
13
18
19231927193119351939194319471951195519591963196719711975197919831987199119951999200320072011
%yr
Source: SA Reserve Bank
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Corporate tax rate
25
30
35
40
45
50
55
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
%
Source: JP Morgan, National Treasury
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Investment boom mid-1990s to mid-2000s
5
7
9
11
13
15
17
60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
% G
DP
Private investment/GDP
Source: SA Reserve Bank
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August 2012
Sout
hAfrica
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Terms of trade highest in decades, but peaking
Source: Reserve Bank
70
80
90
100
110
120
130
140
Mar
-60
Mar
-63
Mar
-66
Mar
-69
Mar
-72
Mar
-75
Mar
-78
Mar
-81
Mar
-84
Mar
-87
Mar
-90
Mar
-93
Mar
-96
Mar
-99
Mar
-02
Mar
-05
Mar
-08
Mar
-11
Inde
x 20
05 =
100
Terms of trade
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Mining and quarrying profits boomGross operating surplus
2.5
3
3.5
4
4.5
5
5.5
6
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000
4Q19
933Q
1994
2Q19
951Q
1996
4Q19
963Q
1997
2Q19
981Q
1999
4Q19
993Q
2000
2Q20
011Q
2002
4Q20
023Q
2003
2Q20
041Q
2005
4Q20
053Q
2006
2Q20
071Q
2008
4Q20
083Q
2009
2Q20
101Q
2011
4Q20
11
4Q m
ovin
g av
erag
e
4Q m
ovin
g av
erag
e
Rm (lhs) % GDP (rhs)
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Current account adjustment to larger deficit in 2011 mainly reflected savings decline
Source: Reserve Bank
10
12
14
16
18
20
22M
ar-9
0
Mar
-92
Mar
-94
Mar
-96
Mar
-98
Mar
-00
Mar
-02
Mar
-04
Mar
-06
Mar
-08
Mar
-10
Mar
-12
% G
DP
Savings ratio Investment ratio
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Household wealth and debt
40
45
50
55
60
65
70
75
80
85
250
270
290
310
330
350
370
390
81 84 87 90 93 96 99 02 05 08 11
%pe
rson
al d
ispo
sabl
e in
com
e
%pe
rson
al d
ispo
sabl
e in
com
e Household net wealth/disposable income(lhs)Household debt/personal disposable income (rhs)
Source: Reserve Bank
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Household net wealth versus savings
200
220
240
260
280
300
320
340
360
380
-3-2-101234567
90 93 96 99 02 05 08 11
%pe
rson
al d
ispo
sabl
e in
com
e
%pe
rson
al d
ispo
sabl
e in
com
e Household savings ratio (lhs)
Household wealth (rhs)
Source: Reserve Bank
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GFCF lags FCE households
Source: Reserve Bank
-10.0-7.5-5.0-2.50.02.55.07.510.012.5
-25-20-15-10-505
101520
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
% y
r
%yrGFCF (lhs) Household FCE (rhs)
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Marginal rate of return on capital relative to real interest rate Consistent with moderate growth only
Source: Reserve Bank
-25
-15
-5
5
15
25
85 87 89 91 93 95 97 99 01 03 05 07 09 11
GFCF - private (%yr)
Marginal rate of return on capital less real after tax interest rate (%)
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SA GDP and global growth
-3
-2
-1
0
1
2
3
4
5
6
7
8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012%
yr
World SA
Source: IMF, Reserve Bank, SIM
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August 2012
SAVER
What about SAin a
low real interest rateworld?
