“Monetary Policy, Fiscal Policy, Devaluation & The China/Wal-Mart Effect” Eugenio J. Aleman, Director and Senior Economist January 17, 2011
Argentina: Large Currency Devaluation
Argentine Peso (pesos per U.S. dollar) 4.50 4.00 3.50 3.00
Abandonment of the Convertibility Law: Devaluation of 70 percent in one year
2.50 2.00 1.50 1.00 0.50
Ja n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n0 Ja 9 n10
0.00
Source: BCRA, Wells Fargo Securities, LLC
Economics
2
Argentina: Inflation
Argentina: Consumer Inflation (% change year-over-year)
50
40
30
Consumer prices surge after the devaluation
20
10
0
Ja n94 Ja n95 Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10
-10
Source: INDEC, Wells Fargo Securities, LLC
Economics
3
Argentina: Real GDP
Argentina: Real GDP (year-over-year change)
15.0% 10.0% 5.0%
GDP plunges by 10.9 percent in 2002
0.0% -5.0% -10.0% -15.0%
19 94 -Q 19 1 95 -Q 1 19 96 -Q 19 1 97 -Q 19 1 98 -Q 19 1 99 -Q 1 20 00 -Q 20 1 01 -Q 20 1 02 -Q 20 1 03 -Q 20 1 04 -Q 20 1 05 -Q 20 1 06 -Q 1 20 07 -Q 20 1 08 -Q 20 1 09 -Q 20 1 10 -Q 1
-20.0%
Source: INDEC, Wells Fargo Securities, LLC
Economics
4
Argentina: Real Personal Consumption Expenditures
Argentina: Real Consumption (year-over-year change)
15.0% 10.0% 5.0% 0.0%
Real Consumption collapsed by 14.4 percent
-5.0% -10.0% -15.0% -20.0%
19 94 19 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 20 Q1 05 20 Q1 06 20 Q1 07 20 Q1 08 20 Q1 09 20 Q1 10 -Q 1
-25.0%
Source: INDEC, Wells Fargo Securities, LLC
Economics
5
Argentina: Current Account
Argentina: Current Account (percentage of GDP) 3.5 3.0 2.5 2.0 1.5
The Current Account changes from a deficit to a strong positive
1.0 0.5 0.0 -0.5 -1.0 -1.5
19 9
419 Q1 95 19 Q1 96 19 Q1 97 19 Q1 98 19 Q1 99 20 Q 1 00 20 Q1 01 20 Q1 02 20 Q1 03 20 Q1 04 20 Q1 05 20 Q1 06 20 Q1 07 20 Q1 08 20 Q1 09 20 Q1 10 -Q 1
-2.0
Source: INDEC, Wells Fargo Securities, LLC
Economics
6
Brazil: Devaluation of the Real in two periods
Brazilian Currency (reais per U.S. dollars, monthly average) 4.0 3.5 3.0 2.5
Brazil abandons the “managed peg” in January of 1999
2.0 1.5 1.0 0.5
Ja n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n0 Ja 9 n10
0.0
Source: BCB, Wells Fargo Securities, LLC
Economics
7
Brazil: Inflation increases in two periods
Brazil: IPCA Inflation Rate (% y-o-y) 24 22 20 18
Inflation surges after the abandonment of the peg and then after the election of Luiz Inacio “Lula” da Silva
16 14 12 10 8 6 4 2
Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10
0
Source: IBGE, Wells Fargo Securities, LLC
Economics
8
Brazil: Recession in 1999
Brazil: Real GDP (year-over-year change)
12.00% 10.00% 8.00% 6.00%
Recession after the abandonment of the managed peg
4.00% 2.00% 0.00% -2.00%
19 94 -Q 1 19 95 -Q 1 19 96 -Q 1 19 97 -Q 1 19 98 -Q 1 19 99 -Q 1 20 00 -Q 1 20 01 -Q 1 20 02 -Q 1 20 03 -Q 1 20 04 -Q 1 20 05 -Q 1 20 06 -Q 1 20 07 -Q 1 20 08 -Q 1 20 09 -Q 1 20 10 -Q 1
-4.00%
Source: IBGE, Wells Fargo Securities, LLC
Economics
9
Brazil: Real Personal Consumption Expenditures
Brazil: Real Consumption (year-over-year change)
20.00%
15.00%
10.00%
