Global Economic Outlook Pt 7

So this homework to be done country by country is going to be very important so every single country should keep his house tidy and clean and then international orgranizations, they are important tools but they are not a substitute for the homework to be done in every single country.

A more coordinated action is absolutely necessary in the Euro Zone.  We hope that the fiscal compact, we hope that this works and it is absolutely necessary to implement this in the Euro Zone without any slippages.  And also G20 I think has a big role also.  Probably under utilized but an important role to have a better global coordination of the policies.  And it’s very important today, during this year  for the countries within G20 not to just follow their own national interest but also think about the global outlook, feel the global responsibility because as Christine said at the very beginning, we are living altogether and if there’s a serious collapse anywhere in the world, it’s going to hurt all of use.  Nobody is going to have a better condition because of a collapse, serious collapse elsewhere in the world.

So, specific to Turkey as Martin has asked.  We have been very prudent on fiscal side and in 2009 we announced a very prudent  tight fiscal policy and medium term fiscal program to even further reduce our deficits and many people had picked on us because they told us “look at Europe, look at everyone else, everyone else is increasing spending and you are doing the reverse”.  But it paid off very well.  The confidence was built up, growth rate was 9% in 2010, 8% in 2011.  We have actually been tightening things to contain the growth to prevent overheating.  We have followed quite a different path from the rest of our European neighbours.

Thank you very much and let me turn now last to Asia and start with Japan in Asia and with you Minister Furokawa please.

Thank you very much.  Let me start with the landscape of Japanese economy.  We have had a relatively stable economic growth rate  and low unemployment rate and we are determined to continue  to the final stabilization of the Euro Zone.  The current government debt crisis in Europe inevitably affects the glob al economy.  With this in mind, we expect that Europe makes effort to manage  the challenges and endeavours to salvage the fireball to calm down the market.

Japan has been supporting this effort  as a major purchaser of EFSF Bonds currently holding 16% of the outstanding issues.  Further engagement of the international community is required.  Japan will collaborate closely  with other countries and relevant parties in supporting Europe’s firm actions.  However, I have somewhat of a concern that the crisis may also have a financial effect outside Europe specially on the capital shortage in Asia.  Japan will intensely concentrate its effort to save off the capital outflow and proactively commit to Asia’s sustainable growth

The issues we are currently facing  are not limited to the debt crisis in the Euro Zone.  I would like to point out more common and underlying issues.  This year, social collectiveness and trust will be tested all around the world because of a number of destabilizing factors.  These factors are low economic growth rates, high unemployment rates and continuous debates in election campaigns.  In confronting these challenges, the Japanese government  is now working on composing a new growth model that pursues three elements altogether namely, the economic growth, social inclusiveness, and environmental sustainability.

Japan will closely collaborate with the economies of Asia and the OECD countries in this effort.  We should pursue this dynamic and inclusive growth because mere economic growth will not resolve the dissatisfaction in the current economic system.  As you witnessed, last year occupied Wall Street and a popular uprising in many countries are typical examples.  Following this annual reform, I am looking forward to elaborating for further discussion in the international community.

And lastly, I would like to comment about Japan’s fiscal deficit issue.  It’s important to note that Japan’s fiscal deficit issues is a pressing issue in terms of its volume.  At the same time, it’  also important to note that vast majority of the debt is financed by domestic savings.  We don’t think this structure will cause immediate crisis. However, tapping fiscal consolidation is a pressing challenge we cannot leave behind.

Our government has been working on these issues since fiscal year 2010 aiming to have the primary debt to GDP ratio in five years both raising the consumption  tax rate in a phase manner and promoting economic growth through implementing the strategy for rebirth of Japan are key components.  They are the wheels of the same car.

Thank you very much.  I am very glad that you brought in Japan’s fiscal position since we’ve had some very strong positions on this issue of fiscal austerity which a number of people prefer to.

Davos 2012 – Global Economic Outlook Pt 7
economics expert witness

Finance: Logistics Pt 2

So course improvements, anyway. So, that’s it. Are there any questions about how the course runs, or how I will run it, or whether you think you should take the course or whether your preparations – So, if you haven’t taken ECON 115 it’s okay, but you’ve got to be confident that you can solve problems, otherwise don’t do it. Any questions?

So, the first problem set will be assigned next Tuesday?

