Aleman-Chile_Latin_America_US_Policy Jan 1411

“Monetary Policy, Fiscal Policy, Devaluation & The China/Wal-Mart Effect” Eugenio J. Aleman, Director and Senior Economist January 17, 2011

Argentina: Large Currency Devaluation

Argentine Peso (pesos per U.S. dollar) 4.50 4.00 3.50 3.00

Abandonment of the Convertibility Law: Devaluation of 70 percent in one year

2.50 2.00 1.50 1.00 0.50

Ja n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n0 Ja 9 n10

0.00

Source: BCRA, Wells Fargo Securities, LLC

Economics

2

Argentina: Inflation

Argentina: Consumer Inflation (% change year-over-year)

50

40

30

Consumer prices surge after the devaluation

20

10

0

Ja n94 Ja n95 Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10

-10

Source: INDEC, Wells Fargo Securities, LLC

Economics

3

Argentina: Real GDP

Argentina: Real GDP (year-over-year change)

15.0% 10.0% 5.0%

GDP plunges by 10.9 percent in 2002

0.0% -5.0% -10.0% -15.0%

19 94 -Q 19 1 95 -Q 1 19 96 -Q 19 1 97 -Q 19 1 98 -Q 19 1 99 -Q 1 20 00 -Q 20 1 01 -Q 20 1 02 -Q 20 1 03 -Q 20 1 04 -Q 20 1 05 -Q 20 1 06 -Q 1 20 07 -Q 20 1 08 -Q 20 1 09 -Q 20 1 10 -Q 1

-20.0%

Source: INDEC, Wells Fargo Securities, LLC

Economics

4

Argentina: Real Personal Consumption Expenditures

Argentina: Real Consumption (year-over-year change)

15.0% 10.0% 5.0% 0.0%

Real Consumption collapsed by 14.4 percent

-5.0% -10.0% -15.0% -20.0%

19 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 20 Q1 05 20 Q1 06 20 Q1 07 20 Q1 08 20 Q1 09 20 Q1 10 -Q 1

-25.0%

Source: INDEC, Wells Fargo Securities, LLC

Economics

5

Argentina: Current Account

Argentina: Current Account (percentage of GDP) 3.5 3.0 2.5 2.0 1.5

The Current Account changes from a deficit to a strong positive

1.0 0.5 0.0 -0.5 -1.0 -1.5

19 9

419 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q 1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 20 Q1 05 20 Q1 06 20 Q1 07 20 Q1 08 20 Q1 09 20 Q1 10 -Q 1

-2.0

Source: INDEC, Wells Fargo Securities, LLC

Economics

6

Brazil: Devaluation of the Real in two periods

Brazilian Currency (reais per U.S. dollars, monthly average) 4.0 3.5 3.0 2.5

Brazil abandons the “managed peg” in January of 1999

2.0 1.5 1.0 0.5

Ja n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n0 Ja 9 n10

0.0

Source: BCB, Wells Fargo Securities, LLC

Economics

7

Brazil: Inflation increases in two periods

Brazil: IPCA Inflation Rate (% y-o-y) 24 22 20 18

Inflation surges after the abandonment of the peg and then after the election of Luiz Inacio “Lula” da Silva

16 14 12 10 8 6 4 2

Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10

0

Source: IBGE, Wells Fargo Securities, LLC

Economics

8

Brazil: Recession in 1999

Brazil: Real GDP (year-over-year change)

12.00% 10.00% 8.00% 6.00%

Recession after the abandonment of the managed peg

4.00% 2.00% 0.00% -2.00%

19 94 -Q 1 19 95 -Q 1 19 96 -Q 1 19 97 -Q 1 19 98 -Q 1 19 99 -Q 1 20 00 -Q 1 20 01 -Q 1 20 02 -Q 1 20 03 -Q 1 20 04 -Q 1 20 05 -Q 1 20 06 -Q 1 20 07 -Q 1 20 08 -Q 1 20 09 -Q 1 20 10 -Q 1

-4.00%

Source: IBGE, Wells Fargo Securities, LLC

Economics

9

Brazil: Real Personal Consumption Expenditures

Brazil: Real Consumption (year-over-year change)

20.00%

15.00%

10.00%

Real personal consumption expenditures drops after the abandonment of the managed peg

5.00%

0.00%

-5.00%

19 94 19 -Q1 95 19 -Q1 96 19 -Q1 97 19 -Q1 98 19 -Q1 99 20 -Q1 00 20 -Q1 01 20 -Q1 02 20 -Q1 03 20 -Q1 04 20 -Q1 05 20 -Q1 06 20 -Q1 07 20 -Q1 08 20 -Q1 09 20 -Q1 10 -Q 1

