FINANCIAL SITUATION IN THE WORLD

AGENDA

1. Brief history of the present global Economic/Financial Crisis

2. The next 3 to 10 years

3. How this will affect everyone?

PART 1

Brief history of the present global Economic/Financial

Crisis

INTRODUCTION

Figure 1. A view of the mountain – Ratio of banks’ assets to GDP, 2007

INTRODUCTION

CAUSES

VALUATIONS

REGULATIONS

RESULTS

ANALYSIS

POSSIBLE SOLUTIONS

TIME FRAME

Iceland

CAUSES• Financial services. Share US corporate profits 10% 1980,

last year 40%. Stock market value up from 6% to 19% but mere 5% of private sector jobs.

• Hedge funds since 2000 increased 400%. Outstanding credit default swaps climbed to $45 trillion. Financial sector debt in 1980 10% of non-financial debt, now 50%.

• Leveraging/gearing. Investment banks debt machines, trading heavily for own account. Average 10:1 but many up to 35:1.

• Risks increased. Mismatching short term funding and long term lending. De-leveraging, illiquid markets, negative spiral.

INTRODUCTION

CAUSES

VALUATIONS

REGULATIONS

RESULTS

ANALYSIS

POSSIBLE SOLUTIONS

TIME FRAME

CAUSESFigure 2. Money machine – Finance industry profits and

gross added as % of US corporate total

INTRODUCTION

CAUSES

VALUATIONS

REGULATIONS

RESULTS

ANALYSIS

POSSIBLE SOLUTIONS

TIME FRAME

CAUSES• Individuals and companies. High levels of debt. Collapse

of auction-rate securities market $330 billion in Febr. 2008.

• Deregulation/Securitisation/Innovation. 75% of all lending outside regulators. Securitised loans up from $4 trillion in 1990 to $28 trillion in 2006. In 2007 60% of US mortgages and25% of consumer debt bundled up and sold.

• Speculation in housing, slipping lending standards, cheap credit. Bear Sterns.

• Risk modeling/Rating agencies.

INTRODUCTION

CAUSES

VALUATIONS

REGULATIONS

RESULTS

ANALYSIS

POSSIBLE SOLUTIONS

TIME FRAME

Source: http://www.marketoracle.co.uk/Article24034.html

Source: http://www.marketoracle.co.uk/Article25358.html

POSSIBLE SOLUTIONS- Divide troubled financial firms into “good” and “bad”

banks

- Split private banking from investment banking and from asset management;

- Enforce new code of conduct on rating agencies, improve disclosure, governance and modeling. Switch to investor – pays system. End regulatory dependence on ratings and eliminate conflict of interest.

INTRODUCTION

CAUSES

VALUATIONS

REGULATIONS

RESULTS

ANALYSIS

POSSIBLE SOLUTIONS

TIME FRAME

THE ISSUE OF “TOO BIG TO FAIL”

b)   Solution: have new regulations limiting exposure, say max. 3% of each

- spread risk % per individual company/subsidiaries/associates/holding

co./off B/S

- spread risk % per country

- spread risk % per type industry/trade/service

- spread risk % per time period

- spread risk % per method/financial instrument

PART 2

The next 3 to 10 years

Source: http://www.marketoracle.co.uk/Article25305.html

DE-LEVERAGING

-    Average leveraging/gearing of international banks 30:1 - Total USA banks leverage percentage more than twice any other

nation- 8 biggest US banks debts $12.2 trillion, tangible common capital $406

billion (3.4%)- US government debt $10.6 trillion (72% of GDP) increasing $1 tr. p.a.- Adding unfunded Medicaid, Social Security/Medicare, Veterans

pension, etc. total increases to $59.1 trillion. How much is off Balance Sheet?

- US consumers’ debts total $15 trillion, 120% of GDP

A Country of Paper Pushers

Source: http://www.marketoracle.co.uk/Article25362.html

200 Years – Dow/Gold Ratio

National Debt from 1940 to Present

Source: http://www.marketoracle.co.uk/Article25403.html

DEPRESSION

-    As in 1929-1940 the economy not functioning normally.- Distrust between financial institutions, between them and corporations

and between them and consumers. General panic.- Japanese experience 1990’s repeated globally - US trade deficit and budget deficits continue. Global debt imbalance

not improving.- Corporate and consumer debt at all time high

WHERE DO WE STAND NOW?

• International country-wide level: IMF supporting with tens of billions

dollars loans to Iceland, Pakistan, Hungary, Ukraine and many others. Needs another $100 billion.

• World wide anti taxes attitude and bail out syndromes continuing many years, burning up trillions by increasing deficits.

• Next global bubble: downgrading of US bonds and re-alignment US dollar and other currencies? Already Ireland’s sovereign debt default swaps cost widening – default of USA possible?

PART 3

How this will affect everyone?

Source: http://www.rtl.nl/(/financien/rtlz/nieuws/)

Source: http://www.marketoracle.co.uk/Article17052.html

How long – post World War II recessions

Source: http://www.kitco.com/ind/Turk/turk_jan052011.html

Source: http://www.marketoracle.co.uk/Article25347.html

POSSIBLE PROTECTION, REMEDIES &

OPPORTUNITIESB) Remedies • Saving more, spending less (on the right targets).• Supplement income (extra part time jobs, etc.), study, acquire new

skills• Re-schooling and re-tooling: for individuals, companies and

industries• No involvement in status symbols (private or corporate) such as

planning and building new headquarters or over extensions• If financial windfalls, consider repaying debts and mortgage bond.

POSSIBLE PROTECTION, REMEDIES &

OPPORTUNITIESC) Opportunities• Purchasing value of cash increased dramatically (over 400%) last

few months• Possible cash investments eventually in new products and services• Recessions/depression produced great winners and world

renowned businesses who changed the game (Microsoft, Cisco, etc).

E-7 and G-7 Population vs. GDP

Currency Decline

HYPERINFLATION?

HYPERINFLATION?