Yeah, so next Tuesday it’s going to be due the Tuesday after. So, I know that’s early but you probably already know whether you’re going to take the course or not. Yes?

Will you teach this next year?

Will I teach it next year? Actually, I probably won’t because I’m going to go on leave, but I might, but probably not. Someone else will teach it. Yes?

Which of the books do you suggest that we buy?

They’re all good. They’re all famous people who’ve written. They’re trying to sell copies so they’re pitch at a quite low level, but they’re very good. Anyone of them is good. Merton’s book is good. Steve Ross is a friend of mine. He used to teach at Yale, so his book is good. So any one of those is very quite good, but they’re not quite at the same mathematical level because they’re trying to sell thousands of books and they stick pretty closely to this financial view of the world that everything is efficient. Yes?

Will the taped lectures be available online?

That’s a good question. I don’t think so. No, they’re shaking their head. So, it won’t be in time for you, but it will be if you want to look back in your old age, “I was there. I saw the leverage cycle.” Sorry. Yes?

Are the lecture slides posted before or after the lecture?

Oh, the lecture notes are all posted already before the class. So, the first twelve of them are there and I’m changing them each year, so there’ll be some changes. So, last year’s first twelve are there they might change a little bit, but you can already get an idea of what they’re about. This first lecture is not on, but the first of them are. Any other questions? Yes?

When do we sign up for the TA sessions?

Oh, you should be signing up now. I don’t know how to do this. It’s online or something, right? You sign up online. Yeah, so you should pick up your sections. We might add another section if all of you stay, but probably you won’t, but if we do, we’ll add another TA section. Yes?

What’s the grade distribution?

The grade distribution, I don’t know. The standard Yale junior level course grade distribution, which is when I was at Yale things were much tougher, so it’s the standard distribution. I don’t remember it offhand. But I’ll tell you all about the distribution at the midterm. So, there will be a midterm before – you’ll have chance to drop the course after the midterm and then there will be another midterm right at the end of the course. Yes?

What level of math and type of math should we be comfortable with to take the course?

I was trying to say that. I’m glad you ask me again. So, I went over the things that you have to know. If you have 3x-4x^(2), you have to be able to take the derivative of that which is 3-8x. If you’ve got the log natural of x, you have to take the derivative. It’s one over x. if you’ve got 3x+5=10 and 2x-7=12, you have to be able to solve that simultaneous equation. So, that’s the kind of thing you have to do and you have to be able to do it quickly and with total confidence that you’re doing it right. And for many of you that’s no problem, but for some of you who are maybe even smarter than everybody else, that’s a problem and so you’ll have to judge yourself whether you can do that comfortably so you don’t have to worry about the mechanics of doing that. You can think conceptually about what the question is asking.

Finance: Logistics Pt 2

Global Economic Outlook Pt 6

Thank you very much.  The issues you have raised we will absolutely come back to if it’s all possible.  Pretty all of them I think.  Let me turn you now to Deputy Prime Minister Mr.  Babacan.  Perhaps I very much want you to talk about your own country in the region, lots going on.  What are the economic  significance of that.  It’s obviously a very big issue.  Also, obviously you have a, I don’t know if we can describe this as a privileged position but ring side seat on the Euro Zone, a disaster…sorry, I didn’t mean that, of events and I know you have views on it.  And also, particularly relevant because Turkey, of course , had a financial crisis quite recently in the last decade and it has gone through that and has coped with this crisis from this point of view remarkably well so I know that you have lessons to teach us as well.  So what is your perspective on where we are?

Well, if I may talk about the current  global economic situation and most specifically what is going on  in Europe and the Euro Zone and if we really want to see sustainable growth, job creation, employment and so forth, there is one  very important concept which I think we have to emphasize over and over again and that is confidence.

When we don’t see a medium of confidence, when consumers don’t have trust for the future, they don’t spend.  When corporations don’t have confidence, they don’t invest and when banks have doubts about our future, they don’t lend.  And when these don’t happen, the economy stops, the financing channel stops and we don’t see growth.

How to attain confidence, how to regain confidence should be at the core of the policies in many, many countries.  For those countries where public debt is a source of concern, we don’t think that fiscal stimulus will work.  If  a country already has high debt and if this debt creates a lot of doubts in the markets, simply trying to spend  more has some kind of growth through just government spending and in Euro Zone there has been some unfortunate trials in 2008, 2009, trying to give fiscal stimulus and had a very unfortunate results at the end of the day.

