The Sources Of The Liquidity

behind the
“Waves Of Change &
Oceans Of Opportunities”
APABI Conference 2013
Kuala Lumpur
Richard Duncan
http://www.richardduncaneconomics.com
 Introduction
• In 1968, the world changed when Money
ceased to be backed by Gold.
• A rising tide of Liquidity transformed the global
economy.
• Asia was one of the principal beneficiaries.
• Has the Tide now turned?
• What are the current sources of Liquidity?
• What will this mean for Asia’s banking industry?
 Money: Currency Outside Banks
US$ billions, 1945 to 2012
1,200

In 1968, the US broke the link

1,000
between Money and Gold
800
US$ billions

600 Fiat Money

400

Gold-backed Money
200

Source: Federal Reserve, Flow of Funds, Table L.204

0
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
 US Total Credit/Debt
US$ billions,1951 to 2013
60,000
$57 trillion
Total Credit increased from $1 trillion
50,000
in 1964 to $50 trillion in 2007,
40,000 a 50-fold increase in 43 years!

30,000

20,000

10,000

Source: Fed, Flow of Funds

-
1951Q4
1953Q4
1955Q4
1957Q4
1959Q4
1961Q4
1963Q4
1965Q4
1967Q4
1969Q4
1971Q4
1973Q4
1975Q4
1977Q4
1979Q4
1981Q4
1983Q4
1985Q4
1987Q4
1989Q4
1991Q4
1993Q4
1995Q4
1997Q4
1999Q4
2001Q4
2003Q4
2005Q4
2007Q4
2009Q4
2011Q4
4
 US Total Credit to GDP
1952 to 2012
450%

400%
Credit Growth Drove Economic Growth
350%

300%

250%

200%

150%

100%

50%
Source: Fed, Flow of Funds
0%
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
 US Current Account Balance
US$ billions, 1960 to 2012
100

-100

-200

-300
US$ bn

-400

-500

-600

-700

-800
Source: Bureau of Economic Analysis
-900
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
6
 Japan: Total Reserves Minus Gold
US$ billions, 1968 to 1988
120

100
More money came in than went out.
Japan’s foreign exchange reserves rose
80 from $3 bn in 1968 to $97 bn in 1988

60

40

20
Source: IMF

0
1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988
7
 After Japan….
• Next came the Asia Crisis in the 1990s
• Thailand, Korea, Indonesia and Malaysia were blown
into bubbles.
• Their Foreign Exchange Reserves ballooned when
more money came into those economies than went
out.
• The foreign money created the Boom.
• Every Boom busts!

8
 The Asia Crisis Countries
Total Reserves minus Gold, US$ bn
40.0
1970 to 1996
35.0

30.0

25.0
US$ bn

20.0

15.0

10.0

5.0
Source: IMF

0.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Indonesia Korea Malaysia Thailand

9
 China's Foreign Exchange Reserves
US$ billions, 1996 to 2013
3,500

3,000

2,500

2,000

1,500

1,000

500

Source: Bloomberg
0
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
 Total Foreign Exchange Reserves
US$ billions, 1948 to mid-2013
12,000
$11 Trillion
10,000

8,000
Acquired through Fiat Money Creation

6,000

4,000

2,000

Source: IMF
0
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
900 US Balance of Payments, $bn
700
Surplus on the Capital and
500 Financial Account
300

100
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
-100

-300

-500 Deficit on the

Current Account
-700

Source: Bureau of Economic Analysis

-900
Current Account Capital and Financial Account

12
 US Household Sector Debt
Year on Year Change, US$ millions
1,400,000

1,200,000

1,000,000

800,000

600,000
-$33 bn
400,000

200,000

-200,000
Source: Fed, Flow of Funds
-400,000
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
13
 US Current Account Balance
US$ billions, 1960 to 2012
100

-100

-200

-300
US$ bn

-400

-500

-600

-700

-800
Source: Bureau of Economic Analysis
-900
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
14
 2012
2011
Source: U.S. Census Bureau