Real personal consumption expenditures drops after the abandonment of the managed peg
5.00%
0.00%
-5.00%
19 94 19 -Q1 95 19 -Q1 96 19 -Q1 97 19 -Q1 98 19 -Q1 99 20 -Q1 00 20 -Q1 01 20 -Q1 02 20 -Q1 03 20 -Q1 04 20 -Q1 05 20 -Q1 06 20 -Q1 07 20 -Q1 08 20 -Q1 09 20 -Q1 10 -Q 1
-10.00%
Source: IBGE, Wells Fargo Securities, LLC
Economics
10
Brazil: Current Account
Brazil: Current Account (percentage of GDP)
1.0
0.5
Current account is not affected by the abandonment of the managed peg but it is after the second round of devaluation after the election of Lula
0.0
-0.5
-1.0
19 95 -Q 1 19 96 -Q 1 19 97 -Q 1 19 98 -Q 1 19 99 -Q 1 20 00 -Q 1 20 01 -Q 1 20 02 -Q 1 20 03 -Q 1 20 04 -Q 1 20 05 -Q 1 20 06 -Q 1 20 07 -Q 1 20 08 -Q 1 20 09 -Q 1 20 10 -Q 1
-1.5
Source: IBGE, Wells Fargo Securities, LLC
Economics
11
Mexico: Large Devaluation
Mexico: Exchange Rate (pesos per U.S. dollar)
16.00 14.00 12.00
A 48 percent devaluation of the Mexican currency from December 1994 to December of 1995: The Tequila Crisis
10.00 8.00 6.00 4.00 2.00
Ja n9 Ja 1 n9 Ja 2 n9 Ja 3 n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n0 Ja 9 n10
0.00
Source: INEGI, Wells Fargo Securities, LLC
Economics
12
Mexico: High Inflation
Mexico:Consumer Inflation (% change year-over-year)
60.0
50.0
40.0
Inflation surges after the devaluation in 1994
30.0
20.0
10.0
Ja nJa 91 nJa 92 nJa 93 nJa 94 nJa 95 nJa 96 nJa 97 nJa 98 nJa 99 nJa 00 nJa 01 nJa 02 nJa 03 nJa 04 nJa 05 nJa 06 nJa 07 nJa 08 nJa 09 n10
0.0
Source: INEGI, Wells Fargo Securities, LLC
Economics
13
Mexico: Real GDP plunges
Mexico: Real GDP (year-over-year change)
10.0% 8.0% 6.0% 4.0% 2.0%
Real GDP plunges by 6.2 percent after the devaluation
0.0% -2.0% -4.0% -6.0% -8.0%
Q 1 19 96 -Q 1 19 97 -Q 1 19 98 -Q 1 19 99 -Q 1 20 00 -Q 1 20 01 -Q 1 20 02 -Q 1 20 03 -Q 1 20 04 -Q 1 20 05 -Q 1 20 06 -Q 1 20 07 -Q 1 20 08 -Q 1 20 09 -Q 1 20 10 -Q 1
5-
19 9
19 9
4-
Q
1
-10.0%
Source: INEGI, Wells Fargo Securities, LLC
Economics
Mexico: Real Personal Consumption Expenditures
Mexico: Real Consumption (year-over-year change)
10.0%
5.0%
Real personal consumption expenditures collapses by 9.5 percent
0.0%
-5.0%
-10.0%
19 94 -Q 19 1 95 -Q 1 19 96 -Q 19 1 97 -Q 19 1 98 -Q 19 1 99 -Q 20 1 00 -Q 1 20 01 -Q 20 1 02 -Q 20 1 03 -Q 20 1 04 -Q 20 1 05 -Q 20 1 06 -Q 20 1 07 -Q 1 20 08 -Q 20 1 09 -Q 20 1 10 -Q 1
-15.0%
Source: INEGI, Wells Fargo Securities, LLC
Economics
15
Mexico: Current Account
Mexico: Current Account (percent of GDP)
0.2 0 -0.2 -0.4
The current account goes from a large deficit to a small surplus after the devaluation of the currency
-0.6 -0.8 -1 -1.2 -1.4 -1.6
19 9
3 19 -Q1 94 19 -Q1 95 19 -Q1 96 19 -Q1 97 19 -Q1 98 19 -Q1 99 20 -Q1 00 20 -Q1 01 20 -Q1 02 20 -Q1 03 20 -Q1 04 20 -Q1 05 20 -Q1 06 20 -Q1 07 20 -Q1 08 20 -Q1 09 20 -Q1 10 -Q 1
-1.8
Source: INEGI, Wells Fargo Securities, LLC
Economics
16
U.S.A: Large Depreciation of the U.S. Dollar
U.S.A.:Trade Weighted Dollar March 1973 =100
The U.S. had a large depreciation of the dollar during the last 10 years
150
150
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70 TWD Major Index: Dec @ 73.8
