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Posts Tagged ‘fiscal stimulus’

Debt/GDP: Ring of Fire

Posted by Larry Doyle on February 15th, 2010 11:45 AM |

All eyes within the markets and on the global financial landscape are currently fixated on Greece. Will it default? Will the EU bail out this island nation? If so, at what cost and on what terms? What is at the core of Greece’s fiscal nightmare? Excessive debt. So, what else is new?

Do not think that the excessive debt within Greece is the only nation on our global financial landscape facing this problem. What other nations do we need to keep on our radar? Bloomberg addresses this question in writing, Carney Says Investors Signal Stimulus ‘Limits’ as Deficits Grow:

Alongside Greece, Pacific Investment Management Co. identifies the U.S., Italy, France, Japan and the U.K. as economies sitting in a “ring of fire.” Each has debt above 90 percent of gross domestic product or the potential for it to rise there soon, slowing economic growth, Pimco said.

Deutsche Bank AG this month warned that the increased cost of insuring against debt defaults by peripheral European nations may be a “dress rehearsal” for the U.S. and U.K. Credit- default swaps on Greece’s debt rose to a record this month.

Living beyond one’s means is no recipe for future economic prosperity. While politicians may talk about the need for fiscal discipline, talk is cheap. Pork piled upon pork wrapped in more pork has stolen our children’s future. Washington may not appreciate the ring of fire, but Main Street is engulfed in it.

As we navigate our global economic landscape, we now need to make sure we pack fire retardant clothing in addition to other protective materials.

What a world.

LD

Goldilocks Economy

Posted by Larry Doyle on May 8th, 2009 1:15 PM |

Will the wizards in Washington be able to recreate the Goldilocks economy, in which we can generate moderate growth with limited inflation and near full employment? Well, that economic dream is still off in the distance, but the Goldilocks analogy is appropriate. How’s that? Much like the cherished tale, the wizards are faced with three choices in virtually every situation: too much, too little, just right.

Fiscal policy
 – too much spending and/or improperly targeted spending will drive interest rates higher via massive deficits and potential hyperinflation.

 – too little spending and/or improperly targeted will not properly stimulate the economy and may lead to a bout of deflation.

 – just the right amount of spending and properly targeted will support the economy and stabilize prices.

Monetary Policy
 – too much gas on this fire will massively grow the money supply and lead to hyperinflation.

 – not enough gas or a slow delivery (the concern in Europe) will not stop the economy from sliding into a deeper recession.

 – just right will lead to support for the economy. However, our wizards must be prescient and know exactly when to turn the gas line down and then off. If this procedure is not executed with precision, our house may go up in the flames of hyperinflation. Many wise and elderly wizards, including none other than Paul Volcker, have this concern.

Regulatory  
 – overly restrictive regulations will inhibit an entrepreneurial spirit and drive business overseas.

 – ineffective, inappropriate, or insufficient regulations will lead to further moral hazards and an economic foundation akin to a pile of sand. Dare I say, our house is suffering from this problem currently.

 – just right would compel new regulators with real teeth to redraft the rules by which we play. Paul Krugman wrote “Stressing The Positive” in yesterday’s New York Time and addressed this topic. Krugman offers:

. . . what worries me most about the way policy is going isn’t any of these things. It’s my sense that the prospects for fundamental financial reform are fading.

Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a “Wall Street éminence grise”? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.

Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won’t be very different from its recent past, declaring, “I am far from convinced there was something inherently wrong with the system.” Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.

Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they’re committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they’ll soon be able to go back to playing the same games as before.

Uncle Sam’s intervention
 – too much involvement means private enterprise will either not play in our markets or charge a higher price in the form of higher interest rates (this is VERY likely to happen given the disregard for property rights and the validity of contracts).

 – too little and the economy may take another leg down in the form of a triple dip.

 – just right . . . how do we compel Uncle Sam to be a benevolent Old Man and not encroach on the principles of capitalism, free markets, and private enterprise as he tries to push forward with a massive social agenda and enormous spending plans?

The trail on which we are proceeding will be LONG. Will we be able to find that warm home in the woods? Do we have the fortitude and courage to sacrifice as need be or do we have leaders who are blinded by ambition and agendas which will cause us to lose our way?

Bring extra supplies.   

LD

Clowns to the Left of Me…

Posted by Larry Doyle on March 24th, 2009 12:52 PM |

I wrote earlier today about the ongoing pressure being applied on our senior financial representatives in Washington by their counterparts in China. In Congressional testimony this morning, both Secretary Geithner and Fed chair Bernanke have discounted China’s call for a new international reserve currency. 

The Obama administration is not only being pressured by China prior to the upcoming G-20. Our European allies also have a decidedly different tact on the appropriate financial maneuvers for global governments at this time. While the United States is currently promoting the need for massive fiscal stimulus on a global basis, the WSJ reports from Europe, ECB Chief Says Stimulus Not Needed

(more…)

Let’s Revisit Europe: The Weakest Link

Posted by Larry Doyle on March 17th, 2009 5:15 AM |

I thank our loyal reader in Michigan, Mr. Fiscal Liberal, for sharing with us a piece written by Simon Johnson, the former chief economist of the International Monetary Fund, a professor at the MIT Sloan School of Management, and a senior fellow at the Peterson Institute for International Economics.

Mr. Johnson writes about the growing problems in Europe. I am hard pressed to see how the European situation, both in the East and West, can not end badly. There are too many economies that are effectively insolvent or on the brink of insolvency. I believe this is the region of the world which will experience increased economic strife leading to social unrest and political change. Can the problems in Europe be contained given the massively interconnected world of global finance? 

Thank you again FL for sharing this very enlightening piece from Simon Johnson!!   

G-20s Real Agenda Should be Saving Europe from Itself
By Simon Johnson
Last Updated: 10:28AM GMT 16 Mar 2009

The media coverage of the G20 finance ministers meeting this weekend was dominated by the apparent battle between those who support more fiscal stimulus and those who want to impose more regulations on the financial system.

This, we are led to believe, is the big debate facing the full G20 heads of government summit early next month: the US is pushing for a bigger global fiscal stimulus (2pc extra government spending from everyone, to be monitored by the IMF), while the continental Europeans are holding out for greater regulation. Gordon Brown is trying hard to cast himself as the broker for any apparent deal.   (more…)






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