Seminar economics uk_2012_eib_bnp version

A mental structure for macro-economics
1
6 Circles
5 Instruments of the ECB
5 Financial markets

Roger Jean Claessens is an International lecturer and an independent
consultant for the financial services industry.
Professor at UBI (United Business Institutes), Brussels
Expert lecturer for FEBELFIN (Federation of banks & insurance in Belgium)
Expert lecturer for the EIB in Luxembourg
Expert lecturer for BGL BNPPARIBAS
others…
Author of several books:
« Corporate culture », End 2011, Serbian Bank Association (SBA)
«What is a bank?» 2009, Promoculture & Author House, UK
« Branch Management», with P. Wiertz,2006 Promoculture & SBA
« Ethics, corporate values and prevention of money laundering», 2003 SBA
« Marketing in financial services », 2007 SBA
Member of the Luxembourg Club of Economists.

The purpose of the seminar
Provide you with a mental structure

The schedule of the day
Morning
 (a) The economic circuit
 (b) The economic cycles
 (c) The intervention of the Central Bank
 (d) The intervention of the Government
 (e) Money and the Financial Markets
Afternoon
 (1) The key economic indicators
 (2) Economic highlights of today

Morning
- (a) The economic circuit
- (b) The economic cycles
- (c) The intervention of the Central Bank
- (d) The intervention of the Government
- (e) Money and the Financial Markets
Afternoon
 (1) The key economic indicators
 (2) Economic highlights of today

(a) The economic circuit
Products
& Services
GNP
CONSUMERS
Salaries,
interest,
rentals
LABOUR
ENTREPRENEURS

Samuelson underlines that every economy has to answer
three basic questions:
What to produce?
Is determined by the consumers.
How to produce?
Is determined by the competition between companies.
For whom?
The answer to the third question is a matter of choice.

Products
& Services
GNP
CONSUMERS
Salaries,
interest,
rentals
LABOUR
ENTREPRENEURS
WHAT?
HOW?
FOR WHOM?

10
€ $
What happens when you purchase a product
in the USA?

Salaries have been doubled,
what are the consequences
on the economy?
Discussion

In Samuelson’s representation, the government is
either acting as a consumer or as a company,
dependant upon its specific action.
The guardian of the monetary system is the
central bank

Products
& Services
GNP
CONSUMERS
Salaries,
interest,
rentals
LABOUR
ENTREPRENEURS
WHAT?
HOW?
FOR WHOM?
Government Central Bank

GNP = C+I+G+(X-M)
The Gross National Product is equivalent to the sum
of private consumer spending (C), private
investment spending (I), government spending (G)
and net foreign spending (eXports - iMports) on final
goods and services output.

The goal of modern economic management is to keep
this circuit in balance.
There are two states of unbalance:
INFLATION = a state of unbalance, characterised by
increasing prices. The consequence of inflation is a
decreasing purchasing power of money, i.e. with the
same amount of money you will acquire a decreasing
number of goods and services.
DEFLATION = is an unbalance characterised by
decreasing prices

You purchase one egg
daily for one Euro!
What happens if the
farmer knows that you
had a big salary
increase?
Discussion

(c) The intervention of the central bank
19

ENTREPRENEURS
(a) The economic circuit : The Entrepreneur

The economic system depends upon people.
Adam Smith pointed out that the individual
motivation, invention, and innovation inspire an
economy to greater prosperity.
The “Wealth of a Nation” depends upon imagination,
entrepreneurship and discipline

Market competition (the invisible hand in Adam
Smith’s terms) leads a self-interested person to wake up
in the morning, look outside at the earth and produce
from its raw materials, not what he wants, but what
others want!
The invisible hand (= the market) forces people to
give up if they do not produce something more valuable
than they started with.

Strangely enough, we often make the statement in our
part of the world, that we have discouraged the
entrepreneurs because of administrative burdens, high
social security contributions and high taxation.

The entrepreneur is also someone who will continuously
struggle to balance flexibility and cost cutting in order to
discover the optimal structure of the enterprise, pushing
for productivity, which is “the” competitive asset of a
nation.