For those countries where public debt is reasonable, and for those who have some physical space, maybe there might be some efforts but what is most important here is about fiscal policies.  There’s an asymmetry.  It is always easy to losen fiscal policies.  So then in 2008 and 2009, many European governments said okay, this is going to solve the problems but then it is time to tighten the policies.  It is very, very difficult.  It has many costs, it costs the fortunes of the leaders, it costs the fortune of the political parties in many countries and thinking about the fact of that sensitivity, the fiscal policies, it is important to be on the prudent side when it comes to budget and public debt and so forth.

Once keeping the fiscal policy at a prudent phase, then for countries it is very important to have a very clear strategy and communicate the strategy very well so that the strategy is owned by the masses because if there is no local ownership of the policies, then probably those policies will not work.  Do people understand?  Do citizens of that country understand?  Do they really understand the necessity of the steps, maybe difficult steps that is needed for the future.

And then having  a medium term vision is also very important.  Now I have attended many, many discussions  in Davos and we have been talking too much about 2012 but if we are going to talk about growth and employment, it is not just the single one year we have in front of us.  We have 2013, 2014 and for some policy  actually, it might be hurting growth in the short term today but it may generate more and sustainable growth  later on so we should probably look at growth and job creation with a medium term approach and the governments announcing these medium term programs is going to be very, very crucial to bring some predictability about what is going to happen.

If the companies or the financial sector doesn’t have any idea about what’s going to happen in this year in the United States, if we all have big doubts about what’s going to turn out in the Euro Zone this year and if all the mass media is broadcasting this, how to expect people to spend more, how to expect companies to continue investment  or hiring people and how to invest…the banks, although they have much liquidity in their hands to do their function of lending.

Davos 2012 – Global Economic Outlook Pt 6
economics expert witness

Financing 101 Part 1

Duke The Fuqua School of Business
Duke Entrepreneurship Education Series
November 5, 2009
Financing 101

Rich, currently is the CEO of Advanced Liquid Logic, which is actually his third start-up company where he served as the CEO.  Advanced Liquid Logic, the technology comes from a Duke spinout and it’s exploiting a novel microfluidics technology that the company is applying to medical diagnostics and other markets.

It’s a very interesting thing.  They are taking the concept of a lab on a chip with a big monster-type of machine and putting it on a lab on a chip that you can fit in your pocket.  It really is just a small-type of component that you can carry around basically.

This is interesting for us and specifically for this talk for Financing because Rich, with this company, has raised over $25 million without any type of traditional VC funding involved.  But before Advanced Liquid Logic, Rich was the founder and CEO of TriVirix, which is a medical equipment contract manufacturer.  Again, also a lot of great things going on in the financial side,  with Rich there where he raised over $40 million in private capital and completed three different acquisitions.  But it all started when he was here, back at Duke and he completed his Engineering degree.  He would go on and spend 15 years in aerospace industry and even serving for four years as a commissioned officer in the US Air Force.

An interesting link that, sort of a funny tidbit, I realized when speaking with Rich was that while he was working in aerospace, he worked on a missile, that 202 Bravo that I have actually fired from, when I served during my time in the military.

We will not talk about any missiles or things like that tonight, but we will have Rich come up and we will get some good information that might be able to help you with your start-up company and getting it financed.  Thanks, Rich.

So, the outline of the talk is very basically talk a little bit about how much money do you need, where and how do you get it and then I’ll walk through a couple of the companies I’ve been involved with by way of case study of where did we get our money and how did we get it.

The first is apologies for gross generalizations and wholesale simplifications with things like how does equity financing work?  You know, that’s a course, not a five minutes.  I do have a couple of charts and you know, this is definitely introductory on that and other topics and I do have opinions and I will act like I knew all the answers, I don’t but after a couple semesters teaching over in the MEM program on Entrepreneurship, I have to act like a know it.   Then I was obviously not solely responsible for either raising the money or the success or the failure of the companies that I have been involved in.  It always takes a village to make these things work.

