Fiscal Policy’s Day in the Sun
But policymakers recognise that this time around, accommodative monetary policy will not drag the world economy out of recession. Low interest rates are part of the problem, not the answer. In the early part of the decade, ultra low interest rates caused a global property boom that is now in the process of unwinding. This global property downturn will likely lead to a deeper than ‘normal’ recession.
For this reason, governments around the world will turn to fiscal policy. And the Chinese government’s announcement on Sunday of a 4 trillion yuan ($870 billion) fiscal stimulus package, to be implemented over two years, will likely be a template for other countries’ efforts.
That is, the packages we are likely to see will be big. China’s spending package equates to around 7% of gross domestic product on an annual basis. The stimulus is designed to maintain China’s economic growth rate around the 8% mark and will focus on the building of infrastructure and other domestic measures to promote employment.
Hundreds of thousands, if not millions, of jobs have been lost in China’s export focussed industries over the course of 2008 as slowing western consumption begins to bite. These jobs are not coming back so Chinese policy makers want to ensure workers find alternative employment quickly.
The huge stimulus program should go some way towards achieving this pick up in employment. While it is way too early to assess the impact of such a policy, there is little doubt that a large part of the funds will be spent on resource intensive infrastructure projects, which longer term will prove positive for commodity related demand.
But we don’t expect the announcement to be a circuit breaker for commodity prices in the short term. The rapid slowdown in global demand experienced over the past few months has led to growing raw material inventories and these stockpiles will need to be run down before prices and sentiment begin to improve again. The announcement does remind us however that China’s industrialisation process has many years to run and that process is resource intensive.
While China is obviously acting in self interest, it is also assuming a leadership role to assist global economic growth. With great power comes great responsibility. We believe China clearly recognises the fact that they are in a sound economic position and can bolster global growth through fiscal (and monetary) stimulus. This fact will not be lost on participants at the G20 meetings in Washington beginning 15 November.
China’s actions are likely to have a major bearing on the US’ forthcoming fiscal package. The US is enduring the worst economic downturn since at least the deep recession of the early 1980s. Consumer spending is declining at a rapid rate.
The US auto industry, once a symbol of America’s manufacturing might, is now imploding. The great General Motors is effectively bankrupt. Years of auto purchases have been brought forward following the days of post 9-11 zero interest financing, which sapped future demand. Judging by GM’s stock price performance, it will not be long before the government is called upon to bail out the iconic car manufacturer.
In the financial world, losses continue to mount. Fannie Mae just reported a US$29 billion third quarter loss and indicated that more government funding would be required. It’s a similar story for struggling insurance company AIG. Back in September, AIG secured an US$85 billion loan from the US government, at an interest rate of 8.5%. That ‘great deal’ for the taxpayer has now been renegotiated. The loan has been reduced to US$60 billion, at 3% interest plus LIBOR (London interbank offered rate). In addition, the government will purchase US$40 billion in preferred shares and buy US$52.5 billion in mortgage securities.
Where is the outrage amongst US taxpayers over the use of their (and their childrens’) funds? The Fed is even ignoring a request by Bloomberg to provide information on who exactly is receiving the benefits of its trillion dollar bailouts (apart from the known candidates of Fannie, Freddie and AIG).
Against this backdrop, President-elect Barrick Obama will soon take the reins of a society desperate for change. But what exactly the change will entail is anyone’s guess. Right now the future looks quite bleak for the US, but it would be a mistake to write the country off.
A few months ago we met with a high ranking executive of a global investment bank, now correctly known as a bank holding company. One comment he made about the US stuck with us. He said the country’s greatest competitive advantage was self-belief, a willingness to fail and an acceptance of failure as being a necessary precursor to success. The US will no doubt reinvent itself on the back of this competitive advantage, but the process will take some time.
We believe the election of Obama is the first step in reigniting America’s self belief. But let’s not ignore the immensity of the problems facing the US currently. Years of loose monetary policy and resultant easy credit has led to a gross misallocation of resources, evidenced by the housing glut and excess capacity in the 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 China’s (7% of GDP) would see the US initiate a nearly US$1 trillion spending program.
