SESSION TWO: The way forward

Lessons from Great Depression THE ROARING TWENTIES

Lessons from Great Depression THE ROARING TWENTIES 1 – Banks: - dynamic &lucrative - eager to make loans 2 – Consumers: - easy money and HP - household debt soared - speculated stock market - high level of inequality 3 – Government: - few rules and regulations

Lessons from Great Depression THE ROARING TWENTIES

Lessons from Great Depression THE GREAT DEPRESSION

Lessons from Great Depression THE AFTERMATH: - Government REGULATION increased significantly - BANKS tightly regulated and conservative - BUT despite “boring banking”, living standards doubled

Lessons from Great Depression THE AFTERMATH: - CONSUMERS reduced debt and spending frugal - MIDDLE CLASS emerged as inequality declined

Lessons from Great Depression A SECOND GILDED ERA s political winds shift - Period renewed DEREGULATION - BANKS dynamic and lucrative - Financial sector doubles to 8% of GDP - Households accumulate DEBT - Income INEQUALITY re-emerges Historical excess wage in the financial sector

Lessons from Great Depression A SECOND GILDED ERA CONSENSUS: dominant FINANCIAL sector critical for prosperity

The way forward: scenarios REPAY, RESTRUCTURE, REBUILD 60% - Stagnation: belated US bank rescue 30% - Gradual recovery: quick resolution US crisis 10% - Global depression: current trends continue 0% - Quick turnaround: business as usual

Green shoots (or weeds?) Clear signs activity stabilising: - impact of government stimulus plans - lower turning point in cycle?

Major risks to emerging recovery Adjustable rate mortgage reset schedule

Major risks to emerging recovery “It is a triumph of hope over reality” - Justin Urquhart Stewart, Seven Investment Management

Likely trends as economy recovers?

TREND: end of the retailing era “If I wanted to destroy a nation, I would give it too much and I would have it on its knees, miserable, greedy and sick.” – John Steinbeck, 1966

TREND: end of the wealth illusion American household net wealth tumbles Personal savings rises as wealth plunges There are many reasons to cut spending but the most important is the destruction of wealth

TREND: the new “normal” Threat to wages will fade as economy recovers, but damage to housing and other assets will probably linger Households likely to remain conservative ito borrowing, lending and investing

TREND: return of the middle classes 1. Slump in asset prices: - housing & equities 2. Government policy: - notably taxes 3. Education: - more equitable distribution of income

TREND: the persistence of thrift JAPAN: ‘01 to ‘07 per capita consumer spending +0.2%

TREND: end of consumer binge

TREND: subdued commodity prices China to the rescue? - boost from government stimulus package - securing resources to diversify out of dollars - BUT unlikely rebound without US recovery

TREND: subdued growth world trade Volume of world trade

TREND: return to protectionism World Bank: 17 of G20 nations violating promise to avoid protectionist measures Thus far, 78 measures have been implemented by G20 Threatens to worsen decline in trade, worst in 80 years Hard to resist in face of domestic pressure: “Buy America” clause

TREND: rising unemployment

TREND: rising social instability US Director National Intelligence, Dennis Blair, warns Congress the global economic turmoil, and the instability it could ignite, has outpaced terrorism as the “most urgent threat facing America”

Implications for South Africa? Banking sector well regulated and financially sound National Credit Act halted debt-fuelled consumer boom Healthy state finances, scope for more government spending Conservative monetary policy, scope to cut interest rates

South Africa: crisis dampens exports European banking crisis: Europe at far greater risk than US Protectionist measures in South Africa

SA: heavily dependent on consumer Consumer spending as % GDP

SA: heavily dependent on consumer

SA: consumer spending to stagnate?

SA: unemployment & social instability ESTIMATED JOB LOSSES: South Africa: (2.2%) China: 20 million (2.5%) USA: 6 million (3.9%)

Global crisis: Brave New World The force of a correction is equal and opposite to the deception that preceded it - Daily Reckoning Australia