John Silvia, Corrected Version Dec 0704

Presentation to: Global I nterdependence Center 22nd Annual I nternational M onetary & Trade Conference

The Economic Outlook in the Post 9/11 World

John Silvia – Chief Economist October 2, 2003

Post 9/11 •Containment to Pre-emption

Pre 9/11 Breakdown Value of Washington Consensus •Open Capital Account •1997 Thailand •1999 Brazil, Ecuador •2001 Argentina

Containment to Pre-Emption

More Insular World

Exports + Imports as a Percent of Real GDP 30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5% 60

64

68

72 76

80

84

88

92

96 00

5%

U.S. Recession

REAL GDP GROWTH

Quarter/Quarter Percent Change, Seasonally Adusted Annual Rate

8%

2nd Quarter 2003 @ 3.3%

8%

6%

6%

4%

4%

2%

2%

0%

0%

-2%

-2%

1999

2000

2001

2002

2003

FINAL DOMESTIC DEMAND COMPONENTS 15%

(Year-on-Year Growth)

15%

Red Line = Government Spending @ 4.1%

2Q 2003

10%

10%

5%

5%

0%

0%

-5%

-5%

-10%

Blue Line = Consumer Spending @ 2.9% Green Line = Business Fixed Investment @ 2.7%

97

98

99

00

01

02

03

-10%

INCOME & SPENDING GROWTH

Year to Year Percent Change, 12 Month Moving Average

6% 5%

Real, Disposable Income (Blue Line) @ 3.1% Real Spending (Green Line) @ 2.9%

6%

August 5%

4%

4%

3%

3%

2%

2%

1%

1%

0%

0%

-1% 87

89

91

93

95

97

99

01

03 -1%

MANUFACTURERS' NEW CAPITAL GOODS ORDERS 20%

NON-DEFENSE, EXCLUDING AIRCRAFT

20%

August 10%

10%

0%

0%

-10%

-10% Year-to-Year Percent Change @ 5.6%

-20%

-20% Series is a 3-Month Moving Average

-30% 93 94 95 96 97 98 99 00 01 02 03

-30%

REAL BUSINESS EQUIPMENT & SOFTWARE SPENDING 10% 5%

Seasonally Adusted Annual Rate

2nd Quarter 2003 @ 8.3%

10% 5%

0%

0%

-5%

-5%

-10%

-10%

-15%

-15%

-20%

-20%

2001

2002

2003

Drop in Productivity?

6% 4%

PRODUCTIVITY AND UNIT LABOR COSTS (TOTAL NON-FARM) Yr-to-Yr Percent Change (4 Qtr. Moving Average) Productivity @ 4.3% (Blue Line)

6% 4%

2nd Qtr. 2%

2%

0%

0%

-2% -4%

Unit Labor Cost @ -1.4% (Green Line)

98

99

00

-2%

01

02

03

-4%

NON-FARM PRODUCTIVITY and REAL GDP 7%

Year-over-Year Percent Change

Line = Real GDP, 2Q @ 2.5%

7%

6%

6%

5%

5%

4%

4%

3%

3%

2%

2%

1%

1%

0%

0%

-1%

Bars = Non-Farm Productivity, 2Q @ 4.1%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2001 2002 2003

-1%

Higher Interest Rates, Risk Taking.

Less

1.80

AA CORPORATE BOND YIELD /10-YEAR TREASURY

1.80

1.70

1.70

1.60

1.60

1.50

1.50

1.40

1.40

1.30

1.30

1.20

1.20

1.10

1.10

97

98

99

00

01

02

03

2.00

BAA CORPORATE BOND YIELD/ 10-YEAR TREASURY YIELD

2.00

1.80

1.80

1.60

1.60

1.40

1.40

1.20

1.20

2000

2001

2002

2003

BB Corporate Bond Yield Spread (O ve r 10-Ye ar Tre asury)

7%

7%

6%

6%

5%

5%

4%

4%

3%

3%

2%

2% Lines = Russia and Worldcom

1% 1997

1998

1999

2000

2001

2002

2003

1%

Weaker Dollar

Easy Strong Dollar Rhetoric 1990s •Economy Strong •Relative Return on Assets Large •Was There Deliberate Policy?

Today?