In the current environment, any tax cuts as part of a stimulus package would likely be saved so look for an infrastructure spending program that provides employment and rebuilds the country’s long forgotten, and by all accounts, crumbling infrastructure.
Of course, there is the matter of how such a huge spending program would be paid for.
Sharply slowing consumption will reduce the trade deficit, so there will be fewer dollars flowing to the predominantly Asian countries that have in the past fed US appetite for imports. This means there will be fewer dollars to be recycled back into US treasuries.
For this reason we doubt whether any fiscal package will be as large as China’s. Even so, higher government bond yields will be required to attract the necessary funds from offshore, because the US does not have enough national savings to finance its own stimulus package.
Short of attracting foreign investment, the Fed can just print the necessary funds required by the Treasury and Government. All heavily indebted governments resort to the printing presses and as far as we can see, the US will be no different. We hasten to add that we certainly do not condone such actions, we are merely saying what we think will happen, as history suggests it will.
We would also like to add that none of these so-called government ‘solutions’ to our current troubles would be necessary if the global financial system was run on the basis of ‘sound money’. In such a scenario, there would not have been such an epic boom and we would not be negotiating our way through an epic bust.
We wonder whether the principles of sound money will be discussed at the upcoming G20 conference in Washington? Will anyone mention gold’s role as the traditional anchor of global finance? After all, the end of the gold standard in 1971 ushered in a period of unparalleled debt growth in the US to the great benefit of the banking system and in our opinion, to the great detriment of society.
In summary, we see the world’s major powers reverting to fiscal measures as the main stimulus tool to reinflate the global economy. To the extent that these packages are directed towards building national infrastructure (as in the case of China) or re-building national infrastructure (in the possible case of the US) the long term effect on commodities should be positive.
IMPORTANT: This message, together with the Fat Prophets website and all its contents have been prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the Fat Prophets website. Past performance is not a reliable guide to future performance, and investors should be aware that returns can be negative. For a full explanation of the performance calculation methodology, please visit the Fat Prophets website.
For this reason, governments around the world will turn to fiscal policy. And the Chinese government’s announcement on Sunday of a 4 trillion yuan ($870 billion) fiscal stimulus package, to be implemented over two years, will likely be a template for other countries’ efforts.
That is, the packages we are likely to see will be big. China’s spending package equates to around 7% of gross domestic product on an annual basis. The stimulus is designed to maintain China’s economic growth rate around the 8% mark and will focus on the building of infrastructure and other domestic measures to promote employment.
Hundreds of thousands, if not millions, of jobs have been lost in China’s export focussed industries over the course of 2008 as slowing western consumption begins to bite. These jobs are not coming back so Chinese policy makers want to ensure workers find alternative employment quickly.
The huge stimulus program should go some way towards achieving this pick up in employment. While it is way too early to assess the impact of such a policy, there is little doubt that a large part of the funds will be spent on resource intensive infrastructure projects, which longer term will prove positive for commodity related demand.
But we don’t expect the announcement to be a circuit breaker for commodity prices in the short term. The rapid slowdown in global demand experienced over the past few months has led to growing raw material inventories and these stockpiles will need to be run down before prices and sentiment begin to improve again. The announcement does remind us however that China’s industrialisation process has many years to run and that process is resource intensive.
While China is obviously acting in self interest, it is also assuming a leadership role to assist global economic growth. With great power comes great responsibility. We believe China clearly recognises the fact that they are in a sound economic position and can bolster global growth through fiscal (and monetary) stimulus. This fact will not be lost on participants at the G20 meetings in Washington beginning 15 November.
China’s actions are likely to have a major bearing on the US’ forthcoming fiscal package. The US is enduring the worst economic downturn since at least the deep recession of the early 1980s. Consumer spending is declining at a rapid rate.