-10.00%

Source: IBGE, Wells Fargo Securities, LLC

Economics

10

Brazil: Current Account

Brazil: Current Account (percentage of GDP)

1.0

0.5

Current account is not affected by the abandonment of the managed peg but it is after the second round of devaluation after the election of Lula

0.0

-0.5

-1.0

19 95 -Q 1 19 96 -Q 1 19 97 -Q 1 19 98 -Q 1 19 99 -Q 1 20 00 -Q 1 20 01 -Q 1 20 02 -Q 1 20 03 -Q 1 20 04 -Q 1 20 05 -Q 1 20 06 -Q 1 20 07 -Q 1 20 08 -Q 1 20 09 -Q 1 20 10 -Q 1

-1.5

Source: IBGE, Wells Fargo Securities, LLC

Economics

11

Mexico: Large Devaluation

Mexico: Exchange Rate (pesos per U.S. dollar)

16.00 14.00 12.00

A 48 percent devaluation of the Mexican currency from December 1994 to December of 1995: The Tequila Crisis

10.00 8.00 6.00 4.00 2.00

Ja n9 Ja 1 n9 Ja 2 n9 Ja 3 n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n0 Ja 9 n10

0.00

Source: INEGI, Wells Fargo Securities, LLC

Economics

12

Mexico: High Inflation

Mexico:Consumer Inflation (% change year-over-year)

60.0

50.0

40.0

Inflation surges after the devaluation in 1994

30.0

20.0

10.0

Ja nJa 91 nJa 92 nJa 93 nJa 94 nJa 95 nJa 96 nJa 97 nJa 98 nJa 99 nJa 00 nJa 01 nJa 02 nJa 03 nJa 04 nJa 05 nJa 06 nJa 07 nJa 08 nJa 09 n10

0.0

Source: INEGI, Wells Fargo Securities, LLC

Economics

13

Mexico: Real GDP plunges

Mexico: Real GDP (year-over-year change)

10.0% 8.0% 6.0% 4.0% 2.0%

Real GDP plunges by 6.2 percent after the devaluation

0.0% -2.0% -4.0% -6.0% -8.0%

Q 1 19 96 -Q 1 19 97 -Q 1 19 98 -Q 1 19 99 -Q 1 20 00 -Q 1 20 01 -Q 1 20 02 -Q 1 20 03 -Q 1 20 04 -Q 1 20 05 -Q 1 20 06 -Q 1 20 07 -Q 1 20 08 -Q 1 20 09 -Q 1 20 10 -Q 1

5-

19 9

19 9

4-

Q

1

-10.0%

Source: INEGI, Wells Fargo Securities, LLC

Economics

Mexico: Real Personal Consumption Expenditures

Mexico: Real Consumption (year-over-year change)

10.0%

5.0%

Real personal consumption expenditures collapses by 9.5 percent

0.0%

-5.0%

-10.0%

19 94 -Q 19 1 95 -Q 1 19 96 -Q 19 1 97 -Q 19 1 98 -Q 19 1 99 -Q 20 1 00 -Q 1 20 01 -Q 20 1 02 -Q 20 1 03 -Q 20 1 04 -Q 20 1 05 -Q 20 1 06 -Q 20 1 07 -Q 1 20 08 -Q 20 1 09 -Q 20 1 10 -Q 1

-15.0%

Source: INEGI, Wells Fargo Securities, LLC

Economics

15

Mexico: Current Account

Mexico: Current Account (percent of GDP)

0.2 0 -0.2 -0.4

The current account goes from a large deficit to a small surplus after the devaluation of the currency

-0.6 -0.8 -1 -1.2 -1.4 -1.6

19 9

3 19 -Q1 94 19 -Q1 95 19 -Q1 96 19 -Q1 97 19 -Q1 98 19 -Q1 99 20 -Q1 00 20 -Q1 01 20 -Q1 02 20 -Q1 03 20 -Q1 04 20 -Q1 05 20 -Q1 06 20 -Q1 07 20 -Q1 08 20 -Q1 09 20 -Q1 10 -Q 1