60 1973
60 1978
1983
1988
1993
Source: U.S. Treasury Department, Wells Fargo Securities, LLC
Economics
17
1998
2003
2008
U.S.A.: Dollar versus the Euro
U.S. Dollar/Euro Exchange Rate Dollars/Euro
1.60
1.60
1.50 1.40
1.50
1.30
The U.S. dollar depreciates 47.4 percent versus the Euro in 8 years
1.20
1.40
1.10 1.00 1.30
0.90 0.80
1.20
0.70 0.60
U.S. Dollars/Euro: Jan @ 1.29
0.50
1.10
1999 2000 2001 2002 2003 2004 2004 2005 2006 2007 2008 2009 2010
Source: U.S. Treasury Department, Wells Fargo Securities, LLC
Economics
18
U.S.A.: Consumer Prices
U.S. Consumer Price Index Year-over-Year Percent Change
6.0%
U.S. Consumer Prices are not affected significantly by the depreciation of the U.S. dollar
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0%
-1.0%
-1.0%
-2.0%
-2.0% CPI: Dec @ 1.5%
-3.0%
-3.0% 92
94
96
98
00
02
Source: U.S. Department of Labor, Wells Fargo Securities, LLC
Economics
19
04
06
08
10
U.S.A.: Real GDP
U.S.A.: Real GDP Bars = Compound Annual Rate
10%
While Real GDP weakens during the short recession in 2001 it continues to grow until the Great Recession in 2008
Line = Yr/Yr % Change
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4% Real GDP: Q3 @ 2.6%
-6%
-6%
Real GDP: Q3 @ 3.2% -8%
-8% 96
97
98
99
00
01
02
03
04
Source: U.S. Department of Commerce, Wells Fargo Securities, LLC
Economics
20
05
06
07
08
09
10
U.S.A.: Real Personal Consumption Expenditures
U.S.A.: Real Consumption Expenditures Bars = SAAR
8%
Real personal consumption expenditures weaken but continue to grow after the large drop in the purchasing power of the dollar
Line = Yr/Yr % Change
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2% Personal Consumption Expenditure: Q3 @ 2.4% Personal Consumption Expenditure: Q3 @ 1.8%
-4%
-4% 96
97
98
99
00
01
02
03
04
Source: U.S. Department of Commerce, Wells Fargo Securities, LLC
Economics
21
05
06
07
08
09
10
U.S.A.: Monetary Policy Helps
U.S. Federal Reserve Target Rate 7.00%
7.00% US Federal Reserve: Jan @ 0.25%
The U.S. Federal Reserve conducts a very expansive monetary policy
6.00%
6.00%
5.00%
5.00%
4.00%
4.00%
3.00%
3.00%
2.00%
2.00%
1.00%
1.00%
0.00% 2000
0.00% 2002
2004
2006
Source: U.S. Department of Commerce, Wells Fargo Securities, LLC
Economics
22
2008
2010
U.S.A.: Credit Remains Expansive
Revolving & Nonrevolving Debt $12
Month-over-Month Change, 3-M Mov. Avg., Millions of Dollars
$10
U.S. credit continues to surge to finance consumption
$10
$8
$8
$6
$6
$4
$4
$2
$2
$0
$0
-$2
-$2
-$4
-$4
-$6
-$6
-$8 -$10
-$8 Revolving: Sep @ -$6.1 Million Nonrevolving: Sep @ $3.4 Million
-$10 -$12
19 9
4 19 95 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
-$12
Source: U.S. Federal Reserve, Wells Fargo Securities, LLC
Economics
$12
23
U.S.A.: Net Equity Extraction
U.S.A.: Net Equity Extraction (billion U.S. dollars)
250 200 150
U.S. consumers start financing part of their consumption expenditures from equity extraction
100 50 0 -50
19 90 Q 19 3 91 Q 19 3 92 Q 19 3 93 Q 19 3 94 Q 19 3 95 Q 19 3 96 Q 19 3 97 Q 19 3 98 Q 19 3 99 Q 20 3 00 Q 20 3 01 Q 20 3 02 Q 20 3 03 Q 20 3 04 Q 20 3 05 Q 20 3 06 Q 20 3 07 Q 20 3 08 Q 3
