Seminar economics uk_2012_eib_bnp version

A mental structure for macro-economics

1

6 Circles5 Instruments of the ECB5 Financial markets

Roger Jean Claessens is an International lecturer and an independent consultant for the financial services industry.

Professor at UBI (United Business Institutes), BrusselsExpert lecturer for FEBELFIN (Federation of banks & insurance in Belgium) Expert lecturer for the EIB in LuxembourgExpert lecturer for BGL BNPPARIBAS others…

Author of several books:« Corporate culture », End 2011, Serbian Bank Association (SBA)«What is a bank?» 2009, Promoculture & Author House, UK« Branch Management», with P. Wiertz,2006 Promoculture & SBA « Ethics, corporate values and prevention of money laundering», 2003 SBA « Marketing in financial services », 2007 SBA

Member of the Luxembourg Club of Economists.

The purpose of the seminar

Provide you with a mental structure

The schedule of the day

Morning (a) The economic circuit (b) The economic cycles (c) The intervention of the Central Bank (d) The intervention of the Government (e) Money and the Financial Markets

Afternoon (1) The key economic indicators (2) Economic highlights of today


Morning - (a) The economic circuit- (b) The economic cycles- (c) The intervention of the Central Bank - (d) The intervention of the Government- (e) Money and the Financial Markets


This is an economic circuit

(a) The economic circuit

Products & Services

GNP

CONSUMERS

Salaries, interest, rentalsLABOUR

ENTREPRENEURS

Offer

Offer

Demand

Demand

Samuelson underlines that every economy has to answer three basic questions:

What to produce? Is determined by the consumers. How to produce? Is determined by the competition between companies.

For whom? The answer to the third question is a matter of choice.


Products & Services

GNP

CONSUMERS


ENTREPRENEURS

Offer

Offer

Demand

Demand

WHAT?HOW?

FOR WHOM?


10

€ $

What happens when you purchase a product in the USA?

Salaries have been doubled,what are the consequenceson the economy?

Discussion



In Samuelson’s representation, the government is either acting as a consumer or as a company, dependant upon its specific action.

The guardian of the monetary system is the central bank

Products & Services

GNP

CONSUMERS


ENTREPRENEURS

Offer

WHAT?HOW?

FOR WHOM?

Demand

Demand

Offer

Government Central Bank

GNP = C+I+G+(X-M)

The Gross National Product is equivalent to the sum of private consumer spending (C), private investment spending (I), government spending (G) and net foreign spending (eXports - iMports) on final goods and services output.


The goal of modern economic management is to keep this circuit in balance.

There are two states of unbalance:

INFLATION = a state of unbalance, characterised by increasing prices. The consequence of inflation is a decreasing purchasing power of money, i.e. with the same amount of money you will acquire a decreasing number of goods and services.DEFLATION = is an unbalance characterised by

decreasing prices


You purchase one egg daily for one Euro!

What happens if the farmer knows that you had a big salary increase?

Discussion


17

INFLATION

18

INFLATION

(c) The intervention of the central bank

19

20

DEFLATION

ENTREPRENEURS

(a) The economic circuit : The Entrepreneur

The economic system depends upon people. Adam Smith pointed out that the individual motivation, invention, and innovation inspire an economy to greater prosperity.

The “Wealth of a Nation” depends upon imagination, entrepreneurship and discipline


Market competition (the invisible hand in Adam Smith’s terms) leads a self-interested person to wake up in the morning, look outside at the earth and produce from its raw materials, not what he wants, but what others want!

The invisible hand (= the market) forces people to give up if they do not produce something more valuable than they started with.


Strangely enough, we often make the statement in our part of the world, that we have discouraged the entrepreneurs because of administrative burdens, high social security contributions and high taxation.


The entrepreneur is also someone who will continuously struggle to balance flexibility and cost cutting in order to discover the optimal structure of the enterprise, pushing for productivity, which is “the” competitive asset of a nation.


Paul Krugman highlights how the government can induce firms to lift productivity.