Paul Krugman highlights how the government can
induce firms to lift productivity.
Higher productivity translates into higher standard of
living.
But rising productivity requires rising investments in
plant, equipment, research and education.
High taxes discourage the search for productivity.

CONSUMERS
(a) The economic circuit : The Consumer

Keynes underlines in the mid thirties that households
are the most important component of overall demand.
Keynes appoints income the chief determinant.

Veblen went even further than Marshall and
encouraged economists to be more willing to meet with
sociologists, anthropologists and psychologists if they
wanted to develop a better understanding of the
consumer.

Veblen made this rightful conclusion that consumers’
demand of goods is determined by the use of the good
and the price that the consumer thinks other people will
think he paid!
He analysed the underlying motivation of many
purchases.

How can one get a feel for the mood of both the
consumers and the entrepreneurs?
By analysing the economic indicators.
There are about 300 major indicators. Every week about
60 of them are being published on the key economies.

Products
& Services
GNP
(b) The economic cycles

A fall of the GNP means that men and women will be
in a more precarious situation and that pessimism will
probably settle in.
It reflects the mood of the entrepreneurs and the
consumers

There are 300 hundred key economic indicators
divided into 3 categories :
1. the leading indicators = upstream indices of
change
2. the coincidental indicators = indices of change
3. the lagging indicators = downstream indices of
change
Example:
1. The stock index
2. Building permits
3. Savings versus income

Each cycle is unique but contains enough similarities with
others to enable us to draw general conclusions.
Let us also remember that many internal or external
factors can have an impact on the economy, such as:
politics, acts of war, etc.

What might be indicators
around us of an economic
boom or a slow down?
Discussion

• Production
• employment
• productivity
• wages
• sales
• profits
• output
• credit
• investment goods
• Stock exchange
• GNP
• public sentiment
• risk taking
• new activities
• interest rates
• central bank
• resources
• inventories

 Orders
 exports / imports
 employment
 sacrificed prices
 raw materials
 intervention
 bankruptcies
 savings
 Intensity of fluctuation
 Excess capacity
 liquidity
 credit-crunch
 competition
 central bank
 producers
 imagination

The better the understanding of a situation is, the
greater the probability to take a right decision, hence the
study of the economic indicators
They are the language of the economy
They are the basis for educated decisions

Markets do react to their release
Each week about 60 are released for the G 7
Monitoring is an on-going and time consuming process
Understanding their correlations is key to economic
decisions

Salaries,
interest,
rentals
LABOUR
44

The challenge of the European Union is to decrease non-
structural[1] unemployment.
[1] Structural unemployment means unemployment linked to the changes or lack of changes within the economy, the social
structure or demographics.
The unemployment in the EU remains significant for various
reasons, which we qualify as structural but are in fact non-
structural.
The equilibrium in the employment market will be more and
more difficult to establish. The structure of the age pyramid is
changing dramatically.
(b) The economic cycles: The labour market
45

(1) The key economic indicators
Population, employment & unemployment
46

47

Products
& Services
GNP
CONSUMERS
Salaries,
interest,
rentals
LABOUR
ENTREPRENEURS
48

49
The economic indicators and their correlation:
1. GDP
2. Unemployment
3. Industrial production
(Source: The Economist)
(b) The economic cycles:

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
Series1 7.3 2.7 1.5 0.8 2.8 1.7 2.2 3.6 4.2 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -2 -2.6 3.1 3.2 2.9
-4
-2
0
2
4
6
8
GDP USA
50

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
Series1 7.3 2.7 1.5 0.8 2.8 1.7 2.2 3.6 4.2 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -2 -2.6 3.1 3.2 2.9
Series2 4.1 3.9 4.5 5.4 6.1 5.9 5.8 5.7 5.7 5.4 5.2 5 4.7 4.4 4.5 4.7 5.1 6.5 9.7 9.7 9 9.1
-4
-2
0
2
4
6
8
10
12
USA
51