REAL FED DOLLAR INDEX VS. EURO

1.20

Blue Line = Real Fed Dollar Index, left scale Green Line = Euro, right scale

110

1.10

105

1.00

100

0.90

95

0.80

99

00

01

02

03

Euro/$

Index

115

U.S.-EU INTEREST RATE DIFFERENTIALS 250

Green Line = BBB Corporate Bond Blue Line = 10-Yr Government Bond

200

150

150

100

100

50

50

0

0

-50

-50

-100

-100

1999

2000

2001

2002

2003

Basis Points

Basis Points

200

250

REAL FED DOLLAR INDEX VS. CANADIAN DOLLAR 115

1.65

Blue Line = Real Fed Dollar Index, left scale Green Line = Canadian Dollar, right scale

1.60 1.55 1.50

105 1.45 1.40

100

1.35 95

99

00

01

02

03

1.30

C$/$

Index

110

REAL FED DOLLAR INDEX VS. MEXICAN PESO

115

11.5

Blue Line = Real Fed Dollar Index, left scale Green Line = Mexican Peso, right scale

11.0 110

105

10.0 9.5

100 9.0 95

99

00

01

02

03

8.5

MXN/$

Index

10.5

JAPANESE FOREIGN EXCHANGE RESERVES In Billions of Dollars

$500

$500

$450

$450

$400

$400

$350

$350

$300

$300

$250

$250

$200

$200

$150

$150

96

97

98

99

00

01

02

03

Weaker Dollar Policy Target?

•Devaluation – But Not Too Much •Against Whom & When?

I nstruments?

•Foreign Central Banks Undertake Dollar Devaluation Not the Fed.

Dollar Policy •Bush I

Brady 1989

•Bush II

Snow 2004?

Public Policy: •Monetary Policy

•Fiscal Policy

12% 10%

REAL FEDERAL FUNDS RATE VS. M2 MONEY GROWTH Blue Line = M2 Growth, Yr/Yr % Change, August @ 8.1% Green Line = Real Fed Funds Rate*, August @ - 0.3%

12% 10%

8%

8%

6%

6%

4%

4%

2%

2%

0%

0% * Fed Funds Rate minus "Core" Consumer Price Index

-2% 92 93 94 95 96 97 98 99 00 01 02 03 -2%

FEDERAL SPENDING vs. REVENUE As Percent of GDP

23%

August '03

22%

19%

22%

SPENDING (Blue Line)

21% 20%

23%

21%

19.5%

20%

Latest 12 months: Revenue $ 1,783 Trillion Spending $ 2,141 Trillion

19%

18%

18%

17% 16% 15% 87

17%

REVENUE (Green Line)

16%

16.3% 89

91

93

95

97

99

01

03 15%

Financial Face of Recovery

HOUSEHOLD DEBT SERVICE

Total Monthly Payments as Percent of Disposable Income

15%

15%

1st Qtr. '03 13.99% 14%

14%

13%

13%

12%

12%

11% 80 82 84 86 88 90 92 94 96 98 00 02

11%

DELINQUENCY RATES

8%

Percent of Average Loans, Seasonally Adjusted

8%

2Q 2003 6%

6%

4%

4%

2%

2%

0%

Green Line = Consumer Loans Blue Line = Real Estate Loans

87

89

91

93

95

97

99

Source: Federal Reserve Board

01

03

0%

NET CASH FLOW WITH INVENTORY & CAPITAL CONSUMPTION ADJUSTMENTS

$1100

$1100

2Q 2003 @ $ 1,035.5 B

$1000

$1000

$900

$900

$800

$800

$700

$700

$600

$600

$500

$500

$400

In Billions of Dollars

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

$400

PRIVATE CAPITAL INFLOWS INTO U.S. $400

In Billions of Dollars

$400

Blue Bar = FDI Green Bar = Portfolio

$300

$300

$200

$200

$100

$100

$0

97

98

99

00

01

02

$0

Capital Flows: European Tension •Ownership of Stocks •Pace of FDI Flows

Capital Sanctions Rather Than Trade Sanctions?

•Trade Liberalization – Agriculture & Service

PHYSICAL ASSETS OWNED BY FOREIGNERS Percent of Total

80%

80%

60%

60%

40%

40%

20%

20%

0%

Europe

Asia

Western Hemisphere

Other

0%

INFLOWS OF FOREIGN DIRECT INVESTMENT Percent of Total, 1997-2001

30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0%

U.K.

Germany

France

Netherlands

Other

0%

EXTERNAL INDICATORS $100

In Billions of Dollars

$0

$100 $0

$-100

$-100

$-200

$-200

$-300

$-300

$-400

$-400

$-500

Blue Line = Current Account Deficit Green Line = National Savings Less Domestic Investment

$-500

$-600 90 91 92 93 94 95 96 97 98 99 00 01 02 $-600

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