Higher productivity translates into higher standard of living.

But rising productivity requires rising investments in plant, equipment, research and education.

High taxes discourage the search for productivity.


CONSUMERS

(a) The economic circuit : The Consumer

ON CONNAIT LE CONSOMMATEUR!

Keynes underlines in the mid thirties that households are the most important component of overall demand.

Keynes appoints income the chief determinant.


Veblen went even further than Marshall and encouraged economists to be more willing to meet with sociologists, anthropologists and psychologists if they wanted to develop a better understanding of the consumer.


Veblen made this rightful conclusion that consumers’ demand of goods is determined by the use of the good and the price that the consumer thinks other people will think he paid!

He analysed the underlying motivation of manypurchases.


How can one get a feel for the mood of both the consumers and the entrepreneurs?

By analysing the economic indicators. There are about 300 major indicators. Every week about 60 of them are being published on the key economies.


Products & Services

GNP

(b) The economic cycles

A fall of the GNP means that men and women will be in a more precarious situation and that pessimism will probably settle in.

It reflects the mood of the entrepreneurs and the consumers


There are 300 hundred key economic indicators divided into 3 categories :

1. the leading indicators = upstream indices of change

2. the coincidental indicators = indices of change3. the lagging indicators = downstream indices of

change

Example:4. The stock index5. Building permits6. Savings versus income



37

Each cycle is unique but contains enough similarities with others to enable us to draw general conclusions.

Let us also remember that many internal or external factors can have an impact on the economy, such as: politics, acts of war, etc.


What might be indicators around us of an economic boom or a slow down?


Discussion

• Production• employment• productivity• wages• sales• profits• output• credit• investment goods

• Stock exchange• GNP• public sentiment• risk taking• new activities• interest rates• central bank• resources• inventories


Orders exports / imports employment sacrificed prices raw materials intervention bankruptcies savings

Intensity of fluctuation Excess capacity liquidity credit-crunch competition central bank producers imagination


The better the understanding of a situation is, the greater the probability to take a right decision, hence the study of the economic indicators

They are the language of the economy

They are the basis for educated decisions


Markets do react to their release

Each week about 60 are released for the G 7

Monitoring is an on-going and time consuming process

Understanding their correlations is key to economic decisions




44

The challenge of the European Union is to decrease non-structural[1] unemployment. [1] Structural unemployment means unemployment linked to the changes or lack of changes within the economy, the social structure or demographics.

The unemployment in the EU remains significant for variousreasons, which we qualify as structural but are in fact non-structural.

The equilibrium in the employment market will be more and more difficult to establish. The structure of the age pyramid is changing dramatically.

(b) The economic cycles: The labour market

45

(1) The key economic indicatorsPopulation, employment & unemployment

46


47

Products & Services

GNP

CONSUMERS


ENTREPRENEURS

Offer

Offer

Demand

Demand

48


49

The economic indicators and their correlation:1. GDP2. Unemployment3. Industrial production

(Source: The Economist)

(b) The economic cycles:

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

Se-ries1

7.3 2.7 1.5 0.8 2.8 1.7 2.2 3.6 4.2 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -2 -2.6 3.1 3.2 2.9

-3

-1

1

3

5

7

GDP USA

50

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

Se-ries1

7.3 2.7 1.5 0.8 2.8 1.7 2.2 3.6 4.2 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -2 -2.6 3.1 3.2 2.9

Se-ries2

4.1 3.9 4.5 5.4 6.1 5.9 5.8 5.7 5.7 5.4 5.2 5 4.7 4.4 4.5 4.7 5.1 6.5 9.7 9.7 9 9.1

-3

-1

1

3

5

7

9

11

USA

51

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

Series1

7.3 2.7 1.5 0.8 2.8 1.7 2.2 3.6 4.2 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -2 -2.6 3.1 3.2 2.9

Series2

4.1 3.9 4.5 5.4 6.1 5.9 5.8 5.7 5.7 5.4 5.2 5 4.7 4.4 4.5 4.7 5.1 6.5 9.7 9.7 9 9.1