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
Series1 7.3 2.7 1.5 0.8 2.8 1.7 2.2 3.6 4.2 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -2 -2.6 3.1 3.2 2.9
Series2 4.1 3.9 4.5 5.4 6.1 5.9 5.8 5.7 5.7 5.4 5.2 5 4.7 4.4 4.5 4.7 5.1 6.5 9.7 9.7 9 9.1
Series3 6.4 3.3 -1 -6.4 -2.9 0.2 0.1 2.3 3.4 4.6 3.9 1.9 3.6 4.9 1.9 1.9 1 -4.5 -10. 1.7 5 3.7
-11.5
-6.5
-1.5
3.5
8.5
USA
52

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
Series1 3.7 3.6 2.3 1.7 1.3 1.2 1.0 0.5 0.6 1.9 1.4 1.6 1.7 2.6 3.1 2.6 1.6 -3.9 1.2 1.7 1.6 1.6
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
EU GDP
53

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
Series1 3.7 3.6 2.3 1.7 1.3 1.2 1.0 0.5 0.6 1.9 1.4 1.6 1.7 2.6 3.1 2.6 1.6 -3.9 1.2 1.7 1.6 1.6
Series2 9.5 9.0 8.4 8.3 8.4 8.3 8.7 8.8 8.8 9.0 8.9 8.4 8.1 7.8 7.2 7.3 7.1 9.5 9.9 9.9 9.9 9.9
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
EU
54

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
Series1 3.7 3.6 2.3 1.7 1.3 1.2 1.0 0.5 0.6 1.9 1.4 1.6 1.7 2.6 3.1 2.6 1.6 -3.9 1.2 1.7 1.6 1.6
Series2 9.5 9.0 8.4 8.3 8.4 8.3 8.7 8.8 8.8 9.0 8.9 8.4 8.1 7.8 7.2 7.3 7.1 9.5 9.9 9.9 9.9 9.9
Series3 3.8 1.9 3.8 -0.6 -0.3 -0.1 1.8 1.2 0.6 1.5 0.6 1.0 3.2 3.3 3.7 4.3 3.8 -15. 1.4 5.3 5.3 2.9
-16.0
-11.0
-6.0
-1.0
4.0
9.0
EU
55

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
GDP -5.5 -4.7 0.6 -2.9 -1.9 -0.4 0.7 1 3.4 4.3 1.1 2 4 2.7 2 2 1.3 0 -5.5 1.7 2.4 -0.6
-7
-5
-3
-1
1
3
5
AxisTitle Japan GDP
56

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
GDP -5.5 -4.7 0.6 -2.9 -1.9 -0.4 0.7 1 3.4 4.3 1.1 2 4 2.7 2 2 1.3 0 -5.5 1.7 2.4 -0.6
Unemployment 4.9 4.7 4.7 5.3 5.2 5.2 5.2 5.3 5 4.8 4.5 4.2 4.1 4.2 4 4 3.9 4 5.7 4.9 4.5 4.6
-6
-4
-2
0
2
4
6
Japan
57

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
09/20
09
05/20
10
05/20
11
08/20
11
GDP -5.5 -4.7 0.6 -2.9 -1.9 -0.4 0.7 1 3.4 4.3 1.1 2 4 2.7 2 2 1.3 0 -5.5 1.7 2.4 -0.6
Unemployment 4.9 4.7 4.7 5.3 5.2 5.2 5.2 5.3 5 4.8 4.5 4.2 4.1 4.2 4 4 3.9 4 5.7 4.9 4.5 4.6
Ind Production 1.1 0.7 -0.3 -1.2 -1.0 -1.0 0.5 0.3 0.7 0.4 0.1 0.1 0.3 0.5 0.2 0.1 0.4 0.2 -2.3 1.9 -1.3 -1.7
-6
-4
-2
0
2
4
6
Japan
58

GNP
CONSUMERS
LABOUR
ENTREPRENEURS
WHAT?
HOW?
FOR WHOM?
59

5 Key tools of the central bank
1. The printing of money
2. The short term interest rates
3. The fractional reserve
requirements
4. The open market policy
5. The financial structure of the
banks