-100
Source: U.S. Federal Reserve, Wells Fargo Securities, LLC
Economics
24
U.S.A.: Fiscal Policy Helps
Real Disposable Income Month-over-Month Percent Change
6%
6%
Real Disposable Income: Nov @ 0.2%
The U.S. government contributes its share with tax rebates during the Bush administration
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4% 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: U.S. Department of Commerce, Wells Fargo Securities, LLC
Economics
25
U.S.A.: Household Debt
Household Debt - Consumer & Mortgage As a Percent of Disposable Personal Income
120%
120%
Consumer Credit: Q3 @ 21.1% Home Mortgages: Q3 @ 88.6%
100%
U.S. household mortgage debt surges to keep up with expenditures
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0% 60
65
70
75
80
85
Source: U.S. Federal Reserve, Wells Fargo Securities, LLC
Economics
26
90
95
00
05
10
U.S.A.: Debt Service Ratio
Household Debt Service Ratio As a Percent of Disposable Personal Income
14.0%
14.0%
DSR: Q3 @ 11.9% 13.5% 13.5% 13.0%
U.S. household debt to service ratio increases considerably during the period and up until the Great Recession
12.5%
13.0%
12.0% 12.5%
11.5% 11.0%
12.0% 10.5% 10.0%
11.5% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: U.S. Federal Reserve, Wells Fargo Securities, LLC
Economics
27
U.S.A.: Current Account
U.S. Current Account Deficit As Percent of GDP, 4 Quarter Moving Average
2%
The Current Account deficit continues to deteriorate after the large depreciation of the U.S. dollar
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
Balance on Current Account: Q3 @ -3.1% -8%
-8% 60
64
68
72
76
80
84
88
Source: U.S. Department of Commerce, Wells Fargo Securities, LLC
Economics
28
92
96
00
04
08
U.S.A.: The China/Wal-Mart Effect
Chinese Exchange Rate CNY per USD
9.0
Another reason why there was little inflation and little change in personal consumption expenditures: The Chinese keep their currency undervalued
9.0
8.5
8.5
8.0
8.0
7.5
7.5
7.0
7.0
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0 CNY per USD: Jan @ 6.60
4.5 1990
4.5 1994
1998
2002
Source: U.S. Department of Commerce, Wells Fargo Securities, LLC
Economics
29
2006
2010
Conclusion
• The Great Recession is just the delayed response to the almost 50 percent devaluation of the U.S. dollar • Monetary policy and fiscal policy, together with lax regulation, contributed to delay the day of reckoning for the U.S. consumer and the U.S. economy
The Day of Reckoning for the U.S. economy is here!
• The U.S. current account deficit is deteriorating again which means that U.S. consumers are still consuming too much compared to U.S. production • U.S. savings are increasing, which is good for the medium to long run, even though this is actually hoarding rather than saving • But policies, both fiscal and monetary, remain extremely expansive and could make the U.S. recovery very volatile, especially if consumers start to reduce savings again
Economics
30
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Economics
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