Series3

6.4 3.3 -1 -6.4 -2.9 0.2 0.1 2.3 3.4 4.6 3.9 1.9 3.6 4.9 1.9 1.9 1 -4.5 -10.7 1.7 5 3.7

-9

-4

1

6

USA

52

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

Se-ries1

3.7 3.6 2.3 1.7 1.3 1.2 1 0.5 0.6 1.9 1.4 1.6 1.7 2.6 3.1 2.6 1.6 -3.9 1.2 1.7 1.6 1.6

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

EU GDP

53

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

Se-ries1

3.7 3.6 2.3 1.7 1.3 1.2 1 0.5 0.6 1.9 1.4 1.6 1.7 2.6 3.1 2.6 1.6 -3.9 1.2 1.7 1.6 1.6

Se-ries2

9.5 9 8.4 8.3 8.4 8.3 8.7 8.8 8.8 9 8.9 8.4 8.1 7.8 7.2 7.3 7.1 9.5 9.9 9.9 9.9 9.9

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

EU

54

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

Series1

3.7 3.6 2.3 1.7 1.3 1.2 1 0.5 0.6 1.9 1.4 1.6 1.7 2.6 3.1 2.6 1.6 -3.9 1.2 1.7 1.6 1.6

Series2

9.5 9 8.4 8.3 8.4 8.3 8.7 8.8 8.8 9 8.9 8.4 8.1 7.8 7.2 7.3 7.1 9.5 9.9 9.9 9.9 9.9

Series3

3.8 1.9 3.8 -0.6 -0.33 -0.12 1.8 1.2 0.6 1.5 0.6 1 3.2 3.3 3.7 4.3 3.8 -15.9 1.4 5.3 5.3 2.9

-13.5

-8.5

-3.5

1.5

6.5

11.5

EU

55

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

GDP

-5.5 -4.7 0.6 -2.9 -1.9 -0.4 0.7 1 3.4 4.3 1.1 2 4 2.7 2 2 1.3 0 -5.5 1.7 2.4 -0.6

-6

-4

-2

0

2

4

Japan GDP

Axis Title

56

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

GDP

-5.5 -4.7 0.6 -2.9 -1.9 -0.4 0.7 1 3.4 4.3 1.1 2 4 2.7 2 2 1.3 0 -5.5 1.7 2.4 -0.6

Unemployment

4.9 4.7 4.7 5.3 5.2 5.2 5.2 5.3 5 4.8 4.5 4.2 4.1 4.2 4 4 3.9 4 5.7 4.9 4.5 4.6

-5

-3

-1

1

3

5

Japan

57

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

09/2009

05/2010

05/2011

08/2011

GDP

-5.5 -4.7 0.6 -2.9 -1.9 -0.4 0.7 1 3.4 4.3 1.1 2 4 2.7 2 2 1.3 0 -5.5 1.7 2.4 -0.6

Unemployment

4.9 4.7 4.7 5.3 5.2 5.2 5.2 5.3 5 4.8 4.5 4.2 4.1 4.2 4 4 3.9 4 5.7 4.9 4.5 4.6

Ind Produc-tion

1.14 0.7 -0.29 -1.19 -1 -1 0.48 0.28 0.69 0.38 0.11 0.12 0.31 0.52 0.16 0.08 0.42 0.2 -2.27 1.85 -1.3 -1.7

-5

-3

-1

1

3

5

Japan

58

GNP

CONSUMERS

LABOUR

ENTREPRENEURS

Offer

WHAT?HOW?

FOR WHOM?

Demand

Demand

Offer


59

5 Key tools of the central bank1. The printing of money2. The short term interest rates3. The fractional reserve

requirements 4. The open market policy5. The financial structure of the

banks


1- Printing money


The question central bankers must answer is:

“What is the correct money supply level?”

The easy answer is enough to buy all the goods and services produced, so that full employment is reached without a rise in prices.