1- Printing money

The question central bankers must answer is:
“What is the correct money supply level?”
The easy answer is enough to buy all the goods and
services produced, so that full employment is reached
without a rise in prices.
P.Q = M.V

P.Q = M.V
P = price level of goods and services
Q = quantity of goods and services produced in a
national economy (= GDP)
M = the monetary supply (the assets of the consumers
and the entrepreneurs, with corresponding liabilities for
the banking system and the central bank)
V = is the velocity of the circulation of money

Reserve requirement of 10 out of 100
100 is deposited with Bank A
Bank A is going to deposit 10 with CB and lend 90
90 is deposited with Bank B
Bank B is going to deposit 9 with CB and lend 81
81 is deposited with bank C
Bank C is going to deposit 8,1 with the CB and lend 72,9
…
M0 = cash = 100 = monetary base
M1 = cash + sight deposits = 342,9 = money supply
= (100+90+81+72,9)

The preference curve of the borrowers
2- Interest rates

The preference curve of the lenders
2- Interest rates

The cost of borrowing and the return of a deposit

When the perspective changes, the curve moves

Interest rate
Short term interest rate + inflation
= +/- long term interest rate
Real interest rate
= +/- nominal interest rate – inflation
2 – Interest rates

0
20
40
60
80
100
120
140
160
180
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12
Interest shares GDP Bonds

Money makes the economic system work.

3 – Fractional reserve requirement
The representation of a bank’s balance sheet
Sum of assets
Sum of
liabilities
Net worth
Assets-Liabilit
ies to third
parties

3 – Fractional reserve requirement
Commercial Bank Central Bank
%
DEPOSITSLOANS DEPOSITS

Commercial Bank Central Bank
Purchase of bonds
Euro
4 – Open market policy or “quantitative easing”

Commercial Bank
5 – Balance sheet structure

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
05/20
09
09/20
09
04/20
10
05/20
11
08/20
11
GDP 7.3 2.7 1.5 0.8 2.8 2.2 2.2 3.6 4.3 4.3 3.5 3.3 3.5 2.9 2.1 2.2 1.2 -1.2 -2.9 -2.6 0.01 2.8 2.3
s t interest rate 6.57 6.49 3.95 2.05 1.82 1.82 1.22 1.05 1.08 2.06 3.02 4.01 5.00 5.23 5.12 4.51 2.01 0.20 0.00 0.02 0.02 0.01 0.27
-4
-2
0
2
4
6
8
USA: GDP vs Short term interest rate
78

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
05/20
09
09/20
09
04/20
10
05/20
11
08/20
11
Short term 6.57 6.49 3.95 2.05 1.82 1.82 1.22 1.05 1.08 2.06 3.15 4.01 5.00 5.22 5.18 4.51 2.01 1.28 0.00 0.02 0.02 0.01 0.27
Long term 6.39 5.60 5.45 4.95 5.21 5.21 3.99 4.11 4.77 3.99 4.22 4.51 5.01 4.57 4.86 4.47 3.46 2.96 3.20 3.40 3.82 3.13 2.12
-0.50
0.50
1.50
2.50
3.50
4.50
5.50
6.50
7.50
USA rates
79

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
05/20
09
09/20
09
04/20
10
05/20
11
08/20
11
short term 4.18 5.1 4.55 3.38 3.42 3.42 2.55 2.08 2.07 2.15 2.13 2.44 2.87 3.61 4 4.6 4.74 3.9 1.3 0.07 0.06 1.4 1.54
long term 5.34 5.06 5.06 4.59 5.09 5.09 4.11 4.11 4.11 3.78 3.33 3.43 3.96 3.67 4.36 4.24 4.00 3.27 3.4 3.4 3.07 3.1 2.24
0
1
2
3
4
5
6
EU rates
80

