Global current account balances as a % of world GDP 1 0.5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-0.5-1 - 1.5-2 United States Germany+Japan Developed Rest OPEC Developing Rest China Source: IMF BOPS Too Much of the Wrong Sort of Capital Flow 1
Eurozone current account deficits: 2000 2008 0-2 % of GDP % of 2000 GDP 2008 % - 4-6 - 8-10 - 12 Greee Greece Ireland Ireland Portugal Portugal Spain Spain - 14-16 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year Source: InternaIonal Monetary Fund, World Economic Outlook Database, October 2012 Too Much of the Wrong Sort of Capital Flow 2
US private and public leverage cycles Source: McCulley and Pozsar Too Much of the Wrong Sort of Capital Flow 3
UK household deposits and loans: 1964 2009 100% 90% 80% 70% SecuriCsaCons and loan transfers Deposits Loans % of GDP 60% 50% 40% 30% 20% 10% 0% 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: Bank of England, Tables A4.3, A4.1 Too Much of the Wrong Sort of Capital Flow 4
Measures of increasing financial intensity 300% US debt as a % of GDP by borrower type 250% 200% 150% 100% 50% 10% 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1990 1996 2002 2007 Too Much of the Wrong Sort of Capital Flow 5
US financial sector assets 300% Banks GSE Issuers of ABS Security Broker- Dealer MMMFs Agency and GSE- Mortgage Pools Finance Companies Funding CorporaCon 250% 200% 150% 100% 50% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Too Much of the Wrong Sort of Capital Flow 6
Categories of debt: UK 2009 bn Other corporate Commercial real estate 232 243 Primarily produccve investment Some produccve investment and some leveraged asset play ResidenCal mortgage (including securiczacons and loan transfers) 1235 Mainly purchase of exiscng assets Unsecured personal 227 Pure life- cycle consumpcon smoothing Too Much of the Wrong Sort of Capital Flow 7
Credit and asset price cycles Increased credit extended Increased lender supply of credit Increased borrower demand for credit Expectation of future asset price increases Increased asset prices Favourable assessments of credit risk Low credit losses: high bank profits Confidence reinforced Increased capital base Too Much of the Wrong Sort of Capital Flow 8
Interactions between credit categories and effects Increased apparent wealth Reduced saving: increased consumpcon Increasing credit supply / demand Increased price of exiscng real estate Increased prices for new real estate Boom in new real estate construccon Borrower and lender net worth, confidence and expectaconal effects Equity withdrawal mortgage supply & demand Too Much of the Wrong Sort of Capital Flow 9
Categories of net capital flow effects Finance for new real estate construcion boom Over- investment cycle and debt overhang Spain, Ireland, US Finance for exising real estate purchase Credit and asset price cycle and debt overhang UK (And Spain, Ireland, US) Finance of unsustainable consumpion Debt overhang US in parccular Too Much of the Wrong Sort of Capital Flow 10
Net capital flows and domestic credit cycles Structural drivers of current account imbalance Increased debt finance of: Real estate ConsumpCon Credit and asset price cycles Wealth effects and increased consumpcon DomesCc banking system creacon of credit and matching money Total increase in credit and subsequent debt overhang a large muliple of the net internaional capital flows Too Much of the Wrong Sort of Capital Flow 11
Total cross-border capital inflows: 1980 2011 12 Foreign direct investment USD trillions, constant 2011 exchange rates 10 8 6 4 2 0 Equity Bonds Loans and deposits 4.9 2.0 5.8 4.8-2 % Global GDP -4 1990 1995 2000 2005 2007 2011 5 5 13 15 21 7 Source: Future of Long-term Finance, Group of Thirty Report, MGI, December 2012 Too Much of the Wrong Sort of Capital Flow 12
Coefficient of variation of inward cross-border runs by type Emerging Markets 2.4 1.8 1.7 1.7 0.7 Short maturity Long maturity Developed Markets 6.0 3.2 0.7 0.9 0.5 Short-term bank claims Long-term bank claims Bonds Equity FDI Source: Future of Long-term Finance, Group of Thirty Report, MGI, December 2012 Too Much of the Wrong Sort of Capital Flow 13
Dynamics of increasing deficits in reserve currency economy Naturally arising operaconal & investment preferences $ Reserve currency status Need to hold $ reserves matched by necessary US current account deficit SCll further increase in market liquidity $ interest rates marginally lower $ exchange rate higher No constraint on increasing deficit given reserve currency status Easier supply of credit increased consumpcon Increased current account deficit Consequent current account deficit and overseas holding of $ can be far higher than reserve currency status makes necessary Too Much of the Wrong Sort of Capital Flow 14