P.Q = M.V


P.Q = M.V

P = price level of goods and services

Q = quantity of goods and services produced in a national economy (= GDP)

M = the monetary supply (the assets of the consumers and the entrepreneurs, with corresponding liabilities for the banking system and the central bank)

V = is the velocity of the circulation of money


Reserve requirement of 10 out of 100

100 is deposited with Bank A Bank A is going to deposit 10 with CB and lend 90

90 is deposited with Bank BBank B is going to deposit 9 with CB and lend 81

81 is deposited with bank CBank C is going to deposit 8,1 with the CB and lend 72,9

…

M0 = cash = 100 = monetary baseM1 = cash + sight deposits = 342,9 = money supply = (100+90+81+72,9)



The preference curve of the borrowers

2- Interest rates

The preference curve of the lenders


2- Interest rates


The cost of borrowing and the return of a deposit


When the perspective changes, the curve moves

Interest rateShort term interest rate + inflation

= +/- long term interest rate

Real interest rate = +/- nominal interest rate – inflation


2 – Interest rates

0

20

40

60

80

100

120

140

160

180

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12

Interest shares GDP Bonds


Money makes the economic system work.



3 – Fractional reserve requirement

The representation of a bank’s balance sheet

Sum of assets

Sum of liabilities

Net worth

Assets-Liabilities to third parties


3 – Fractional reserve requirementCommercial Bank Central Bank

%DEPOSIT

SLOAN

S DEPOSITS


Commercial Bank Central Bank

Purchase of bonds

Euro

4 – Open market policy or “quantitative easing”


Commercial Bank

5 – Balance sheet structure

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

05/2009

09/2009

04/2010

05/2011

08/2011

GDP

7.3 2.7 1.5 0.8 2.8 2.2 2.2 3.6 4.3 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -1.2 -2.9 -2.6 0.01 2.8 2.3

s t interest rate

6.57 6.49 3.95 2.05 1.82 1.82 1.22 1.05 1.08 2.06 3.015 4.006 5.002 5.225 5.118 4.51 2.008 0.2 0 0.02 0.022 0.013 0.27

-3

-1

1

3

5

7

USA: GDP vs Short term interest rate

78

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

05/2009

09/2009

04/2010

05/2011

08/2011

Short term

6.57 6.49 3.95 2.05 1.82 1.82 1.22 1.05 1.08 2.06 3.15 4.006 5.002 5.22 5.18 4.51 2.008 1.28 0 0.02 0.02 0.013 0.27

Long term

6.39 5.6 5.45 4.95 5.21 5.21 3.99 4.11 4.77 3.99 4.22 4.51 5.014 4.57 4.86 4.47 3.46 2.96 3.2 3.4 3.82 3.13 2.12

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

USA rates

79

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

05/2009

09/2009

04/2010

05/2011

08/2011

short term

4.18 5.1 4.55 3.38 3.42 3.42 2.55 2.08 2.07 2.15 2.13 2.44 2.87 3.61 4 4.6 4.74 3.9 1.3 0.075 0.064 1.4 1.54

long term

5.34 5.06 5.06 4.59 5.09 5.09 4.11 4.11 4.11 3.78 3.33 3.43 3.96 3.67 4.36 4.24 4.002 3.27 3.4 3.4 3.07 3.1 2.24

0.5

1.5

2.5

3.5

4.5

5.5

EU rates

80

05/2000

11/2000

05/2001

11/2001

05/2002

11/2002

05/2003

11/2003

05/2004

11/2004

05/2005

11/2005

05/2006

11/2006

05/2007

11/2007

05/2008

11/2008

05/2009

09/2009

04/2010

05/2011

08/2011

short term

0.04 0.05 0.02 0.02 0.03 0.03 0.02 0 0.02 0 0.02 0.02 0.04 0.04 0.057 0.073 0.075 0.077 0.048 0.039 0.029 0.016 0.15

long term

0.171 0.17 0.128 0.134 0.134 0.136 0.06 0.134 0.156 0.142 0.13 0.148 0.192 0.167 0.168 0.16 0.134 0.139 0.142 0.132 0.131 0.115 1.02

0.10

0.30

0.50

0.70

0.90

1.10

Japan rates

81

The ECB’s president argues that its most valuable asset is information,

not money.82

GNP

CONSUMERS

LABOUR

ENTREPRENEURS

Offer

WHAT?HOW?

