The U.S. & Global Economic Outlook Greg Ip, U.S. Economics Editor, The Economist Remarks to The American Sportfishing Association

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2 The U.S. & Global Economic Outlook Greg Ip, U.S. Economics Editor, The Economist Remarks to The American Sportfishing Association Hilton Head, S.C. Oct. 9, 2012

3 How We Got Here

4 Great Moderation = More Leverage Debt % of GDP Grey bars = recessions 275% 225% 175% 125% 75% Public Private 25%

5 Bipartisan push for more home ownership Financing strategies, fueled by the creativity and resources of the private and public sectors, should address financial barriers to homeownership. Clinton s National Homeownership Strategy, 1994 We want everybody in America to own their own home. An ownership society is a compassionate society. George Bush, 2002

6 Where We Are Now

7 Two models of recovery Bungee model (V): The deeper the recession, the stronger the recovery Post crisis model (U, L): Recoveries after financial crises are weak

8 This ain t no V Employment, post-war cycles % Months since pre-recession peak Source: Minneapolis Fed, updated 9/28/2012

9 Crises Leave Lasting Damage Source: IMF World Economic Outlook Sept 2009 p 122

10 America Follows the Pattern GDP, $trn (2005 dollars) Potential GDP Actual GDP

11 The Deleveraging Cycle: See you in 2015 Household debt % disposable income 140% 120% 100% 80% Trendline 60%

12 A long slog back for jobs % population not in labor force unemployment rate

13 Where are we now?

14 1600 On Course barely S&P 500 Weekly UI claims 700, Claims S&P , , , , , , , , ,000

15 Feels so good when it stops (1) Ratio of home prices to income & rents Over/under valuation vs average Source: Capital Economics 2/9/2012

16 Home vacancy rate Time to build again

17 Feels so good when it stops (2) Bank loan loss provisions $billion Source: FDIC

18 Feeling QEasy What is the Fed doing? Where is inflation going?

19 Printing money, not credit $trn Bank credit (left axis) Money supply (right axis) Source: Federal Reserve; Credit data break-adjusted by author

20 QE3: Spend now, not later please! QE1 QE2 Expected inflation Real bond yield QE

21 160 Seems to be working Consumer confidence Expectations of the future Current Situation

22 Recovery likely to strengthen as: *housing improves *deleveraging less urgent *credit easier *QE3 What could go wrong?

23 The Big Hairball of Risk Probability China avoids hard landing: 80% Probability Euro zone survives mostly intact: 60% Probability United States eliminates fiscal cliff : 70% Probability all 3 things happen: 80% X 60% X 70% = 34%

24 Risks to the Recovery #1 - Europe

25 Spot the sovereign crisis Net public debt % of GDP 5-yr credit default swap spreads United States Spain Spain United States

26 Looking for relief government bond yields, % 8 7 First ECB purchases ECB 3-year loans 6 5 Spain 4 3 ECB promises unlimited buying 2 1 Germany 0 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10

27 Risks to the Recovery #2 Emerging markets

28 Watch for falling BRICs

29 China s transition problem

30 Risks to the Recovery #3 - America

31 Fiscal cliff & clifflet Fiscal tightening in 2013, % of GDP Sequester+ expiration of Bush tax cuts United States Italy Spain UK France Source: IMF Fiscal monitor, April 2012

32 Need this like a hole in the head Indexes of uncertainty Source: The Economist, June 16, 2012

33 The grand canyon Ideological distribution of Congressmen, 2012 # of individuals <= More liberal. More conservative => Source: Voteview.com

34 A pox on both your houses

35 Economists rate the candidates 4 1=very poor, 5=very good 3 Obama Romney Overall Tax reform Deficit Entitlements

36 Economists rate the candidates (2) Who do you rate better on 70% 60% 50% 40% 30% Obama Romney Neither/no difference 20% 10% 0% Economics The Fed China

37 Platforms compared Obama Romney/Ryan Top tax rate 39.6% 28%/25% Medicare Provider cuts, premium increases, IPAB Vouchers Social Security No proposal Raise eligibility age Medicaid Expand Block grants

38 The fine print We re not coming before you today to say we have a definitive solution to that long-term problem. What we do know is, we don t like yours. Tim Geithner So will there be [departments and programs] that get eliminated or combined? Yes, but I m not going to give you a list right now. Mitt Romney

39 Shameless self promotion Thinking citizen s guide to the economy Clearly written, examples, anecdotes No Greek letters or charts. Not a crisis book Does explain origins of crisis, and its consequences Journalism, not ideology Useful: explains economic indicators and economic concepts Little: half the size of most hard cover books. And short!

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