round_robbin
02-01-08, - 03:41 PM
http://www.caribbeannetnews.com/news-5777--6-6--.html
Commentary: Stimulus impact on trade deficit
Published on Friday, February 1, 2008 Email To Friend Print Version
By Gilbert NMO Morris
Professor Ben Bernanke – the US Federal Reserve Chairman – is a professor no more. Instead of applying economic theory, he is inventing contemporary economics by his actions that will impact not only consumers at whom it is targeted, but also trade and investment in the US, and so regional and global economies.
Born in Abaco, The Bahamas, Dr Gilbert NMO Morris is an economist and Founder/CEO of the Nassau-based Landfall Centre, a non-profit, non-political research body.
A few days ago, he cut a key interest rate (The Federal Funds Rate), by one half of a percentage point. That rate is now 3%; down from 5.25% and the most aggressive cuts in interest rate for 25 years. The objective of these cuts is to steer the economy away from recession. Whilst no two economists agree, a recession is defined as a decline in the GDP for two quarters in any one year, consecutively. There are some preliminary issues: in context, the question can be asked, is the US in recession?
Any answer exposes, first how poorly Americans understand their economy or that of the world, and second, how economists use terms which have little relevance to the everyday lives of consumers.
Last week, I wrote that the “Stimulus” would not “Stimulate”. A little analysis may assist in showing why.
First, the definition of recession is nonsensical. Why does “any one year” matter? And what if there are severe declines in two quarters overlapping from one year to another? Also, think of the variables that go into the GDP, employment, investment, corporate profits or inflation for instance. Suppose the decline is weighted in either one moreso than others?
In real terms, a Recession means that there has been a severe, medium term decline in economic activity. This brings us to the heart of our subject matter. In the case of the US, there has been a sharp decline (growth had slowed in the 4th quarter of last year to 0.6%) in two main drivers that now define the US economy:
a. Availability and Price of Credit
b. The value and sales of existing homes
House prices have fallen by 25% in recent months. Banks are refusing to lend on favourable terms that could be had only months ago. Nearly $200 billion in bad loans worldwide have been written down (UBS announced another $14 billion in losses this week). The impact will be felt both in cash flow terms and balance sheet valuations. What this means is that the impact is both large and multiplying. To understand the extents, think about the impacts of falling house prices on lenders, builders, and negative equity for homeowners. Then think – as I have explained months ago – of the bond holders who bought bonds backed by the value of the loans, which were collateralized by the value of the houses.
Last week we said the stimulus will not work, because it will have no effect on the above and the problem for the US economy is structural and not transactional.
But there will be indirect but real impacts in other areas. As I said – again last week - Americans make up 4.7% of the world’s population, but consume 47% of what the world produces. As such, if you pump $150 billion dollars into the economy, it is likely that most of that money (which the President says repeatedly should be spent) will likely be spent on imports.
That is, at a time when the Asian countries own over $3 trillion dollars of American debt, they are likely, by reason of the stimulus, to acquire another $100 billion.
Second, the money will not get into the hands of tax payers before more bad news – most of it related to subprime losses – has further negative impacts on the economy.
We believe the ‘stimulus strategy is further evidence that American politicians do not understand the US economy. For instance the real impact is not that the money from the stimulus will end up in Asia, but that under the erroneous notion that the stimulus will go to investment in US manufactures, the Bush administration is likely to continue its ‘cheap dollar’ policy. And this we believe is the more dangerous policy effect.
The deliberate cheapening of the dollar has created the reflected effect of a strong Euro and British Pound; implying that the underlying European economies are strong. But that is not so. They have been sluggish and inflationary, around 1.6 - 2.4% for the Euro-zone in total (whilst the rest of the world, excluding America, is growing at 4.3% on average), masking low growth rates in Germany, France, Italy and Spain.
Whilst – as I said – the stimulus is likely to lead to a larger trade imbalance with the rest of the world (primarily China), ironically, I have little concern about the trade imbalance. What I am concerned about is the cheap dollar strategy and the losses in the value of capital stock (houses, buildings, other financed commercial structures) in the US.
I believe the subprime shake out will run for another 12 - 18 months. As I said two months ago, look to see bankruptcies, buyouts and consolidations, continued falling valuations and prices and even criminal charges levied over the subprime mess. Yet, the underlying thinking that led to these problems is still very much in play.
For the Caribbean, obviously the impact in the decline of US economic activity is a considerable concern. Few, if any, Caribbean nations are poised to receive investor attention based on policies, infrastructure, environment and crime.
Moreover, we have done too little to offset the one leggedness of our economies, or to expand capital, credit or equity to a broader cross-section of our populations. The concentration of wealth in a few hands, means that the few hands will be less well of, the society will be less well off and the market place of ideas and capital will lack dynamism.