Anyway, I like to think of everything as a process, financial resource development process in this case.  So start here by defining what you need.  Find some alternatives for getting it.  Make a plan and test that with people that know a little bit about it and make it happen.  Then, you go and do something else for a while.  I think, as an entrepreneur, what you find out is there are always too many things to do that you have time for and you sort of, cycle your way through raising money, securing the intellectual property, developing the product, building the team, raising the money and around and around.  Fortunately, raising money usually comes in lumps.  If you’re lucky, big lumps and you don’t have to worry about it for a while, but it’s not something that goes away because generally, people won’t give you all the money you need at one time.  It is an episodic kind of thing.  So that’s the process.

Now, how much do you need?  It varies a lot by the type enterprise that you trying to start.  Minimum investment here for a Mac laptop and several weeks of pizza and Coca-cola, you can develop a Web 2.0 business.  If you want to get in therapeutics, a pharmaceutical in the market, you might be talking about a billion dollars.  In between there, you have everything else.

I’m currently involved in medical diagnostic technology.  We are probably looking at $25 – $30 million to get our product on the market.  It does take capital.  That doesn’t mean that that’s what you need to start.   All you need is guts to start, but it does mean that to get something on the market, you know that you got to need money on this order for these kinds of businesses.

Financing 101 Pt. 1
finance expert witness

Global Economic Outlook Pt 5

And a lot of these things have happened over the last 18 months within the Euro Zone and I think we should credit that but I think more needs to be done.  I think the Euro Zone understands that and I think it needs to happen in the next few weeks. Now the two things I would focus on are first of all the creation of this firewall.  It’s been much talked about but I think that is now a key to unlocking further confidence.

The second thing which I am not sure has been mentioned yet is Greece.  I mean we are still, at the beginning of 2012, talking about Greece again.  I think it’s  sign that this problem has not been dealt with, that this is the…the danger here is that the tail wags the dog throughout this crisis.  In other words, the inability to do the specific problems in the periphery causes shock waves across the whole European economy and the world economy and concluding the deal that will  lead to a more sustainable situation  in Greece I think is actually fundamental to stability in the Euro Zone.

But I think those things can be done and I think                 they can be done over the next couple of months.  The second thing I think that needs to happen is, I think, policy makers need to get a greater grip on the deleveraging process.  Now part of that is the deleveraging of public sector debt and obviously, talking my own book, I think we’ve demonstrated in the UK and even if you have a very high budget deficit and we have one of the highest in the world,  a credible plan to deal with it can command market confidence, give you very low rates in the market and provide a platform of stability in an otherwise very volatile time.

I think the other thing that we all need to better understand is the deleveraging happening in the financial system, an inevitable consequence of a financial crisis than a balance sheet recession.  But I think that the point that Martin made is something that I would like to see more tension to from policy makers over the coming weeks which is the vulcanization of European Finance which has happened as a number of institutions  and individuals have taken actions to protect  themselves from the terror risk of things going wrong in the Euro and what the impact it will be on the European economy and how that can be unwound which I think is very important.

Then I think one of the things we can do is also provide a regulatory certainty this year.  Of course it’s inevitable after a big banking crash that you consider how to avoid these things happening again and suddenly in Britain, and maybe we can come on and talk about that, we have done a lot of work in looking at how we can better protect our banking system that Martin himself was involved in.  But we now need to move to a point where we tell everyone what we’re going to do, get clarity on the rules, I would include the United States  in this and again provide some stability  which will provide a platform for investment.

The final point I will make is that I think we need to restore some confidence in the ability of the multilateral  organizations to work effectively.  We can come on and talk about IMF resources and I think  there is a case for increasing IMF resources and that would also be a way of demonstrating that the world wants to help together solve the world’s problems.  But I think that’s also an important task ahead for the FSB and Mark this year.  And on trade, which I continue to think is one of the most disappointing features at the moment of the world, that we have not been able to pick up the Free Trade Agreement that we know would act as a significant economic stimulus, not just for the real benefits it will bring but also because it would demonstrate that we are able to take collective action for the common good.

I think in the absence of that, I think it is actually positive to see more regional trade agreements  in the European context, a deepening of the single market and bilateral agreements in the case of Europe, bilateral agreements between the European Union and for example, India.  Which I think would again demonstrate that we are not retreating into protectionism but actually moving forward and opening up markets.  All those three things  are within the hands of policy makers. They are not things that will require acts of God and guidable  forces of nature  to deliver.  These are all things that people such as the people in this room, can get together this year and deliver.

