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World Bank head says stimulus alone won't fix economy
Warning that 2009 will be a "very dangerous year", he said state stimulus alone would give only a short-lived economic boost that would soon evaporate unless credit flowed again.
Perhaps what we need is stimulus that initially covers a wide area of effect but can also provide economic boosts consistently in the future.
Cluster Bomb
While all weapons are potentially dangerous to civilians, cluster bombs pose a particular threat to civilians for two reasons: they have a wide area of effect, and they have consistently left behind a large number of unexploded bomblets. The unexploded bomblets remain dangerous for decades after the end of a conflict.
Behold the cluster debt bomb. Serious stimulus baby, that's what I'm talking about.
Sunday Night Futures
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Weekend:
• Schedule for Week of November 24, 2024
Monday:
• At 8:30 AM ET, *Chicago Fed National Activity Index* for October. This is
a composite index of ...
13 hours ago
4 comments:
Stag,
http://research.stlouisfed.org/publications/review/09/03/Gavin.pdf
The above is an interesting article on the fed's alphabet soup facilities. Despite all the talk of printing money, it looks like swaps, loans, debt with interest etc.
The Maiden Lane (Bear Stearns) and the AIG facilities are no doubt full of dodgy assets. Those aside, Bernanke claims the rest is AAA with a haircut. I think even Bernanke would concede that AAA isn't what it used to be. All facilities are at interest, albeit not a market rate of interest.
Cheap cheap funding, but arguably not raw printing of money. Of course it could be a sham or leger de main too (I'm more skeptical than ever).
The one item that sticks out to me is the new mortgage purchase facility. So far it's just $6.8 billion, but it's authorized for $500 billion. I read on the fed's website that this would be funded with new reserves. That could be a printing operation, but I still think printing is an empty threat. Printing is senseless.
The stated goal is to get the private sector to borrow and the banks to create credit. If/when that happens the fractional reserve printing is backed by a promise to work and produce. Of course our idea of work is suspect these days. Most of our credit creation doesn't seem to involve actual output so much as asset inflation. But in the fed's (simple) mind, all credit creation is good.
Based on Japan's experience, kick starting borrowing and lending at a profit is a difficult task in a debt saturated eCONomy. I want to see the plan if your stagflation scenario bears out - CPI heats up while output and employment are still in the tank.
Anyway, I still see too much debt.
mab,
I agree that printing is senseless. I would argue that defaulting on our debt is at least as senseless. In the long run, which senseless act will we eventually do? I sure hope I'm dead and buried then. We seem fairly adept at using smoke and mirrors to buy us time though, so call me an optimist.
I read another's opinion earlier today about the senselessness of buying credit default insurance for US Government debt. What kind of bear would do that? I'm really trying to picture the thinking.
I'm worried that the US won't print money to pay me? That's why I bought some insurance from a former prince in Nigeria? I won't know that until after I try to collect of course. In the meantime he will gladly accept my insurance payments though, lol.
If the US doesn't pay, I'd expect serious cascading defaults and biblical proportion counterparty risks.
It's all relative I suppose. At least we only have to deal with our zombie banks. The rest of the world gets to deal with their zombie banks AND... us! It seems that we are too big to fail. Nobody really wants to mark us to market, at least so far.
Zombie Country! Forget Shock and Awe, we'll Shamble and Fall! Much scarier! Rated R for financial violence and brief nudity (as the tide goes out).
I would argue that defaulting on our debt is at least as senseless. In the long run, which senseless act will we eventually do?
I was hoping we would do neither. There is wealth in this country although it is overstated.
Past generations seemed to have a better grasp of reality. During WW2, when government debt was soaring, people sacrificed. They weren't promised more and more free medical care or urged to spend. Just the opposite. They were urged to save. They went on an austerity plan. And taxes, primarily on the wealthy, were raised. Excess and windfall taxes were implemented.
Raising taxes and/or cutting spending seems like a more sensible course of action. Unpopular, but better than printing of borrowing to the point of national insolvency.
Taxing unearned income at a lower rate than earned income seems so wrong to me. So much of our wealth is shielded from taxes. The tax burden has been shifted inappropriately imo. The incentives are skewed too.
Somehow, I can't help thinking that being in the steep part of the exponential curve limits our ability to change course or act more rationally. At this point, any shock to the system is potentially deadly. The system now needs a stunningly large amount of constantly expanding new credit to survive. Any interruption and this "sucker will go down."
mab,
Taxing unearned income at a lower rate than earned income seems so wrong to me. So much of our wealth is shielded from taxes. The tax burden has been shifted inappropriately imo. The incentives are skewed too.
I agree.
There are some who would post a chart showing that the top 1% pay SO much more taxes than the bottom. I saw one recently. He asked if it was fair.
Let's extrapolate back to my just one worker left analogy. Let's say automation and outsourcing eliminated all jobs except for one worker with a "Produce" button on his desk. Would it be fair to tax that person? If we did, the top 1% of workers would pay all the taxes. I wouldn't exactly shed a tear for him though. At least he'd still have a job.
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