FOR WHOM?

Demand

Demand

Offer


About 200 years ago Adam Smith defined what, in his view, should be the role for a government.

“First”, he said, “providing for national defence, second, administering justice through a court system; third, maintaining public institutions and resources such as roads, canals, bridges, educational systems, and the dignity of the sovereign.”

(d) The intervention of the government

From the end of the 19th century the economic functions of the state developed without interruption in almost all of the industrialised countries.

Today, simultaneously public and private institutions exert control.


The state intervenes, as a spending prone economic agent, to improve the real or nominal income of certain citizens. (For example the minimum income level are nowadaysamong the usual objectives of the public authorities).

The State, all things considered, behaves exactly like any other large consumer or investor or entrepreneur.


Keynes recommended, in addition to state intervention resorting to budget deficits to stimulate the economy, to spend thus more than the receipts and to borrow to finance this extra expenditure.

Many states did pursue this economic policy only too well with a resulting high inflation and/or a high

indebtedness as a result.


One of the functions of the state consists in attenuating the acute or chronic crises of unemployment or inflation as well as promoting the economic growth.


The balance of payments is a good source in this respect.

It reveals the overall situation of the economy and provides an excellent idea of the economic activity by both the state and the consumers and producers.


Trade in goods balance -20

Plus Trade in services balance 4

Plus Transfer payments 2

Plus Investment income 6

Equals CURRENT ACCOUNT -8

Equals CAPITAL ACCOUNT 5

Plus Balancing item 3

BALANCE OF PAYMENTS 0

91


A surplus in the overall balance will indicate a probability of a strong and stable currency, of a healthy economy with stable interest rates, where the investment climate should be favourable.

Deficits can occur. During recessions, balanced budgets are probably not the best thing.

Over the course of the business cycles budgets should be balanced.


With huge non-funded pension liabilities, European governments will struggle to keep their budget deficits within the limits they agreed to when joining the Euro.

The solution has to do with welfare reform rather than tax harmonisation

The real problem in the EU is that taxes on labour are very high, probably too high. The answer to that is not tax harmonisation but the reform of the welfare state.


The national debt is a relatively new and impressive event.

On the positive side, a national debt undeniably allows for internal transfers between individuals of the same age or different age.

On the negative side, an external national debt constitutes a real charge for the economy and a limitation to the national consumption.


Intérêts& Capital

Time

The law of compounded interest

96

At 10 % p.a. = capital & int. Double in 7,2 years.

(e) Money and the financial markets

The art of asking questions…..


98

What might be the difference between

those markets?

1. The money market2. The capital market3. The foreign exchange

market4. The stock market5. The future market

Discussion


The art of asking oneself questions


The market is available for financial transactions up to one year for the professionals of the financial sector.

Periods are standard and the computation of interest is done on an exact day count basis.

Beyond one year one talks about the capital market.


1. Money Market

Quotations are with bid and offer rates- for instance 2.25 – 2.35 for a given period;

This means that if you would call a bank you:

Could place money at 2.25 less the margin of the bank & Could borrow at 2.35 plus the margin of the bank (providing a contractual framework).


1. Money Market

The capital market comprehends transactions beyond one year.

Rates reflect the inflation expectations of the market participants, mainly the governments and institutional borrowers and lenders.

The main instrument used to raise long term capital is a bond.


2. Capital Market

Bond pricing is determined by:• the rating of the issuer, • the rating of the bond, • the market’s appetite for a certain rate or

borrower, • the placement power of the underwriters, • the commissions, • the tenor of the bond, …


2. Capital Market

Present Value (PV) & Future value (FV) of money

What will be the purchasing power of 100 € in year from now?