Davos 2012 – Global Economic Outlook Pt 5

Finance: Examples of Finance Pt 4

All right, so this is too hard for you to read, so let’s do this. So, let me just give you a few examples here of the kinds, just so you realize there’s something to the Standard Theory. There’s a lot to it. So, I’m going to give you ten examples very quickly of the Standard Theory. So, these are things that I’m guessing you’ll have, at least some of them, trouble figuring out how to answer now, but by the end of the course, this should be totally obvious to you.

So, suppose you win the lottery, forty million dollars, it’s a hundred million dollars, the lottery. Now, they always give you a choice. Do you want to take five million a year over twenty years or just get forty million dollars right now? Which would you do and how do you think about what to do?

So now, you get tenure at Yale at the age of 50, say. You’re making a hundred fifty thousand dollars a year and you think professors – it’s going to go up with the rate of inflation, and that’s about it for the next twenty years until you retire. So, that’s twenty years of that and then you’re going to live another twenty years when you’re going to be making nothing. So, much of the hundred fifty thousand and let’s say inflation is three percent, and what you’d like to do is consume inflation corrected the same amount every year after you retire and before you retire, and so how much of the hundred fifty thousand should you spend this year and how much should you save? You’ll learn very quickly how to do a problem like that.

Now, President Levin wrote a few months ago, the end of last year if you remember, he said that, “Well, the crisis was bad. Yale was going to weather it, but Yale had lost twenty five percent, probably, of its endowment. That’s five billion dollars almost of the twenty three billion dollar endowment. So, much should he choose to cut? It’s his decision. How much should Yale reduce spending every year? The total spending at Yale is a little over two billion. So, the endowment goes down by five billion what cuts should you take to the budget. Should faculty salaries be cut, be frozen, should you get three TAs instead of four TAs? What should you do? How big a cut should you take? Now, the same question faced Yale in 1996 or so. I’ve forgotten exactly the year. Ten or twelve years ago, the previous president, Benno Schmidt, he suddenly noticed that there was deferred maintenance, as he called it, a billion dollars to fix the Yale buildings. That’s why, incidentally, every year another college gets fixed.

They decided there was deferred maintenance of a billion dollars. A hundred million dollars every year for ten years had to be spent. The whole endowment then was three billion, and now we had a one billion dollar deferred maintenance problem. The budget was about one billion then. So, how much should you cut the Yale budget at that time? So, Benno Schimdt said, “I’m firing fifteen percent of the faculty.” He announced he was firing fifteen percent of the faculty. That was on the front page of the New York Times, “Yale to fire faculty.” Well, did he make the right decision? Rick Levin took over as president three months later, so probably not. What mistake did he make in his calculations? What was the right response? We’re going to talk about it. It’s not that hard a problem.

Now, let’s take a slightly more complicated one. You’re a bookie. The World Series is coming up. The Yankees are playing the Dodgers, let’s say, and you know that the teams are evenly matched and you’ve got a bunch of friends who you know every game will be willing to bet at even odds on either side because they think it’s a tossup. Well, one of your customers comes to you and says, he’s a Yankee fan, he’s sure the Yankees are going to win the series. He’s willing to put up three hundred thousand dollars to bet on the Yankees.

So, if the Yankees win he gets two hundred thousand, but if the Yankees lose, he loses three hundred thousand. So, 3:2 odds he’s willing to bet on the Yankees winning the series.  Well, you say, “This guy’s sort of a sucker here. I can take big advantage of him. On the other hand, it’s a lot of money, two hundred thousand I might lose if I have to pay off and the Yankees win.

Finance: Examples of Finance Pt 4

Finance: An Experiment Of The Financial Market Pt 2

So, here are the rules. I’m going to put you all together, start inching your way towards each other and try not – now, when I say go, which won’t be for two minutes you’re going to start yelling out an offer. So, if you think it’s worth fifteen and you’re a seller, you’re not going to sell it for fifteen. You’re going to say give me twenty, or give me thirty, or give me twenty five. You’re going to try and get as much as you can. You have to yell it out. The buyers are going to be making their offers.

When the two of you see that there’s a deal, you have to shake, exchange the football and leave, and tell your number to TA. Where’s the TA? You’re going to stand outside the group that way. So, once you make a deal, you just leave and tell what’s happened to TA who’s now standing back here. So, it has to be public outcry. It’s very important that you’re yelling these things publicly and all the other people can hear you, and you’ve only got two minutes. Now, two minutes sounds like an incredibly short period of time, which it is, but it’s much longer than you think, wait, quiet here.

