When Past Performance Is a Guide:

Using History to Make Sense of the Post-Crisis World

Overview of past recessions in the U.S.

Duration from peak to trough of the business cycle

Source: NBER.

0

10

20

30

40

50

60

70

1858 1868 1878 1888 1898 1908 1918 1928 1938 1948 1958 1968 1978 1988 1998 2008

Month1879: 65 months

2009: 18 months

Note: Recessions are assumed to start at the peak of a business cycle and end at the trough.

U.S. saw negative GDP growth for the first time

in more than 70 years

Source: The White House - Office of Management and Budget.

-30

-20

-10

0

10

20

30

1931 1941 1951 1961 1971 1981 1991 2001 2011

Percent

1942: 26.5%

2009: -2.8%

Note: Projections are shaded.

Source: Natixis Global Asset Management.

.

Stock market volatility has increased dramatically during the

past decade

0

20

40

60

80

100

120

140

1950-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2011

Number of 3% daily S&P 500 moves

More volatile days than in the previous 50 years combined

Ten-year U.S. Treasury yield reached historical low

Source: Federal Reserve Board.

0

2

4

6

8

10

12

14

16

18

1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Average since 1964: 6.7 percent

Ten-year Treasuryyield, percent

Federal debt expected to continue increasing Gross federal debt as percent of GDP

Source: The White House - Office of Management and Budget.

0

20

40

60

80

100

120

140

1940 1950 1960 1970 1980 1990 2000 2010

Percent of GDP

1946: 121.7%

Note: Projections are shaded.

Source: Bloomberg.

Central bank target interest rates remained low

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013

Policy interest rates, percent

Eurozone

United Kingdom

United States

Bank of Japan

Public debt in advanced economies approached

another record high

Gross public debt as percent of GDP

Source: IMF WEO.

0

20

40

60

80

100

120

140

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Percent of GDP1944: 117.8%

2011: 104.8%

Sources: OECD, Bloomberg.

Household deleveraging process diverged

across major countries

80

100

120

140

160

2001 2003 2005 2007 2009 2011

Household gross debt (% of net disposable income)

Canada

U.S.

Japan

Euro area

Gold price at record high

Source: World Gold Council,

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-1970 Jan-1980 Jan-1990 Jan-2000 Jan-2010

US$ per troy ounce

Sep 1980: $666.8

Aug 2011: $1813.5

Source: J.P. Morgan.

0

2

4

6

8

10

12

REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes Average investor

Percent

20-year annualized returns

1992-2012

Returns of major asset classes over a century

1900-2011

Source: Credit Suisse.

0

1

2

3

4

5

6

7

Equities Bonds U.S. Bills

Percent

U.S.World

A two speed recovery

GDP growth

Source: IMF WEO.

-6

-4

-2

0

2

4

6

8

10

1980 1985 1990 1995 2000 2005 2010 2015

Percent

Advanced economies

Emerging market and developing economies

World

Note: Projections are shaded.

Daniel Arbess

Note: Payroll employment adjusted for Trend employment growth.

This Time is Different.

Index, NBER peak = 100

1973-75recession

1981-82 recession

1990-91 recession

2001 recession

2007-09 recession

92

94

96

98

100

102

92

94

96

98

100

102

Quarters since NBER peak

0 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 201

Source: Yellen, Janet. “A Painfully Slow Recovery for America’s Workers: Causes, Implications, and The Federal Reserve’s Response”. “A Trans-Atlantic Agenda for Shared Prosperity”. February 11, 2013.

Nonfarm Payroll Employment in Selected Recessions and Recoveries

GEC triggered the deepest and longest

employment drawdown on record.

Households lost $17 trillion of wealth in

balance sheet recession ($10T stocks,

$7T housing), leaving excess capacity

and employment globally.

Fiscal Policy Could be a Headwind or a Tailwind. Really?

4 quarters since start of recovery (left bars)

12 quarters since start of recovery (right bars)

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

Average contribution to GDP growth, percentage points (annual rate)

8 quarters since start of recovery (center bars)

Recovery from 1981-82 recession Recovery from 2001 recession Average recovery from

postwar recessions

Current recovery

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

Estimated Effect of Discretionary Fiscal Policy on the Economy during Recoveries

Note: Average recovery from postwar recessions excludes recovery after 2007-2009 recession; because of data limitations, average also excludes recovery after 1948-49 recession.

Source: Yellen, Janet. “A Painfully Slow Recovery for America’s Workers: Causes, Implications, and The Federal Reserve’s Response”. “A Trans-Atlantic Agenda for Shared Prosperity”. February 11, 2013.

Household income losses offset when taxes are reduced or government spending increases. Opposite case when governments cut spending or raise taxes in response to recession. Normal times, easy monetary policy can offset fiscal tightening. But not when economy is depressed and rates are already zero. Summers & DeLong. No surprise then, higher payroll taxes and sequestration negatively impacting ’13 GDP by 1.3%.

This Time Is Different…But Not for the Reasons you Think.