Commentary: Stimulus impact on trade deficit
Published on Friday, February 1, 2008 Email To Friend Print Version
By Gilbert NMO Morris
Professor Ben Bernanke – the US Federal Reserve Chairman – is a professor no more. Instead of applying economic theory, he is inventing contemporary economics by his actions that will impact not only consumers at whom it is targeted, but also trade and investment in the US, and so regional and global economies.
Born in Abaco, The Bahamas, Dr Gilbert NMO Morris is an economist and Founder/CEO of the Nassau-based Landfall Centre, a non-profit, non-political research body.
A few days ago, he cut a key interest rate (The Federal Funds Rate), by one half of a percentage point. That rate is now 3%; down from 5.25% and the most aggressive cuts in interest rate for 25 years. The objective of these cuts is to steer the economy away from recession. Whilst no two economists agree, a recession is defined as a decline in the GDP for two quarters in any one year, consecutively. There are some preliminary issues: in context, the question can be asked, is the US in recession?
Any answer exposes, first how poorly Americans understand their economy or that of the world, and second, how economists use terms which have little relevance to the everyday lives of consumers.
Last week, I wrote that the “Stimulus” would not “Stimulate”. A little analysis may assist in showing why.
First, the definition of recession is nonsensical. Why does “any one year” matter? And what if there are severe declines in two quarters overlapping from one year to another? Also, think of the variables that go into the GDP, employment, investment, corporate profits or inflation for instance. Suppose the decline is weighted in either one moreso than others?
In real terms, a Recession means that there has been a severe, medium term decline in economic activity. This brings us to the heart of our subject matter. In the case of the US, there has been a sharp decline (growth had slowed in the 4th quarter of last year to 0.6%) in two main drivers that now define the US economy:
a. Availability and Price of Credit
b. The value and sales of existing homes
House prices have fallen by 25% in recent months. Banks are refusing to lend on favourable terms that could be had only months ago. Nearly $200 billion in bad loans worldwide have been written down (UBS announced another $14 billion in losses this week). The impact will be felt both in cash flow terms and balance sheet valuations. What this means is that the impact is both large and multiplying. To understand the extents, think about the impacts of falling house prices on lenders, builders, and negative equity for homeowners. Then think – as I have explained months ago – of the bond holders who bought bonds backed by the value of the loans, which were collateralized by the value of the houses.
Last week we said the stimulus will not work, because it will have no effect on the above and the problem for the US economy is structural and not transactional.
But there will be indirect but real impacts in other areas. As I said – again last week - Americans make up 4.7% of the world’s population, but consume 47% of what the world produces. As such, if you pump $150 billion dollars into the economy, it is likely that most of that money (which the President says repeatedly should be spent) will likely be spent on imports.
That is, at a time when the Asian countries own over $3 trillion dollars of American debt, they are likely, by reason of the stimulus, to acquire another $100 billion.
Second, the money will not get into the hands of tax payers before more bad news – most of it related to subprime losses – has further negative impacts on the economy.
We believe the ‘stimulus strategy is further evidence that American politicians do not understand the US economy. For instance the real impact is not that the money from the stimulus will end up in Asia, but that under the erroneous notion that the stimulus will go to investment in US manufactures, the Bush administration is likely to continue its ‘cheap dollar’ policy. And this we believe is the more dangerous policy effect.
The deliberate cheapening of the dollar has created the reflected effect of a strong Euro and British Pound; implying that the underlying European economies are strong. But that is not so. They have been sluggish and inflationary, around 1.6 - 2.4% for the Euro-zone in total (whilst the rest of the world, excluding America, is growing at 4.3% on average), masking low growth rates in Germany, France, Italy and Spain.
Whilst – as I said – the stimulus is likely to lead to a larger trade imbalance with the rest of the world (primarily China), ironically, I have little concern about the trade imbalance. What I am concerned about is the cheap dollar strategy and the losses in the value of capital stock (houses, buildings, other financed commercial structures) in the US.
I believe the subprime shake out will run for another 12 - 18 months. As I said two months ago, look to see bankruptcies, buyouts and consolidations, continued falling valuations and prices and even criminal charges levied over the subprime mess. Yet, the underlying thinking that led to these problems is still very much in play.
For the Caribbean, obviously the impact in the decline of US economic activity is a considerable concern. Few, if any, Caribbean nations are poised to receive investor attention based on policies, infrastructure, environment and crime.
Moreover, we have done too little to offset the one leggedness of our economies, or to expand capital, credit or equity to a broader cross-section of our populations. The concentration of wealth in a few hands, means that the few hands will be less well of, the society will be less well off and the market place of ideas and capital will lack dynamism.