21 richard duncan - new era of banking
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New era of bankingTRANSCRIPT
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The Sources Of The Liquidity behind the
Waves Of Change & Oceans Of Opportunities
APABI Conference 2013
Kuala Lumpur
Richard Duncan
http://www.richardduncaneconomics.com
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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 Asias banking industry?
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0
200
400
600
800
1,000
1,200
19
45
19
47
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
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19
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91
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93
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95
19
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19
99
20
01
20
03
20
05
20
07
20
09
20
11
U
S$ b
illio
ns
Money: Currency Outside Banks US$ billions, 1945 to 2012
Gold-backed Money
Fiat Money
In 1968, the US broke the link between Money and Gold
Source: Federal Reserve, Flow of Funds, Table L.204
-
-
10,000
20,000
30,000
40,000
50,000
60,000
19
51
Q4
19
53
Q4
19
55
Q4
19
57
Q4
19
59
Q4
19
61
Q4
19
63
Q4
19
65
Q4
19
67
Q4
19
69
Q4
19
71
Q4
19
73
Q4
19
75
Q4
19
77
Q4
19
79
Q4
19
81
Q4
19
83
Q4
19
85
Q4
19
87
Q4
19
89
Q4
19
91
Q4
19
93
Q4
19
95
Q4
19
97
Q4
19
99
Q4
20
01
Q4
20
03
Q4
20
05
Q4
20
07
Q4
20
09
Q4
20
11
Q4
US Total Credit/Debt US$ billions,1951 to 2013
Total Credit increased from $1 trillion in 1964 to $50 trillion in 2007, a 50-fold increase in 43 years!
$57 trillion
Source: Fed, Flow of Funds
4
-
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
US Total Credit to GDP
1952 to 2012
Source: Fed, Flow of Funds
Credit Growth Drove Economic Growth
-
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
U
S$ b
n
US Current Account Balance US$ billions, 1960 to 2012
Source: Bureau of Economic Analysis
6
-
0
20
40
60
80
100
120
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
Japan: Total Reserves Minus Gold US$ billions, 1968 to 1988
More money came in than went out. Japans foreign exchange reserves rose
from $3 bn in 1968 to $97 bn in 1988
Source: IMF
7
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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
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0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
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
US
$ b
n
The Asia Crisis Countries Total Reserves minus Gold, US$ bn
Indonesia Korea Malaysia Thailand
Source: IMF
1970 to 1996
9
-
0
500
1,000
1,500
2,000
2,500
3,000
3,500
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
China's Foreign Exchange Reserves US$ billions, 1996 to 2013
Source: Bloomberg
-
0
2,000
4,000
6,000
8,000
10,000
12,000
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
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70
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72
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19
78
19
80
19
82
19
84
19
86
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19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
Total Foreign Exchange Reserves US$ billions, 1948 to mid-2013
Source: IMF
$11 Trillion
Acquired through Fiat Money Creation
-
-900
-700
-500
-300
-100
100
300
500
700
900
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
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19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
Current Account Capital and Financial Account
Surplus on the Capital and Financial Account
Deficit on the Current Account
US Balance of Payments, $bn
Source: Bureau of Economic Analysis
12
-
-400,000
-200,000
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q1
19
95
Q1
19
96
Q1
19
97
Q1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
20
11
Q1
20
12
Q1
20
13
Q1
US Household Sector Debt Year on Year Change, US$ millions
Source: Fed, Flow of Funds
-$33 bn
13
-
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
19
60
19
62
19
64
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66
19
68
19
70
19
72
19
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19
76
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19
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19
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19
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19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
U
S$ b
n
US Current Account Balance US$ billions, 1960 to 2012
Source: Bureau of Economic Analysis
14
-
0
50
100
150
200
250
300
350
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
US
$ b
n
China's Trade Surplus with the US US$ billions, 1985 to 2012
Source: U.S. Census Bureau
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0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
19
92
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93
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19
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00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
China: Total Bank Loans RMB billions, 1992 to 2013
Up 125% since the crisis began!
Source: Bloomberg
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Then & Now
THE GREAT DEPRESSION
Gold Standard Breaks Down (1914).
Credit Boom: The Roaring Twenties
Boom Leads to Bust When The Credit Cant 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 Cant Be Repaid.
Banking Collapse.
International Trade Collapses.
17
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-500,000
0
500,000
1,000,000
1,500,000
2,000,000
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q1
19
95
Q1
19
96
Q1
19
97
Q1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
20
11
Q1
20
12
Q1
20
13
Q1
US Government Debt Year on Year Change, US$ millions
Source: Fed, Flow of Funds
$1,078 bn
18
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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
01
/20
07
07
/20
07
01
/20
08
07
/20
08
01
/20
09
07
/20
09
01
/20
10
07
/20
10
01
/20
11
07
/20
11
01
/20
12
07
/20
12
01
/20
13
07
/20
13
Fed's Balance Sheet US$ billions, 2007 to 2013
QE 1 Dec. 2008 to March 2010
QE 2 Nov. 2010 to mid-2011
QE 3 Oct. 2012 to present
Emergency Lending to the Financial Sector during the Crisis Peak Sept. Oct. 2008.
Source: Federal Reserve
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
01
-20
07
07
-20
07
01
-20
08
07
-20
08
01
-20
09
07
-20
09
01
-20
10
07
-20
10
01
-20
11
07
-20
11
01
-20
12
07
-20
12
01
-20
13
07
-20
13
S & P 500 Index, 2007 to July 2013
QE 1 Dec. 2008 to March 2010
QE 3 Oct. 2012 to July 2013
QE 2 Nov. 2010 to mid-2011
Source: St Louis Fed
20
-
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Case-Shiller 20 City Home Price Index
annual % change, 2001 to July 2013
Source: St Louis Fed
21
-
30
35
40
45
50
55
60
65
70
75
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
U
S$ t
rilli
on
s
US Household Net Worth US$ Trillions, 2000 to 2013
Source: St Louis Fed
22
-
-1,600
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
est
20
14
est
20
15
est
20
16
est
20
17
est
20
18
est
Government's Budget Deficit US$ billions, 2006 - 2018 est.
The Government will borrow $445 billion less in 2013.
Source: Congressional Budget Office
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The Feds 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.
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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 rafts natural tendency is to sink.
Why Defective? Global debt has expanded to such an extent that the Income of the worlds population is insufficient to service it.
Without more government borrowing, spending and printing, the Raft Will Sink!
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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.