Economic Growth and Risk Appetite: A Perspective from the US Accounts Dr. Catherine L. Mann Barbara 54 and Richard M. Rosenberg Professor of Global Finance International Business School, Brandeis University Visiting Scholar, Federal Reserve Bank of Boston www.CLMann.com Fourth Annual Rocky Mountain Economic Summit Jackson Hole, July 2012 Global Interdependence Center

Overview •  Growth through the international trade lens •  Risk appetite through the capital flows lens •  US Treasury market focus •  Implications

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Collapse in demand for corporate asset (Europe); Private flight to UST, now official again; Sloshing of interbank flows

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No UST Crisis in 2011; Not likely 2012; Prospects for 2013? .

UST ‘Demand’ -- Stock: Foreign Investors

Total foreign: $4.5T 3/11, $5.1T 3/12 =>Δ$600 billion last yr. Debt held by public: 2010=$9T, 2011,$10.4T=> Δ $1.4T last yr. Peak of foreign share (61%) was in 2008, currenntly 21% owned by China&Japan 10

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UST ‘Demand’ -- Flow: Federal Reserve QE Fed QE&QE2 as large as ‘normal’ foreign demand for UST online.wsj.com/.../SB10001424052748703709804575.., October 18, 2011

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Final Remarks on Growth Prospects poor •  US export and business E&S engines slowing •  Eurozone contagion hurts RO-Europe brightness •  China hard landing, dependence on exports, can’t pivot to domestic •  Every where else buffeted by big-guy downdrafts

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Final Remarks on UST Prospects good •  Portfolio headroom for all types of US assets •  Low global risk appetite supports UST demand •  Exchange rate intervention demand around the world •  Foreign Official like what Fed has—so exit might work

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RMES 17 2011

Currency Market Stories Dollar? •  Depreciation: Fiscal deficit, monetary policy exit fails. •  Appreciation: Portfolio headroom, rebound from historical lows, UST purchases for intervention by others

Euro? •  Depreciation: to counter fiscal austerity, sovereign crisis •  Appreciation: if crisis resolved

RMB? •  Depreciation: dependence on export-led growth, –  but against who?

•  Appreciation: only when global growth resumes, –  and against who?

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Thank you! Questions?

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