The US auto industry, once a symbol of America’s manufacturing might, is now imploding. The great General Motors is effectively bankrupt. Years of auto purchases have been brought forward following the days of post 9-11 zero interest financing, which sapped future demand. Judging by GM’s stock price performance, it will not be long before the government is called upon to bail out the iconic car manufacturer.
In the financial world, losses continue to mount. Fannie Mae just reported a US$29 billion third quarter loss and indicated that more government funding would be required. It’s a similar story for struggling insurance company AIG. Back in September, AIG secured an US$85 billion loan from the US government, at an interest rate of 8.5%. That ‘great deal’ for the taxpayer has now been renegotiated. The loan has been reduced to US$60 billion, at 3% interest plus LIBOR (London interbank offered rate). In addition, the government will purchase US$40 billion in preferred shares and buy US$52.5 billion in mortgage securities.
Where is the outrage amongst US taxpayers over the use of their (and their childrens’) funds? The Fed is even ignoring a request by Bloomberg to provide information on who exactly is receiving the benefits of its trillion dollar bailouts (apart from the known candidates of Fannie, Freddie and AIG).
Against this backdrop, President-elect Barrick Obama will soon take the reins of a society desperate for change. But what exactly the change will entail is anyone’s guess. Right now the future looks quite bleak for the US, but it would be a mistake to write the country off.
A few months ago we met with a high ranking executive of a global investment bank, now correctly known as a bank holding company. One comment he made about the US stuck with us. He said the country’s greatest competitive advantage was self-belief, a willingness to fail and an acceptance of failure as being a necessary precursor to success. The US will no doubt reinvent itself on the back of this competitive advantage, but the process will take some time.
We believe the election of Obama is the first step in reigniting America’s self belief. But let’s not ignore the immensity of the problems facing the US currently. Years of loose monetary policy and resultant easy credit has led to a gross misallocation of resources, evidenced by the housing glut and excess capacity in the 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 China’s (7% of GDP) would see the US initiate a nearly US$1 trillion spending program.
In the current environment, any tax cuts as part of a stimulus package would likely be saved so look for an infrastructure spending program that provides employment and rebuilds the country’s long forgotten, and by all accounts, crumbling infrastructure.
Of course, there is the matter of how such a huge spending program would be paid for.
Sharply slowing consumption will reduce the trade deficit, so there will be fewer dollars flowing to the predominantly Asian countries that have in the past fed US appetite for imports. This means there will be fewer dollars to be recycled back into US treasuries.
For this reason we doubt whether any fiscal package will be as large as China’s. Even so, higher government bond yields will be required to attract the necessary funds from offshore, because the US does not have enough national savings to finance its own stimulus package.
Short of attracting foreign investment, the Fed can just print the necessary funds required by the Treasury and Government. All heavily indebted governments resort to the printing presses and as far as we can see, the US will be no different. We hasten to add that we certainly do not condone such actions, we are merely saying what we think will happen, as history suggests it will.
We would also like to add that none of these so-called government ‘solutions’ to our current troubles would be necessary if the global financial system was run on the basis of ‘sound money’. In such a scenario, there would not have been such an epic boom and we would not be negotiating our way through an epic bust.
We wonder whether the principles of sound money will be discussed at the upcoming G20 conference in Washington? Will anyone mention gold’s role as the traditional anchor of global finance? After all, the end of the gold standard in 1971 ushered in a period of unparalleled debt growth in the US to the great benefit of the banking system and in our opinion, to the great detriment of society.
In summary, we see the world’s major powers reverting to fiscal measures as the main stimulus tool to reinflate the global economy. To the extent that these packages are directed towards building national infrastructure (as in the case of China) or re-building national infrastructure (in the possible case of the US) the long term effect on commodities should be positive.
IMPORTANT: This message, together with the Fat Prophets website and all its contents have been prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the Fat Prophets website. Past performance is not a reliable guide to future performance, and investors should be aware that returns can be negative. For a full explanation of the performance calculation methodology, please visit the Fat Prophets website.