You shouldn’t trade – I’m giving you valuable advice, you shouldn’t trade in the first ten or fifteen seconds because you have to hear what everybody else is offering. If you trade right away, you’re probably doing something really stupid. Two minutes, though, it sounds short, is actually a very long period of time. So, be patient. Try to get the best possible price and we’ll see what happens. Any questions about what you’re doing? And now, in the heat of the moment, you might be so frustrated that you can’t sell when you think it’s worth fifteen that you sell it for ten. I’m going to expose you in front of all these people if you do that, so keep track of what you think the thing is worth. All right, any questions, anybody about what is going on? So, you have two minutes. Is there a second hand there? I can’t see it? No.

It’s on the ten, or coming to.

Where is it?

Now, it’s on the three. It’s moving.

It’s on the three. I think I see something. When it gets to the four we’re going to start. So, start, go.

(Students calling out prices)

Come out and tell TA. If you made a deal, tell TA. How much time is left? One minute left, plenty of time, one minute. Any other deal made? Write down the price and the two, what price they agreed. How much time? Twenty five seconds, stay cool. How much time? Fifteen. Stay cool. Don’t make any mistakes, ten, five, four, three, two, one, stop. Did you get all the numbers?

(Students discussing sales)

Give me back the tickets.

Was this designed to make us look bad on camera?

Give me back the tickets. No, you you’re going to look great on camera, you are. Give me all the tickets back. All tickets, I need them all back, all the stuff. God, you’re big folders here. These tickets have lasted ten years until you guys took over. They’re all crumpled up. All the ticket, I need them all back. You can sit down now. Everybody’s reported in? Now, let’s see what happened.

So, here’s what happened. Here, were the numbers. So, we have five minutes just to look at this. So, all the buyer prices are in blue, forty four, forty, thirty six, you should recognize these you buyers, and the red ones were the sellers. So, you notice that every seller, for everybody there’s a seller who’s underneath. So, it could have happened that thirty eight sold to forty four, and thirty four sold to forty at thirty seven, and twenty eight sold to thirty six at thirty two. You could have had eight trades. So, what did happen? Nothing’s like that happened. You had five trades, five pairs of people traded and there are those three poor schlumps, pairs of people at the end looking despondent, hopeless, unable to trade, worried that they were on camera.

Now, let’s see, who are the people who traded? So, name the buyers who bought. The prices.

The seller got it for nine and managed to sell it for twenty dollars. It was all quick, so I don’t have everybody’s name, because they were all rushing.

Finance: An Experiment Of The Financial Market Pt 2

Global Economic Outlook Pt 4

The actual execution of these deals is frightfully low.  Anyone who have seen the most recent results of the major investment banks would know that.  The point is there are things to do  but people are understandably pulling back.  Now, you reference the measures of the ECB in December and upcoming, absolutely taken tail risk out of the financial system which is incredibly important.  There is not going to be a style event in Europe that matters but  that is different than having a well fully functioning banking system in Europe, a banking system that is lending to the real economy.

We see deleveraging effects, perspective deleveraging effects , I don’t think we are really seeing this yet, in a number of key financial markets.  In project finance, in trade finance, in the commodity markets, there is a direct pullback by European Institutions.  I think we should be conscious that the majority of foreign holders in the emerging markets that are European and some of this pull its capital back into Europe has directly affected emerging market capital flow so we’re getting a perverse flight from where we need growth and need capital to where it’s being repaired.

Overall in terms of the where the financial system is and I will conclude with this.  The system is much healthier as a whole than it was in 2008.  Capital has increased in virtually all jurisdictions, although the least in Europe which is one of the fundamental issues.  Liquidity is up substantially in all jurisdictions.  In fact there’s probably too much liquidity being held directly in the financial sector.

Those are the positive and a number of structured markets and other markets that caused problems have diminished  very much in importance.  The other way that financial resilience has increased though is left positive and I will finish on this which is that the contingency measures that institutions are taking for the possibility of a more adverse outcome in Europe and elsewhere are holding back the willingness to provide finance across the range of projects.  So implementing pristine solutions will make a real difference in terms of corporate attitudes, I think, but also in terms of direct supplies capital.