05/20
00
11/20
00
05/20
01
11/20
01
05/20
02
11/20
02
05/20
03
11/20
03
05/20
04
11/20
04
05/20
05
11/20
05
05/20
06
11/20
06
05/20
07
11/20
07
05/20
08
11/20
08
05/20
09
09/20
09
04/20
10
05/20
11
08/20
11
short term 0.04 0.05 0.02 0.02 0.03 0.03 0.02 0.00 0.02 0.00 0.02 0.02 0.04 0.04 0.06 0.07 0.08 0.08 0.05 0.04 0.03 0.02 0.15
long term 0.17 0.17 0.13 0.13 0.13 0.14 0.06 0.13 0.16 0.14 0.13 0.15 0.19 0.17 0.17 0.16 0.13 0.14 0.14 0.13 0.13 0.12 1.02
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Japan rates
81

The ECB’s president argues that its most
valuable asset is information, not money.82

GNP
CONSUMERS
LABOUR
ENTREPRENEURS
WHAT?
HOW?
FOR WHOM?

About 200 years ago Adam Smith defined what, in his
view, should be the role for a government.
“First”, he said, “providing for national
defence, second, administering justice through a court
system; third, maintaining public institutions and
resources such as
roads, canals, bridges, educational systems, and the
dignity of the sovereign.”
(d) The intervention of the government

From the end of the 19th century the economic
functions of the state developed without
interruption in almost all of the industrialised
countries.
Today, simultaneously public and private institutions
exert control.

The state intervenes, as a spending prone
economic agent, to improve the real or nominal
income of certain citizens.
(For example the minimum income level are nowadays
among the usual objectives of the public authorities).
The State, all things considered, behaves exactly like
any other large consumer or investor or entrepreneur.

Keynes recommended, in addition to state intervention
resorting to budget deficits to stimulate the
economy, to spend thus more than the receipts and to
borrow to
finance this extra expenditure.
Many states did pursue this economic policy only too
well with a resulting high inflation and/or a high
indebtedness as a result.

One of the functions of the state consists in
attenuating the acute or chronic crises of
unemployment or inflation as well as promoting the
economic growth.

The balance of payments is a good source in this
respect.
It reveals the overall situation of the economy and
provides an excellent idea of the economic activity by
both the state and the consumers and producers.

Trade in goods balance -20
Plus Trade in services balance 4
Plus Transfer payments 2
Plus Investment income 6
Equals CURRENT ACCOUNT -8
Equals CAPITAL ACCOUNT 5
Plus Balancing item 3
BALANCE OF PAYMENTS 0
91

A surplus in the overall balance will indicate a
probability of a strong and stable currency, of a healthy
economy with stable interest rates, where the
investment climate should be favourable.
Deficits can occur. During recessions, balanced budgets
are probably not the best thing.
Over the course of the business cycles budgets should
be balanced.

With huge non-funded pension liabilities, European
governments will struggle to keep their budget deficits
within the limits they agreed to when joining the Euro.
The solution has to do with welfare reform rather than
tax harmonisation
The real problem in the EU is that taxes on labour are
very high, probably too high. The answer to that is not
tax harmonisation but the reform of the welfare
state.

The national debt is a relatively new and impressive
event.
On the positive side, a national debt undeniably allows
for internal transfers between individuals of the same
age or different age.
On the negative side, an external national debt
constitutes a real charge for the economy and a
limitation to the national consumption.

Intérêts
&
Capital
Time
The law of compounded interest
96
At 10 % p.a. =
capital & int.
Double in 7,2
years.

(e) Money and the financial markets

The art of asking questions…..
98

What might be the difference
between
those markets?
1. The money market
2. The capital market
3. The foreign exchange
market
4. The stock market
5. The future market
Discussion

The art of asking oneself questions

The market is available for financial transactions up
to one year for the professionals of the financial
sector.
Periods are standard and the computation of interest
is done on an exact day count basis.
Beyond one year one talks about the capital market.
1. Money Market

Quotations are with bid and offer rates
- for instance 2.25 – 2.35 for a given period;
This means that if you would call a bank you:
Could place money at 2.25 less the margin of
the bank & Could borrow at 2.35 plus the margin of
the bank (providing a contractual framework).
1. Money Market

The capital market comprehends transactions
beyond one year.
Rates reflect the inflation expectations of the market
participants, mainly the governments and institutional
borrowers and lenders.
The main instrument used to raise long term capital is
a bond.
2. Capital Market

