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Financial Policy's Day in the Sun
But politicians recognize that this time, expansionary monetary policy can not drag the world economy out of recession. Low interest rates rates are a part of the problem not the solution. In the early part of the decade, due to ultra-low interest rates, a global real estate boom that is now about to relax. This global property downturn will probably lead to a deeper than 'normal' recession.
For this reason, governments around the world turn to fiscal policy. And the Chinese government announced on Sunday in a 4 trillion yuan (870 billion U.S. dollars) fiscal stimulus package to be implemented over two years, will probably become a template for other countries' efforts.
That is, the packages we will probably see will be great. China's spending package equivalent to about 7% of gross gross annually. The stimulus is designed to maintain China's economic growth rate around 8% mark and will focus on building infrastructure and other domestic measures to promote employment.
Hundreds of thousands if not millions, of jobs lost in China's export-focused industries during 2008, which delayed the western consumption begins to bite. These jobs are not coming back, so Chinese politicians want to ensure workers find alternative employment quickly.
The massive stimulus program should go some way towards achieving this pick up in employment. Although it is too early to assess impact such a policy, there is little doubt that a large proportion of funds will be spent on costly infrastructure projects that will ultimately prove positive for commodity-related demand.
But we did not expect the message to be a heck of commodity prices in the short term. The rapid slowdown in global demand experienced in the past few months has led to rising commodity stocks and those stocks will be necessary to run down before prices and emotions begin to improve again. The notice contains remind us, however, China's industrialization process has many years to run and that the process is resource intensive.
While China is obviously acting in self interest, it's also assume a leadership role to help the global economy growth. With great power comes great responsibility. We believe that China recognizes clearly that they are in a healthy financial position and to strengthen global growth through fiscal policy (and monetary) stimulus. This fact will not be lost on members of the G20 meetings in Washington starts 15th November.
China is expected to have great influence on the American future tax package. U.S. durable the worst economic downturn since at least the deep recession of the early 1980s. Consumer costs are declining at a rapid pace.
The American automobile industry, when a symbol of U.S. manufacturing may now imploding. The Great General Motors effectively bankrupt. Year of car purchases has been brought forward after days of post 9-11 zero interest financing, which undermined the future demand. Judging by GM's share price performance, it will not be long before the government urged to bail out the iconic carmaker.
In the financial world continues losses to mount. Fannie Mae recently reported a U.S. 29 billion dollar third quarter loss and said that more state funding will be necessary. It is a similar story for the struggling insurance company AIG. Back in September, AIG secured a U.S. 85 billion dollar loan from the U.S. government at an interest rate of 8.5%. That 'much' for taxpayers has now been renegotiated. The loan has been reduced to $ 60 billion at 3% interest plus LIBOR (London Interbank Offered Rate). Furthermore, the Government will purchase U.S. $ 40 billion in preferred shares and buy U.S. $ 52.5 billion in mortgage securities.
Where is the outrage among U.S. taxpayers over the use of their (and their children) funds? Fed even ignore a request from Bloomberg to provide information on who exactly are the benefits of its trillion dollar bailouts (apart from the known candidates of Fannie, Freddie and AIG).
Against this background, the elected President Barrick Obama will soon take the reins in a society desperate for change. But what exactly change will bring is anyone's guess. Right now the future looks very bleak for the U.S., but it would be a mistake to write off the country.
A couple months ago we met with a senior leader a global investment bank, is now correctly known as a bank holding company. One comment he on the U.S. stuck with us. He said that the country's biggest competitive advantage was self-confidence, a willingness to fail and an acceptance of mistakes as a necessary precursor to success. U.S. will undoubtedly reinvent itself on the back of this competitive advantage, but the process will take some time.
We believe that the election of Obama is the first step in reigniting the America's own faith. But let us not forget the enormous problems that the U.S. currently. Years of loose monetary policy and the consequent easy credit has led to a serious misallocation of resources, apparent from the housing glut and excess capacity in auto and consumer discretionary retail sectors.
The new democratic government will use this as evidence of 'market failure', and following China's lead, implement a massive fiscal program. A fiscal stimulus equivalent to Chinese (7% of GDP) would see the U.S. initiate a nearly U.S. 1 trillion U.S. dollar spending program.
In the current environment, any tax cuts as part of a stimulus package likely be hidden, so look for an infrastructure spending program that provides employment and rebuild the country's long forgotten, and by all accounts, crumbling infrastructure.
Of course there is the question of how such a large spending program would be paid for.
Sharp fall in consumption will reduce the trade deficit, so there will be fewer U.S. dollars flowing to the predominantly Asian countries that have previously fed American appetite for imports. This means that there will be fewer dollars to be recycled into U.S. treasuries.
For this reason, we doubt any fiscal package will be as big as China. Nevertheless, higher government bond yields should be required to attract the necessary funds from offshore, because the U.S. does not have enough domestic savings to finance its own stimulus package.
Map attract foreign investment, the Fed just print the necessary funds by the Treasury and the government. All indebted governments resort to printing presses and so far we can see that the U.S. will not be different. We hasten to add that we certainly do not condone such actions, we simply say what we think will happen because history suggests it will.
We would also like to add that none of these so called government "solutions to our current problems would be needed if the global financial system has been run on the basis of "sound money". In such a scenario would not have been Such an epic boom and we would not negotiate our way through an epic bust.
We wonder whether the principles of sound money will be discussed at the forthcoming G20 Summit in Washington? Will anyone mention gold's role as the traditional anchor of global finance? After all, heralding the end of the gold standard in 1971 in a period of unprecedented growth in the U.S. debt to the great benefit of the banking system and we believe that the great detriment of society.
Summary we see the world's great powers to return to fiscal measures as the main incentive tool to reinflate the global economy. To the extent that these packages are aimed at building national infrastructure (as in the case of China) or rebuilding national infrastructure (in any case the U.S.) long-term effect on commodities should be positive.
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