Thank you very much.  One of the issues is I think very much raised which a lot of the banks have complained about is they’re being asked simultaneously, immensely to improve their capital ratios and to increase their lending.  I’m sure you wanted to address that sort of concern and indicate how

Completely coherent and cohesive and together the policy direction is for the world economy.

Let me now turn to you Chancellor.  You are in the slightly strange position of being the nearest we have to somebody who can speak to the Euro Zone.  The irony will not be lost on anybody.  But anyway, you are in the meeting.  I would like you to think a bit about from your perspective where the UK is in this context  and what the options of the UK are and also particularly where you personally think the Euro Zone has got to and what you might want to add to Christine Lagarde’s indication of the priorities and one of the issues that we will touch on now but that we will come to later is what you think the role of the IMF needs to be in that crisis.

Thank you Martin and yeah I am looking forward.  Probably the only time in my life I intend to speak to the Euro Zone.  I think people have commented on the mood of this conference being quite somber but having been here for a couple of days, people have also pointed out that actually people are slightly more optimistic at the end of the week than the beginning even if, as you put it Martin, that’s because they’ve been hanged.  I think, of course, the economic challenges are very self-evident to particularly western economies, particularly European economies and the UK is certainly not immune to that.

But I think, and I will focus on three things which I think rely within the hands of policy makers.  Positive actions that would turn a more optimistic mood at the end of the early week of January into a more optimistic outlook for the world economy at the end of this year.  I would focus on these.  I mean first of all, the Euro Zone.  I think it is important to recognize that for elected politicians to achieve what has already been achieved in the Euro Zone has been a real act of courage to pool your national resources into a common fund to help other countries is very controversial to undertake austerity measures  usually gets you kicked out of office unless you manage that correctly.   To undertake difficult structural reform  of pensions or labor markets is again very controversial.

Davos 2012 – Global Economic Outlook Pt 4

Global Economic Outlook Pt 3

But turning to U.S. and Japan in particular.  Those two countries are running higher deficits than the Euro Zone on a consolidated basis.  They run very high debt.  Completely different structure depending whether on you sit in Japan, the U.S. or the Euro Zone but equally those countries  have to anchor in the medium term what they’re going to do about this constant, regular deficit in the last two years and how they are going to turn around the debt trajectory that is theirs at the moment.

Emerging market economies and particularly those that are in a surplus situation, they have to continue what they have began to do which is actually re-concentrate on the internal markets on the domestic consumption  rather than rely too exclusively on exports and investment.  That could apply equally to advance the economies that are in a surplus situation.

So that’s pretty much what can be done by the Euro Zone in particular, by the rest of the world, I recognize that it’s very sketchy Martin but  in the interest of being brief and to the point I have decided to be a little bit elliptic.  What the IMF can do, because the IMF is one of the tools that I referred to earlier on, is clearly to act as an aggregator of trust, as a propagator of stability and certainly in that process needs to demonstrate the multilateral support of its membership to actually accommodate  and supplement some of the situations, not in the Euro Zone but in any country that is a member of the IMF.

There will be needs in the Euro Zone, no doubt about it but in Central and Eastern Europe there will be needs as well.  And in other countries, including low income countries, including middle income countries, there will be needs.  Short term for some, longer term for others and it’s for that reason Martin that I’m here with my little bag to actually collect a bit of money.  Thank you.

I take it that this is not a plea to the business leaders for a philantrophic gesture but we will certainly come back to the question of IMF resources after the introductory remarks.  I am going to turn now to Governor Mark Carney and how you see the world economy and you are presiding over an economy that seems to be happily immune, presiding the monetary fear obviously and a number of people say, a striking feature of this crisis is all the countries that have recently had crisis in the last three decades have managed to avoid the crisis this time.  I would also like your view on how you see the financial sector more broadly in your present role and its resilience because that has been an enormous concern in the last few months and I think it’s kind of really gone away just because Mario has decided to provide more money than before.  So what’s your perspective on where we are in those to respects.

Thank you Martin.  Just in terms of overall outlook,  I absolutely agree with the IMF.  I mean this is a 3% growth world, roughly a  2% United States, 8% China.  China decelerating but to a still strong pace.  Importantly in that though is  the impact of the Euro Zone crisis.  In our view, the impact of Europe at the level of global GDP is about 1% off the level of global GDP at the end of 2012.  So, we are all going to feel this and that’s in a world where this crisis is contained and containment is different than resolution.  So why is there the impact.  There’s an impact in terms of the order of dexterity.  In Europe, we have Europe down 1%, a little more than the IMF for 2012.