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Bond yields
Source: Bloomberg, INet
3456789
101112
Jan-
08M
ar-0
8M
ay-0
8Ju
l-08
Sep
-08
Nov
-08
Jan-
09M
ar-0
9M
ay-0
9Ju
l-09
Sep
-09
Nov
-09
Jan-
10M
ar-1
0M
ay-1
0Ju
l-10
Sep
-10
Nov
-10
Jan-
11M
ar-1
1M
ay-1
1Ju
l-11
Sep
-11
Nov
-11
Jan-
12M
ar-1
2M
ay-1
2Ju
l-12
%
Spain (rhs) SA (rhs)
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Rand underpins domestic final demand recovery
EUR
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Rand actual and fair value
0
2
4
6
8
10
12
14Ja
n-80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
Jan-
12
US
DZA
R
USDZAR PPP USDZAR actual
Source: I Net, SIM PPP calculation
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Food inflation
-30
-20
-10
0
10
20
30
40Ja
n/01
Jul/0
1Ja
n/02
Jul/0
2Ja
n/03
Jul/0
3Ja
n/04
Jul/0
4Ja
n/05
Jul/0
5Ja
n/06
Jul/0
6Ja
n/07
Jul/0
7Ja
n/08
Jul/0
8Ja
n/09
Jul/0
9Ja
n/10
Jul/1
0Ja
n/11
Jul/1
1Ja
n/12
Jul/1
2
%yr
Food at agriculture Food at manufacturing CPI food
Source: Statistics SA
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Global and domestic food prices
-5
0
5
10
15
20
25
-40
-20
0
20
40
60
80
10095
/08/
0196
/05/
0197
/02/
0197
/11/
0198
/08/
0199
/05/
0100
/02/
0100
/11/
0101
/08/
0102
/05/
0103
/02/
0103
/11/
0104
/08/
0105
/05/
0106
/02/
0106
/11/
0107
/08/
0108
/05/
0109
/02/
0109
/11/
0110
/08/
0111
/05/
0112
/02/
01
y/r%
Global -food index in ZAR(lhs) lagged 3 months CPI- food(rhs)
y/r%
Source: Statistics SA
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Fertilizer and diesel - PPI
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
Jan-
01A
ug-0
1M
ar-0
2O
ct-0
2M
ay-0
3D
ec-0
3Ju
l-04
Feb-
05S
ep-0
5A
pr-0
6N
ov-0
6Ju
n-07
Jan-
08A
ug-0
8M
ar-0
9O
ct-0
9M
ay-1
0D
ec-1
0Ju
l-11
Feb-
12
yr%
Chemicals Basic: fertilizers Diesel
Source: Statistics SA
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Electricity prices - CPI
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
yr%
Electricity
Source: Statistics SA
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Rents CPI
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
yr%
Actual rentals
Actual rentals-Houses
Actual rentals-Flats
Actual rentals-Town houses
Source: Statistics SA
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Inflation – back to the 60s
Source: SA Reserve Bank
-10
-5
0
5
10
15
20
25
Jan-
23Fe
b-27
Mar
-31
Apr
-35
May
-39
Jun-
43Ju
l-47
Aug
-51
Sep
-55
Oct
-59
Nov
-63
Dec
-67
Jan-
72Fe
b-76
Mar
-80
Apr
-84
May
-88
Jun-
92Ju
l-96
Aug
-00
Sep
-04
Oct
-08
%yr
Headline CPI Mean 5.73
Mean 5.7%
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Recessions and subsequent recoveries: PSCENot your run of the mill credit cycle
90100110120130140150160170180
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10Q11 Q12Q13Q14Q15 Q16
4Q1974 4Q1976 1Q1982
1Q1985 2Q1990 4Q2008
Currentrecovery
Source: Reserve Bank
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Residential mortgages / total household credit
56
58
60
62
64
66
68
70
72
Jan-
1999
Sep
-199
9M
ay-2
000
Jan-
2001
Sep
-200
1M
ay-2
002
Jan-
2003
Sep
-200
3M
ay-2
004
Jan-
2005
Sep
-200
5M
ay-2
006
Jan-
2007
Sep
-200
7M
ay-2
008
Jan-
2009
Sep
-200
9M
ay-2
010
Jan-
2011
Sep
-201
1M
ay-2
012
%
Source: SA Reserve Bank
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Is housing affordable? Probably not
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
4Q19
691Q
1971
2Q19
723Q
1973
4Q19
741Q
1976
2Q19
773Q
1978
4Q19
791Q
1981
2Q19
823Q
1983
4Q19
841Q
1986
2Q19
873Q
1988
4Q19
891Q
1991
2Q19
923Q
1993
4Q19
941Q
1996
2Q19
973Q
1998
4Q19
991Q
2001
2Q20
023Q
2003
4Q20
041Q
2006
2Q20
073Q
2008
4Q20
091Q
2011
Loan amortisation / PDY per capita
Ratio
Source: I Net, SIM
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Unsecured lending
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
400000045000005000000550000060000006500000700000075000008000000D
ec-0
7
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
Aug
-10
Dec
-10
Apr
-11
Aug
-11
Dec
-11
R'm
Number of accounts (lhs)
Gross debtors Book - Unsecured Credit (rhs)
Source: National Credit Regulator
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Households’ unsecured credit
0
10
20
30
40
50
60
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
% o
f tot
al n
ew lo
ans
Mortgages Short term Unsecured
Credit facilities Secured
Source: National Credit Regulator
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SA real long bond yield
-6-4-202468
101214
1968/01/011970/01/011972/01/011974/01/011976/01/011978/01/011980/01/011982/01/011984/01/011986/01/011988/01/011990/01/011992/01/011994/01/011996/01/011998/01/012000/01/012002/01/012004/01/012006/01/012008/01/012010/01/01
%
Source: I Net
Credit ceilings 1965-721976-80
1980 Interest rate controls removed Credit ceilings removedReserve requirements lowered
Foreign exchange and investmentcontrolled by government in 1970s
Capital controlstightened in 1985
Registrar of Co-operation(limited bank competition)removed in 1983
1990s• Trade liberalisation,
lower inflation and removal of controls on FDI
• Forex controls easing• Capital account
liberalised from 1991• Exchange controls on
non-residents eliminated in 1995
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Financial Crisis
Bank crisis
Reinhart
Rogoff
AusterityThis time it’s
different
THANK-YOU!!