-1.8

Source: INEGI, Wells Fargo Securities, LLC

Economics

16

U.S.A: Large Depreciation of the U.S. Dollar

U.S.A.:Trade Weighted Dollar March 1973 =100

The U.S. had a large depreciation of the dollar during the last 10 years

150

150

140

140

130

130

120

120

110

110

100

100

90

90

80

80

70

70 TWD Major Index: Dec @ 73.8

60 1973

60 1978

1983

1988

1993

Source: U.S. Treasury Department, Wells Fargo Securities, LLC

Economics

17

1998

2003

2008

U.S.A.: Dollar versus the Euro

U.S. Dollar/Euro Exchange Rate Dollars/Euro

1.60

1.60

1.50 1.40

1.50

1.30

The U.S. dollar depreciates 47.4 percent versus the Euro in 8 years

1.20

1.40

1.10 1.00 1.30

0.90 0.80

1.20

0.70 0.60

U.S. Dollars/Euro: Jan @ 1.29

0.50

1.10

1999 2000 2001 2002 2003 2004 2004 2005 2006 2007 2008 2009 2010

Source: U.S. Treasury Department, Wells Fargo Securities, LLC

Economics

18

U.S.A.: Consumer Prices

U.S. Consumer Price Index Year-over-Year Percent Change

6.0%

U.S. Consumer Prices are not affected significantly by the depreciation of the U.S. dollar

6.0%

5.0%

5.0%

4.0%

4.0%

3.0%

3.0%

2.0%

2.0%

1.0%

1.0%

0.0%

0.0%

-1.0%

-1.0%

-2.0%

-2.0% CPI: Dec @ 1.5%

-3.0%

-3.0% 92

94

96

98

00

02

Source: U.S. Department of Labor, Wells Fargo Securities, LLC

Economics

19

04

06

08

10

U.S.A.: Real GDP

U.S.A.: Real GDP Bars = Compound Annual Rate

10%

While Real GDP weakens during the short recession in 2001 it continues to grow until the Great Recession in 2008

Line = Yr/Yr % Change

10%

8%

8%

6%

6%

4%

4%

2%

2%

0%

0%

-2%

-2%

-4%

-4% Real GDP: Q3 @ 2.6%

-6%

-6%

Real GDP: Q3 @ 3.2% -8%

-8% 96

97

98

99

00

01

02

03

04

Source: U.S. Department of Commerce, Wells Fargo Securities, LLC

Economics

20

05

06

07

08

09

10

U.S.A.: Real Personal Consumption Expenditures

U.S.A.: Real Consumption Expenditures Bars = SAAR

8%

Real personal consumption expenditures weaken but continue to grow after the large drop in the purchasing power of the dollar

Line = Yr/Yr % Change

8%

6%

6%

4%

4%

2%

2%

0%

0%

-2%

-2% Personal Consumption Expenditure: Q3 @ 2.4% Personal Consumption Expenditure: Q3 @ 1.8%

-4%

-4% 96

97

98

99

00

01

02

03

04

Source: U.S. Department of Commerce, Wells Fargo Securities, LLC

Economics

21

05

06

07

08

09

10

U.S.A.: Monetary Policy Helps

U.S. Federal Reserve Target Rate 7.00%

7.00% US Federal Reserve: Jan @ 0.25%

The U.S. Federal Reserve conducts a very expansive monetary policy

6.00%

6.00%

5.00%

5.00%

4.00%

4.00%

3.00%

3.00%

2.00%

2.00%

1.00%

1.00%

0.00% 2000

0.00% 2002

2004

2006

Source: U.S. Department of Commerce, Wells Fargo Securities, LLC

Economics

22

2008

2010

U.S.A.: Credit Remains Expansive

Revolving & Nonrevolving Debt $12

Month-over-Month Change, 3-M Mov. Avg., Millions of Dollars

$10

U.S. credit continues to surge to finance consumption

$10

$8

$8

$6

$6

$4

$4

$2

$2

$0

$0

-$2

-$2

-$4

-$4

-$6

-$6

-$8 -$10

-$8 Revolving: Sep @ -$6.1 Million Nonrevolving: Sep @ $3.4 Million

-$10 -$12

19 9

4 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

-$12

Source: U.S. Federal Reserve, Wells Fargo Securities, LLC

Economics

$12

23

U.S.A.: Net Equity Extraction

U.S.A.: Net Equity Extraction (billion U.S. dollars)

250 200 150

U.S. consumers start financing part of their consumption expenditures from equity extraction

100 50 0 -50

19 90 Q 19 3 91 Q 19 3 92 Q 19 3 93 Q 19 3 94 Q 19 3 95 Q 19 3 96 Q 19 3 97 Q 19 3 98 Q 19 3 99 Q 20 3 00 Q 20 3 01 Q 20 3 02 Q 20 3 03 Q 20 3 04 Q 20 3 05 Q 20 3 06 Q 20 3 07 Q 20 3 08 Q 3