Bond pricing is determined by:
• the rating of the issuer,
• the rating of the bond,
• the market’s appetite for a certain rate or
borrower,
• the placement power of the underwriters,
• the commissions,
• the tenor of the bond, …
2. Capital Market

Present Value (PV) & Future value (FV) of money
What will be the purchasing power of 100 € in year from
now?
2. Capital Market
105

Future value (FV) = Present value x interest rate
Present Value (PV) = Future value (FV) x discount factor
Discount factor for one year =
Discount factor for two years =
2
1
1
r
r1
1
2. Capital Market
106

Bond pricing
Please note what would happen with a 3 % and with
a 10 % discount rate!
(1.07)³
100.000
(1.07)³
10.000
(1.07)²
10.000
1.07
10.000
107.83681.6008.1608.7309.346
2. Capital Market

Price
Interest rate
Bond Price

SS&&PP RRaattiinngg MMooooddyy’’ss
EEqquuiivvaalleenntt
DDeeffaauulltt PPrroobbaabbiilliittyy
((SSuubbsseeqquueenntt yyeeaarr))
AAAAAA AAaaaa 00..0022
AAAA AAaa33//AA11 00..0055
AA AA22//AA33 00..0088
BBBBBB BBaaaa22 00..2288
BBBB BBaa11//BBaa22 11..5533
BB BBaa33//BB11 77..2288
CCCCCC BB22//BB33 1144..0000
CCCC BB33//CCaaaa 1177..0000
CC CCaaaa//CCaa 1188..2255
Credit risk – credit ratings

Samuelson’s circle shows a closed economy.
When a consumer purchases a piece of equipment in
another economic/currency system, he will need to
exchange his national currency into the foreign one.
3. Foreign Exchange Market

€ $
Consumer
Market

• The seller could accept the
currency of the buyer and
change the currency in his
home country.
• When would he choose
that option?
• What determines the value
of a currency?
112
3. The foreign exchange markets
Discussion

The foreign exchange market is the largest market in
the world. It is an over the counter
market, regulated by a strict code of conduct.
The daily turnover is now close to an estimated
$4.000.000.000.000.

It is by large the largest market in the world and the
most unpredictable, although theoretically there is a
fundamental link between the interest rates, the
balance of payments of countries and the exchange
rates of their currencies.

EUR / USD 1.39458 - 1.39475
Prices are quoted as shown:
The EUR is the unit - buyer & selling side

The dealer which is being called quotes:
EURO / USD 1.39458 – 1.39475
1.39458 is the buying side = the rate at which he is
willing to purchase EURO against USD
1.39475 is the selling side = the rate at which the dealer
is willing to sell EURO against USD

The dealer which is being called quotes:
EURO / USD 1.39458 – 1.39475
Settlement needs to be done in two working days -
physical exchange
$
€
Settlement risk !

Inflation - Interest rates & Foreign Exchange
1970 : £ = 120 FLUX = € 3
2003 : £ = 66 FLUX = € 1.60
2011 : £ = 50 FLUX = € 1.10
There is a relationship between the inflation and the
interest rate and the exchange rate
The key economics indicator : the exchange rate

Difference in
interest rate
Expected
difference in
inflation rate
Difference
between
forward & spot
rate
Expected
change in spot
rate
equals equals
equals
equals
The key economics indicator : the exchange rate

4_ Stock Market

Forward Future
Specific amounts Standard amounts
Over the counter Organised market
Settlement risk Off-setting is easy
Up to 12 months Up to what the market
will bear
5_Futures Market
122

The name derivative comes from the fact that the
profit or loss is derived from the fluctuation of another
product called the “underlying” product
5. Futures and derivatives Market

The underlying product might be a raw material
such as wheat, petrol, but could also be shares or
bonds, a portfolio, and so on.
A derivative could be an option to purchase or to
sell something at a later date at a certain price.