2. Capital Market

105

Future value (FV) = Present value x interest ratePresent Value (PV) = Future value (FV) x discount factor

Discount factor for one year =

Discount factor for two years =

21

1

r

r1

1


2. Capital Market

106

Bond pricingPlease note what would happen with a 3 % and with a 10 % discount rate!

(1.07)³

100.000

(1.07)³

10.000

(1.07)²

10.000

1.07

10.000

107.83681.6008.1608.7309.346


2. Capital Market

Price

Interest rate

(e) Money and the financial marketsBond Price

SS&&PP RRaattiinngg MMooooddyy’’ss EEqquuiivvaalleenntt

DDeeffaauulltt PPrroobbaabbiilliittyy ((SSuubbsseeqquueenntt yyeeaarr))

AAAAAA AAaaaa 00..0022

AAAA AAaa33//AA11 00..0055

AA AA22//AA33 00..0088

BBBBBB BBaaaa22 00..2288

BBBB BBaa11//BBaa22 11..5533

BB BBaa33//BB11 77..2288

CCCCCC BB22//BB33 1144..0000

CCCC BB33//CCaaaa 1177..0000

CC CCaaaa//CCaa 1188..2255

(e) Money and the financial marketsCredit risk – credit ratings

Samuelson’s circle shows a closed economy.

When a consumer purchases a piece of equipment in another economic/currency system, he will need to exchange his national currency into the foreign one.


3. Foreign Exchange Market

€ $Consume

r

Market



• The seller could accept the currency of the buyer and change the currency in his home country.

• When would he choose that option?

• What determines the value of a currency?


112

3. The foreign exchange markets

Discussion

The foreign exchange market is the largest market in the world. It is an over the counter market, regulated by a strict code of conduct.

The daily turnover is now close to an estimated $4.000.000.000.000.



It is by large the largest market in the world and the most unpredictable, although theoretically there is a fundamental link between the interest rates, the balance of payments of countries and the exchange rates of their currencies.



EUR / USD 1.39458 - 1.39475

Prices are quoted as shown:The EUR is the unit - buyer & selling side



The dealer which is being called quotes:

EURO / USD 1.39458 – 1.39475

1.39458 is the buying side = the rate at which he is willing to purchase EURO against USD

1.39475 is the selling side = the rate at which the dealer is willing to sell EURO against USD



The dealer which is being called quotes: EURO / USD 1.39458 – 1.39475

Settlement needs to be done in two working days - physical exchange

$

€

Settlement risk !



Inflation - Interest rates & Foreign Exchange

1970 : £ = 120 FLUX = € 32003 : £ = 66 FLUX = € 1.602011 : £ = 50 FLUX = € 1.10

There is a relationship between the inflation and theinterest rate and the exchange rate


The key economics indicator : the exchange rate

Difference in interest rate

Expected difference in

inflation rate

Difference between

forward & spot rate

Expected change in spot rate

equals equals

equals

equals


The key economics indicator : the exchange rate

(e) Money and the financial markets4_ Stock Market


4_ Stock Market

Forward Future

Specific amounts Standard amounts

Over the counter Organised market

Settlement risk Off-setting is easy

Up to 12 months Up to what the market will bear


5_Futures Market

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The name derivative comes from the fact that the profit or loss is derived from the fluctuation of another product called the “underlying” product


5. Futures and derivatives Market

The underlying product might be a raw material such as wheat, petrol, but could also be shares or bonds, a portfolio, and so on.

A derivative could be an option to purchase or to sell something at a later date at a certain price.



The prices of the derivatives will fluctuate in line with:

1. The interest rate2. The volatility of the underlying instrument3. The time 4. The actual price of the underlying instrument5. The price at maturity of the contract



“People often talk about financial markets as if they were casinos, but they are more dangerous than any gambling den. The numbers on a roulette wheel never change, but markets offer no guarantee that yesterday’s odds will be the same tomorrow. 126

(e) Les marchés financiers

0

20

40

60

80

100

120

140

160

180

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12



Market Fundamentals

What would happen in extreme economic deterioration, characterised by hyper-inflation?


