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Posts Tagged ‘China’

According to various reports Obama’s intended stimulus package will be enormous and most experts believe the U.S. budget deficit will soon exceed 1.3 trillion.

How big is that?

It’s about 9% of the country’s GDP (gross domestic product) and to put it into even better perspective Ronald Regan’s record breaking amount was 6% of GDP!

The big question is though, what plans does the incoming administration have apart from a huge stimulus package which if used alone could well make a bad situation much worse?

Economists, for the most part divide the U.S. economy into four parts.

1) Consumer spending

2) Investment into business and housing

3) Government spending

4) Net exports

Consumer spending is at an all time low; housing construction has collapsed and businesses are afraid to invest; and the incoming government is set to prime the pumps with massive amounts of money.

So export-led growth would seem the way to go but the problem with that is that many other countries such as China need that too, and they can produce goods at a much lower cost than America can.

What is the huge stimulus package that’s waiting in the wings supposed to do?

In essence, it’s simply to buy time with the thinking being that by propping up production and boosting employment and pubic confidence in the short-term that Americans will have time to repay their debts after which they will hopefully go back to higher spending. They’ll buy houses again, meaning that home construction will restart, bringing with it heightened business investment.

1) IHS Global Insight predicts that unemployment will peak at 9.2 percent in early 2010.

2) Right now investors have rushed to buy long-term treasuries because they fear inflation, but the interest rates are so abysmally low that they will most likely seek any better alternative the moment it appears. The government’s response would of course be, to raise interest rates!

3) Rapid and huge rises in the federal debt might well cause a new lack of confidence that would in turn prolong the problems.

4) And finally, added to all the other problems will be the retiring baby-boomers and the huge strain that they will put on the economy.

Right now there is growing controversy over whether or not FDRs stimulus actually helped or hindered recovery from the Great Depression with many economists now saying that he lengthened it by several years.

For better or worse it is clear however that America is going to get a huge stimulus package but what Americans and the world will soon need to know is what the follow up plans are – if there are any at this juncture.

The latest surveys in the United States show that around 70% of people are upbeat about the economy and Obama’s ability to solve the country’s pressing problems.

What is baffling however is why they are optimistic, and I would not want to be in Obama’s shoes given such high expectations.

Optimism is good but it should have a dose of reality mixed in with it if it’s to be helpful and all the present signs are that the economy will get a helluva lot worse before it starts to get better and we’re looking at a two year period at least before anyone is likely to feel any improvements.

What we are most likely looking at is a future rise in unemployment to around nine percent and a cumulative gross domestic product drop of more than four percent making it the most severe recession since WWII and it will most likely be longer and deeper than the ones that occurred between 1974-1975 and 1980-1982.

What’s more, even if the economy were to technically exit a recession by the end of 2009, the recovery could be so weak because of the damage to the credit mechanism and overall financial system that the benefits would not be felt until a long time afterwards.

Obama will also inherit an out of control fiscal deficit that may reach as much as a trillion dollars in 2009 – 2010 and a situation in which deleveraging is still taking place and causing a worsening of the credit crunch. In addition to this nightmare scenario millions of properties are in negative equity territory and people are on the verge of losing their homes. To make things worse, the Fed will soon be at the point where it can no longer reduce the Fed funds rate and as the slack in goods, labor and commodity markets becomes deeper there will be a serious risk of deflation.

Not just the United states but the world economy will experience a severe recession and a contraction can be expected in Europe, the U.K. Canada, Japan, Australia and New Zealand and China is probably looking at growth rate of around 6% in 2009.

So, why are people feeling so optimistic?