But secondly, through financial channels and I will get to that in a moment.  To go back to where you started at the very beginning though,  we are in a great deleveraging in the advanced economy and it’s very hard to grow economies, it’s very hard to de-lever unless you are increasing leverage somewhere else and there’s only really two options in the world.  The corporate sector and the emerging markets as a whole and we will hear it more directly from colleagues on the latter so I will focus on the corporate sector and the link with finance.

I think part of the mood here in talking directly to the real economy, is there’s a lot to do but there is a great deal of uncertainty we’ve contributed  to that from our respective world in our respective jurisdictions.  I will give you one fact or anecdote, if you will, the M&A backlog at major investment banks  is at an all time high so the number of potential transactions that CEO’s are contemplating, and the equity backlog is also at an all time high.

Davos 2012 – Global Economic Outlook Pt 3

Global Economic Outlook Pt 2

Thank you very much Martin.  Does this work?  Great.  You’ve asked us on the panel to focus on solutions.  I would try to do that but I would first like to start with three comments:  number 1, no one is immune in the current situation.  It’s not just a Euro Zone crisis. It’s a crisis that could have collateral effects, spill over effects around the world and you know, we will hear from others but what I have seen and what we are seeing in numbers and forecasts is that no country  is immune and everybody has an interest in making sure that this crisis is resolved adequately.

Number 2, I would say that now is the time.  There has been a lot of pressure building in order to see a solution come about.  And Number 3, I would like to just to refer to Churchill, if I may, he used to say that we have the tool, we must do the  job.  The IMF is one of the tools  but we need a tool kit to actually address the crisis as it is at the moment unfolding.

And focusing on solution Martin, if I may, I would like to address the European current situation specifically the Euro Zone.  Then what other countries need to do as well, because as I said it’s a took kit and it’s not going to rely exclusively on one single region  and number 3 what the IMF can do.

Turning to Europe and to the Euro Zone in particular, the IMF sees three necessary solutions to the current situation.  The first one is about growth and growth will be critical for many reasons.  To deal with the job issue, to deal with the physical consolidation necessity and we will come to that in a second, and to just encourage value creation in a part of the world whereas you said in the last five years there’s been pretty much zero growth.

And growth in our view is on two components, monetary policy aside which is obviously another one but  I would like to focus on the other two.  The first one is combination of liquidity so that banks in particular have sufficient liquidity and clearly what the head of the ECB has done in the last weeks of December is critical but also, more importantly at the moment, a decent firewall.  There is work underway, there is progress as we see it but it is critical that the Euro Zone members actually develop a clear, simple firewall that can operate both to limit the contagion and number two to provide this sort of act of trust in the Euro Zone so that the financing needs of that zone can actually be met if the finances of the world  are not interested in that zone.

And the second aspect that will actually build growth in the zone is obviously competitiveness and competitiveness is a very important factor that needs to be tailor made, that needs to be customized to the country as is physical consolidation but we are not suggesting that there should be physical consolidation across the board without differentiation and without specific treatment adjusted to the specifics of the country.

Some countries have to go full speed ahead and do that physical consolidation that is so much needed.  I would include in that category certainly those countries  that are under programs and a few others.  But other countries have space, have room and can do something and there are not many of them, I can think of one or two those who suddenly explore what they can do to actually boost growth in their respective quarter in order to help themselves and also in order to help the rest of the zone.

Just like competitiveness has to be tailor-made and adjusted to the weaknesses and strengths of the country to its comparative advantages equally the physical consolidation  that is needed need to be adjusted, need to be customized to the country and cannot be just across the board because otherwise, it will simply strangle the little growth that there is or there could be.

That’s as far as the growth firewall and liquidity.  Third component that we see as a necessity for Europe is clearly more integration.  I said it, I will be happy to repeat it in addition to having a monetary zone, the Euro Zone needs  to develop its physical consolidation compact that is currently in the works  and that we hope will be strengthened and validated on Monday at the Leaders Summit.  I certainly agree that it’s not a sprint, it’s a marathon but one along the way of which there needs to be deliverable.

Turning now to U.S. and Japan because this session cannot be all about Europe, Europe, although the Euro Zone has to do very important things  very quickly.

Davos 2012 – Global Economic Outlook Pt 2