-100

Source: U.S. Federal Reserve, Wells Fargo Securities, LLC

Economics

24

U.S.A.: Fiscal Policy Helps

Real Disposable Income Month-over-Month Percent Change

6%

6%

Real Disposable Income: Nov @ 0.2%

The U.S. government contributes its share with tax rebates during the Bush administration

4%

4%

2%

2%

0%

0%

-2%

-2%

-4%

-4% 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: U.S. Department of Commerce, Wells Fargo Securities, LLC

Economics

25

U.S.A.: Household Debt

Household Debt - Consumer & Mortgage As a Percent of Disposable Personal Income

120%

120%

Consumer Credit: Q3 @ 21.1% Home Mortgages: Q3 @ 88.6%

100%

U.S. household mortgage debt surges to keep up with expenditures

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

0% 60

65

70

75

80

85

Source: U.S. Federal Reserve, Wells Fargo Securities, LLC

Economics

26

90

95

00

05

10

U.S.A.: Debt Service Ratio

Household Debt Service Ratio As a Percent of Disposable Personal Income

14.0%

14.0%

DSR: Q3 @ 11.9% 13.5% 13.5% 13.0%

U.S. household debt to service ratio increases considerably during the period and up until the Great Recession

12.5%

13.0%

12.0% 12.5%

11.5% 11.0%

12.0% 10.5% 10.0%

11.5% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: U.S. Federal Reserve, Wells Fargo Securities, LLC

Economics

27

U.S.A.: Current Account

U.S. Current Account Deficit As Percent of GDP, 4 Quarter Moving Average

2%

The Current Account deficit continues to deteriorate after the large depreciation of the U.S. dollar

2%

0%

0%

-2%

-2%

-4%

-4%

-6%

-6%

Balance on Current Account: Q3 @ -3.1% -8%

-8% 60

64

68

72

76

80

84

88

Source: U.S. Department of Commerce, Wells Fargo Securities, LLC

Economics

28

92

96

00

04

08

U.S.A.: The China/Wal-Mart Effect

Chinese Exchange Rate CNY per USD

9.0

Another reason why there was little inflation and little change in personal consumption expenditures: The Chinese keep their currency undervalued

9.0

8.5

8.5

8.0

8.0

7.5

7.5

7.0

7.0

6.5

6.5

6.0

6.0

5.5

5.5

5.0

5.0 CNY per USD: Jan @ 6.60

4.5 1990

4.5 1994

1998

2002

Source: U.S. Department of Commerce, Wells Fargo Securities, LLC

Economics

29

2006

2010

Conclusion

• The Great Recession is just the delayed response to the almost 50 percent devaluation of the U.S. dollar • Monetary policy and fiscal policy, together with lax regulation, contributed to delay the day of reckoning for the U.S. consumer and the U.S. economy

The Day of Reckoning for the U.S. economy is here!

• The U.S. current account deficit is deteriorating again which means that U.S. consumers are still consuming too much compared to U.S. production • U.S. savings are increasing, which is good for the medium to long run, even though this is actually hoarding rather than saving • But policies, both fiscal and monetary, remain extremely expansive and could make the U.S. recovery very volatile, especially if consumers start to reduce savings again

Economics

30

Wells Fargo Securities, LLC Economics Group a Global Head of Research and Economics: Diane Schumaker-Krieg Chief Economist:

Senior Economists

     

John Silvia, Chief Economist Mark Vitner, Senior Economist Jay Bryson, Global Economist Scott Anderson, Senior Economist Eugenio Aleman, Senior Economist Sam Bullard, Senior Economist

John Silvia 301 S. College Street MAC D1053-077 Charlotte, NC 28288

john.silvia@wellsfargo.com mark.vitner@wellsfargo.com jay.bryson@wellsfargo.com scott.a.anderson@wellsfargo.com eugenio.j.aleman@wellsfargo.com sam.bullard@wellsfargo.com

Economists

    

Anika Khan, Economist Azhar Iqbal, Econometrician Ed Kashmarek, Economist Tim Quinlan, Economist Michael Brown, Economist

anika.khan@wellsfargo.com azhar.iqbal@wellsfargo.com ed.kashmarek@wellsfargo.com tim.quinlan@wellsfargo.com michael.brown4@wellsfargo.com

Economic Analysts

  

Tyler Kruse, Economic Analyst Joe Seydl, Economic Analyst Sarah Watt, Economic Analyst

tyler.kruse@wellsfargo.com joseph.seydl@wellsfargo.com sarah.watt@wellsfargo.com

Executive Assistant

 

Peg Gavin Carol Nighengale

peg.gavin@wellsfargo.com carol.nightengale@wellsfargo.com

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Economics

31