Discussion

0

50

100

150

200

250

300

350

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12



Market Fundamentals


Morning - (a) The economic circuit- (b) The economic cycles- (c) The intervention of the central bank - (d) The intervention of the government- (e) Money and the financial markets


Products & Services

GNP

CONSUMERS


ENTREPRENEURS

Offer

WHAT?HOW?

FOR WHOM?

Demand

Demand

Offer


(1) The key economic indicators1. Measuring economic

activity2. Growth3. Population, employment

and unemployment4. Fiscal indicators5. Consumers6. Investment and savings7. The balance of payments8. The exchange rates9. Money and the financial

markets10. Prices and wages

(1) The key economic indicators Consumption

(1) The key economic indicators Investments and Savings

(1) The key economic indicators Economic activity

The gross domestic product is measured per quarter and is often expressed as a percentage increase or reduction compared with the previous quarter.

The change is often annualised.

One speaks about a recession when the GDP falls two quarters in a row.

(1) The key economic indicators Growth

GNP

CONSUMERS

LABOUR

ENTREPRENEURS

Offer

WHAT?HOW?

FOR WHOM?

Demand

Demand

Offer


(1) The key economic indicatorsExchange rate

(1) The key economic indicators Fiscal indicators

(1) The key economic indicators The balance of payments

(1) The key economic indicators Fiscal indicators

Government spending as percentage of national income in G7 countries

2000 2010

France 51.6 55.9

UK 36.6 52.5

Italy 46.1 51.6

Germany 45.1 47.9

Canada 42.0 43.2

United States 33.9 41.6

Japan 39.0 40.8


What are the recent

economichighlights?

Discussion

152

(2) The economic highlights of today

“WE ARE A MOONWALKER NATION”

President Obama visits Facebook on the 20th of April 2011

160160


Most crisis do not detonate like bombs – they emerge:

What could be their indicators?


Most crisis do not detonate like bombs – they emerge:

What could be there indicators?

° fraud, waste, abuse

° disinformation

° financial indicators

° economic indicators

° lack of common sense

1. Aging2. Far-East3. Connectivity4. “GRIN”

technologies5. Environnemen

t

(genetics, robotics, internet, nano technology)

The trend

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Conclusion

Economics is the study of choice. It does not tell us what to choose. It only helps us understand the consequences of our choices.

“New Ideas from dead economists”, Todd Bucholz

Sources

[email protected]

It was nice being with you !

167

Bibliography

“Pocket Economist”, M Bishop, The Economist Books,2000“Economics” Paul Samuelson, Armand Colin ( old French edition), 1964“Economics for Professional Investors” Tim Lee, Prentice Hall Professional Finance series, 1998“New Ideas of Dead Economists”, Todd Bucholz, Plume, 1990“The world is flat”, T. Friedman, Penguin, 2006 “The dead of inflation” R.Bootle, Nicholas Brealey, 1996“International Economics, P. Krugman & M. Obstfeld, Addison Wesley Longman,1995

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AddendumInterventions & Ideas for the financial sector

Interventions in 2008 - 2009

1. Bank deposit guarantee2. Bank recapitalisation3. Purchase of poor quality assets4. Liquidity guarantee5. Lending guarantee6. Mergers7. Investment banks accepting commercial bank

regulations8. Stress test

9. Short selling crack down 10. Derivatives regulations11. Interest rates decrease12. Help for municipalities and households13. Corporate tax cuts14. Tax rebates for individuals15. Infrastructure improvement programs16. IMF 17. EU Supervision


18. Accounting rules19. Credit rating agencies20. Executive pay21. Private equity22. Credit card regulations23. Product transparency 24. Off-shore centres


Seminar economics uk_2012_eib_bnp version

Economy & Finance

Transcript of Seminar economics uk_2012_eib_bnp version