Source: Bianco Research.

Monetary Policy to the Rescue: ZIRP and unprecedented $15T global CB balance sheet expansion have offset deflation and repaired balance sheets:

Recovered $10T of lost equity wealth & $1.7T housing value. $5B in housing still to be recovered. Rich have benefitted most: Only top 13% saw their net worth gain between ’09-’11.

Even if Reinhart and Rogoff’s math were correct:

Are high debt levels a cause or consequence of slower growth? Is government debt as dangerous when funded by CBs? When nominal rates are < nominal GDP growth?

Sources: Bloomberg.

The Persistent Risk is Deflation, not Inflation.

OECD US Velocity of Money: Estimates the rate at which money changes hands.

1.6

1.65

1.7

1.75

1.8

1.85

1.9

1.95

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

US Federal Reseve Balance Sheet OECD US Velocity of Money

Balance sheet recession = demand recession. Money is at the Fed, not in the system.

The multi-sector approach of MMT suggests that government demand can substitute for flagging private sector demand.

No inflation risk unless and until increased monetary base moves into economy via credit acceleration & deposits. Fed can withdraw.

Overt Monetary Finance (OMF)—Helicopter Money: the Final Frontier?

Bernanke to Japan ’03: “Cut taxes & fund shortfall with printed money”. OMF dispenses with Treasury issuance: CB funds Treasury directly. Theory is fiscal spending expands activity, revenues, restores surplus. Fed can then withdraw by increasing reserve requirements.

The Perfect Crime!

Ben Funnell

Source: US Census Bureau, Oriel Securities.

US 90/10 ratio – median income of the 90th percentile of

income / 10th percentile

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Source: US Census Bureau, Oriel Securities.

US share of total income by quintile (%)

3.9%

4.3%

3.2%

43.6%

42.6%

51.1%

38%

40%

42%

44%

46%

48%

50%

52%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Lowest quintile (LHS) Top quintile (RHS)

Source: Federal Reserve Bulletin, June 2012, referencing the Survey of Consumer Finances 2010 .

Debt Burden Disproportionately on the Lower Income Quintiles

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 9th Decile 10th Decile

Debt payment / income % debt service > 40%

Source: Moody's, Bloomberg, GLG Partners .

Moody's BBB Corporate Bond Yield (%), 1920-2013

0

2

4

6

8

10

12

14

16

18

20

Jan

-20

Jan

-24

Jan

-28

Jan

-32

Jan

-36

Jan

-40

Jan

-44

Jan

-48

Jan

-52

Jan

-56

Jan

-60

Jan

-64

Jan

-68

Jan

-72

Jan

-76

Jan

-80

Jan

-84

Jan

-88

Jan

-92

Jan

-96

Jan

-00

Jan

-04

Jan

-08

Jan

-12

MOODCBAA Index

Mitchell Julis

Source: 2010 Dan Regan

Does Understanding History Help Us to Avoid Getting Left Behind?

Source: Eric D. Beinhocker, The Origin of Wealth

The Big Bang of Wealth Creation – A Timeline

Source: Eric D. Beinhocker, The Origin of Wealth

What Happened to Create This Explosion of Wealth at This Point

in History?

• In The Origin of Wealth, Eric Beinhocker argues, “wealth creation is

the product of a simple, but profoundly powerful, three-step formula –

differentiate, select, and amplify – the formula of evolution.”

• “The same process that led to an explosion of species diversity in the

Cambrian period led to an explosion in SKU diversity during the

Industrial Revolution.”

A Basic Question on the Relevance of History: Is This Time

Different?

For example:

• Will Europe’s history of conflict drive the fate of the Euro?

• Has monetary policy evolved into something without historical

precedent?

• Are we in a unique political and policy gridlock bereft of great leaders or

great events to break us free?

• What is the role of Big Data in understanding our past and our future and

how does data gathering and analysis relate to the current Reinhart /

Rogoff controversy over their findings?

History Drives the Euro According to Helmut Kohl

"The evil spirits of the past have by no means been banished, they can

always return. That means: Europe remains a question of war and peace and

the desire for peace remains the driving force behind European integration,"

- Former German Chancellor Helmut Kohl (February 2012)

Source: Bild, Helmut Kohl

What Is the Appropriate Framework to Understand History and its

Relevance to the Economic Landscape of Today and the Future?

• Great People

• Great Ideas

• Great Institutions / Structures

• Great Forces of Nature

The Law of Unintended Consequences

Source: Introduction to Systems Thinking by Jayendran Venkateswaran, Jan-Apr 2008

The Law of Unintended Consequences

Source: Introduction to Systems Thinking by Jayendran Venkateswaran, Jan-Apr 2008

Niall Ferguson

Source: Maddison

Ratios of per capita GDP

1500-2008

Source: Economagic

The U.S. stock market in Three Depressions

1872-2013

Sources: Various

Debt / GNP ratios

1688-1999

Sources: Global Financial Data

Real returns

1688-1999

Sources: Global Financial Data

UK consumer price index

1209-2013