The prices of the derivatives will fluctuate in line
with:
1. The interest rate
2. The volatility of the underlying instrument
3. The time
4. The actual price of the underlying instrument
5. The price at maturity of the contract

“People often talk about financial markets as if they were
casinos, but they are more dangerous than any gambling
den. The numbers on a roulette wheel never change, but
markets offer no guarantee that yesterday’s odds will be
the same tomorrow. 126
(e) Les marchés financiers

0
20
40
60
80
100
120
140
160
180
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12
Market Fundamentals

What would happen in extreme
economic deterioration,
characterised by hyper-inflation?
Discussion

0
50
100
150
200
250
300
350
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12
Market Fundamentals

Morning
- (a) The economic circuit
- (b) The economic cycles
- (c) The intervention of the central bank
- (d) The intervention of the government
- (e) Money and the financial markets
Afternoon
 (1) The key economic indicators
 (2) Economic highlights of today

1. Measuring economic
activity
2. Growth
3. Population, employment
and unemployment
4. Fiscal indicators
5. Consumers
6. Investment and savings
7. The balance of payments
8. The exchange rates
9. Money and the financial
markets
10. Prices and wages

Consumption

Investments and Savings

Economic activity
The gross domestic product is measured per quarter
and is often expressed as a percentage increase or
reduction compared with the previous quarter.
The change is often annualised.
One speaks about a recession when the GDP falls two
quarters in a row.

Growth

Exchange rate

Fiscal indicators

The balance of payments

Fiscal indicators
Government spending as percentage of national income
in G7 countries
2000 2010
France 51.6 55.9
UK 36.6 52.5
Italy 46.1 51.6
Germany 45.1 47.9
Canada 42.0 43.2
United States 33.9 41.6
Japan 39.0 40.8

What are the
recent
economic
highlights?
Discussion

152
(2) The economic highlights of today

“WE ARE A MOONWALKER NATION”
President Obama visits Facebook on the 20th of
April 2011

Most crisis do not detonate like
bombs – they emerge:
What could be their indicators?

Most crisis do not detonate like
bombs – they emerge:
What could be there indicators?
° fraud, waste, abuse
° disinformation
° financial indicators
° economic indicators
° lack of common sense

1. Aging
2. Far-East
3. Connectivity
4. “GRIN”
technologies
5. Environnement
(genetics, robotics, internet, na
no technology)
The trend
163

Conclusion
Economics is the study of choice.
It does not tell us what to
choose. It only helps us
understand the consequences of
our choices.
“New Ideas from dead
economists”, Todd Bucholz

Bibliography
“Pocket Economist”, M Bishop, The Economist
Books,2000
“Economics” Paul Samuelson, Armand Colin ( old French
edition), 1964
“Economics for Professional Investors” Tim
Lee, Prentice Hall Professional Finance series, 1998
“New Ideas of Dead Economists”, Todd
Bucholz, Plume, 1990
“The world is flat”, T. Friedman, Penguin, 2006
“The dead of inflation” R.Bootle, Nicholas Brealey, 1996
“International Economics, P. Krugman & M.
Obstfeld, Addison Wesley Longman,1995

169
Addendum
Interventions & Ideas for the financial sector

Interventions in 2008 - 2009
1. Bank deposit guarantee
2. Bank recapitalisation
3. Purchase of poor quality assets
4. Liquidity guarantee
5. Lending guarantee
6. Mergers
7. Investment banks accepting commercial bank
regulations
8. Stress test

9. Short selling crack down
10. Derivatives regulations
11. Interest rates decrease
12. Help for municipalities and households
13. Corporate tax cuts
14. Tax rebates for individuals
15. Infrastructure improvement programs
16. IMF
17. EU Supervision

18. Accounting rules
19. Credit rating agencies
20. Executive pay
21. Private equity
22. Credit card regulations
23. Product transparency
24. Off-shore centres

Seminar economics uk_2012_eib_bnp version

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

Similaire à Seminar economics uk_2012_eib_bnp version

Similaire à Seminar economics uk_2012_eib_bnp version (20)

Plus de Roger Claessens

Plus de Roger Claessens (20)

Dernier

Dernier (20)

Seminar economics uk_2012_eib_bnp version