Is $150 bn Deficit spending going to save the US economy ?
Bill Gross, says not completely.
"The $150 billion "return to sender" deficit plan advanced by Bush and the Congress, for instance, amounts to just 1% of GDP and is labeled temporary. It will be of marginal benefit to long-term prosperity. To understand why, consider that the productivity of our economy ultimately depends on its ability to 1) innovate, and 2) save and invest, and that there is little of either in this stimulus package. Some have even suggested – and with my somewhat grudging concession – that this package will help the Chinese economy more than ours. Americans will use the rebates to buy Chinese imports offered at Wal-Mart and the $150 billion will then wind its way inevitably back to Asian coffers."
Some interesting points:
1. The US Fed is caught between the Devil and the Abyss. If it cuts the interest rates, it incentivises the leveraged spending behavior of the American consumer which created the credit crisis in the first place and can lead to future price bubbles in other asset classes. Also a cut in the interest rates will force the Asian central banks and Gulf states, to evaluate the falling yields on their current dollar reserves and increase the incentive for diversification into alternate currencies like Euro, Pound etc.
2. On the other hand, if the Fed does not cut the rates, it will risk being accused of inaction during a period when economy is showing signs of a recession. 2008 being an election year in US, the pressure would be immense to salvage the economy. In addition, a full blown recession, of which there is an even chance according to the great (?) Greenspan, will test the so-called "Decoupling of Emerging Market's theory" to the fullest extent. With the increased correlation between financial markets across the world and the tangled web of leverage everywhere, it will not take long for the above theory to be tested, once US enters a recession.
3. Moral of the story - Damned if you do and damned if you don't !
4. So who is responsible for this mess? Reminds of a line from the movie Beowulf about "the sins of the fathers".
For the complete article by Bill Gross see: Better late than never
"The $150 billion "return to sender" deficit plan advanced by Bush and the Congress, for instance, amounts to just 1% of GDP and is labeled temporary. It will be of marginal benefit to long-term prosperity. To understand why, consider that the productivity of our economy ultimately depends on its ability to 1) innovate, and 2) save and invest, and that there is little of either in this stimulus package. Some have even suggested – and with my somewhat grudging concession – that this package will help the Chinese economy more than ours. Americans will use the rebates to buy Chinese imports offered at Wal-Mart and the $150 billion will then wind its way inevitably back to Asian coffers."
Some interesting points:
1. The US Fed is caught between the Devil and the Abyss. If it cuts the interest rates, it incentivises the leveraged spending behavior of the American consumer which created the credit crisis in the first place and can lead to future price bubbles in other asset classes. Also a cut in the interest rates will force the Asian central banks and Gulf states, to evaluate the falling yields on their current dollar reserves and increase the incentive for diversification into alternate currencies like Euro, Pound etc.
2. On the other hand, if the Fed does not cut the rates, it will risk being accused of inaction during a period when economy is showing signs of a recession. 2008 being an election year in US, the pressure would be immense to salvage the economy. In addition, a full blown recession, of which there is an even chance according to the great (?) Greenspan, will test the so-called "Decoupling of Emerging Market's theory" to the fullest extent. With the increased correlation between financial markets across the world and the tangled web of leverage everywhere, it will not take long for the above theory to be tested, once US enters a recession.
3. Moral of the story - Damned if you do and damned if you don't !
4. So who is responsible for this mess? Reminds of a line from the movie Beowulf about "the sins of the fathers".
For the complete article by Bill Gross see: Better late than never
posted by OptionSwap at
5:31 AM
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