2010
2009
2008
China's Trade Surplus with the US

2007
2006
2005
2004
US$ billions, 1985 to 2012

2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
350

300

250

200

150

100

0
50
US$ bn
 China: Total Bank Loans
RMB billions, 1992 to 2013
80,000

70,000
Up 125% since the crisis began!
60,000

50,000

40,000

30,000

20,000

10,000

Source: Bloomberg
0
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
 Then & Now
THE GREAT DEPRESSION
• Gold Standard Breaks Down
(1914).
• Credit Boom: The Roaring
Twenties
• Boom Leads to Bust When The
Credit Can’t Be Repaid.
• Banking Collapse.
• International Trade Collapses.
THE NEW DEPRESSION
• Bretton Woods Breaks Down
(1971).
• Credit Boom: Global Economic
Bubble.
• Boom Leads to Bust When The
Credit Can’t Be Repaid.
• Banking Collapse.
• International Trade Collapses.
17
 $1,078 bn

18

2013Q1
Source: Fed, Flow of Funds

2012Q1
2011Q1
2010Q1
2009Q1
2008Q1
Year on Year Change, US$ millions

2007Q1
US Government Debt

2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
2000Q1
1999Q1
1998Q1
1997Q1
1996Q1
1995Q1
1994Q1
1993Q1
1992Q1
1991Q1

0
2,000,000

1,500,000

1,000,000

-500,000
500,000
 Fed's Balance Sheet
US$ billions, 2007 to 2013
4,000

3,500
Emergency Lending to
3,000 the Financial Sector
during the Crisis Peak
2,500 Sept. – Oct. 2008.
QE 3
2,000
Oct. 2012
QE 2
to present
1,500 QE 1 Nov. 2010 to
Dec. 2008 to mid-2011
1,000
March 2010
500
Source: Federal Reserve
0
01/2007

07/2007

01/2008

07/2008

01/2009

07/2009

01/2010

07/2010

01/2011

07/2011

01/2012

07/2012

01/2013

07/2013
 S & P 500 Index, 2007 to July 2013
1,800

1,600

1,400

1,200
QE 3
Oct. 2012
1,000
to July 2013
QE 2
800 Nov. 2010 to
mid-2011
600
QE 1
400 Dec. 2008 to
March 2010 Source: St Louis Fed

200
01-2007

07-2007

01-2008

07-2008

01-2009

07-2009

01-2010

07-2010

01-2011

07-2011

01-2012

07-2012

01-2013

07-2013
20
 Case-Shiller 20 City Home Price Index
annual % change, 2001 to July 2013
20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0
Source: St Louis Fed
-20.0
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
21
 US Household Net Worth
US$ Trillions, 2000 to 2013
75

70

65

60
US$ trillions

55

50

45

40

35
Source: St Louis Fed
30
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
22
 Government's Budget Deficit
US$ billions, 2006 - 2018 est.
0

-200

-400

-600

-800
The Government will borrow
-1,000 $445 billion less in 2013.

-1,200

-1,400
Source: Congressional Budget Office
-1,600
2013 est

2014 est

2015 est

2016 est

2017 est

2018 est
2006

2007

2008

2009

2010

2011

2012

23
 The Fed’s Challenge

• To provide enough Liquidity/QE to make asset prices

rise enough to support economic growth;
• but not so much Liquidity/QE that asset prices
bubble, which would then cause a new crisis when
those bubbles pop.
• There is no predetermined formula.
• The Fed is experimenting - adjusting the level of
Liquidity/QE in line with what the economy seems to
require, based on “incoming data”.

24
 Think Of The Global Economy As
A Big Rubber Raft
• The Global Economy is like a big rubber raft, but one
inflated with Credit instead of air.
• The raft is defective and the credit is leaking out
through numerous holes as it is destroyed by
defaults, so the raft’s natural tendency is to sink.
• Why Defective? Global debt has expanded to such
an extent that the Income of the world’s population
is insufficient to service it.
• Without more government borrowing, spending and
printing, the Raft Will Sink!

25
 Conclusions
• A worldwide credit bubble formed when money
ceased to be backed by gold.
• That bubble nearly popped in 2008 when the
credit could not be repaid.
• Central Banks are now pumping in more Liquidity
in the form of fiat money to keep the bubble
inflated.
• QE will not end soon. I expect between $500
billion and $1 trillion of QE in both 2014 and
2015.
• Interest rates will remain low.