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fiscal stimulus and crisis recovery 2009

Page history last edited by Brian D Butler 13 years, 7 months ago

 

 

 

 

 

fiscal stimulus and crisis recovery 2009

Table of Contents:


 

see also:

 

 

Size (incredible size) of fiscal stimulus

 

ncredible:   The U.S. government and the Fed spent, lent or committed $12.8 trillion, the equivalent of 90 percent of last year’s gross domestic product, to stem the longest recession since the 1930s. Obama met with more than a dozen chief executive officers from banks including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. on March 27, imploring them to get credit flowing through the markets again. Source:  bloomberg Libor Falling Fastest Since January on Credit Revival By Gavin Finch and Anna Rascouet 4.14.09

 

see more in our globotrends section on USA macro data  and LIBOR

 

Timing issues:

 

Congressional Budget Office estimates that almost 60% of the new spending projects would take place after September of 2010 (CBO, 2009, p. 3).

 

 

Will Fiscal Stimulus get us out of the economic crisis....ie. "will it work"?

 

Governments’ stimulus measures worldwide will boost GDP by 1 percent to 1.5 percent this year, Deutsche Bank AG economists led by Peter Hooper in New York said in an April 8 report. “Aggressive fiscal expansion will, in our view, play an important role in ameliorating the economic downturn and helping to lift the global economy out of its current severe recession,” the economists wrote.  Source:  bloomberg Libor Falling Fastest Since January on Credit Revival By Gavin Finch and Anna Rascouet 4.14.09

 

In other words... all of this stimulus is good for an extra 1% of GDP.  I guess the bet is that... if you can boost 1% now, and avoid all of those people losing jobs/homes, etc... then a reboud should happen quicker.  And, with a faster reboud, = more tax collection... so, maybe the cost of spending 4% of GDP to get back 1% in growth is worth it... only if it actually causes rebound to happen faster.  Thats a big "if"

 

"If there's not a restructuring of the banking system, then all the money that you can put into [monetary and fiscal] stimulus will just go into a black hole," Strauss-Kahn told a panel discussion at Georgetown University in Washington DC.

 

Size (so far)

* The IMF estimates of the size of different stimulus packages, as of the end of January, is on p. 18 of this document. The IMF estimated the global stimulus at 1.5% of world GDP. Other estimates have a higher number

 

not counting fed + central bank

not counting 'multiplier" effect

 

 

Risk:

 

The risk of this stimulus strategy for China is the same risk that the U.S. and European countries face: that the government spending and transfers do not get the economy moving and instead provide a drag on future growth as bloated government deficits and debt levels lead to lower spending or higher taxes in the future.

 

" Germany Faces Extended Downturn Despite Stimulus"

 

 

Fiscal Stimulus - Globally

 

The IMF has proposed that governments in a position to do so should act together to inject a global fiscal stimulus equivalent to about 2 percent of world GDP—$1.2 trillion.  source: http://www.imf.org/external/pubs/ft/survey/so/2009/NEW012109A.htm 

 

The IMF has recommended a combination of measures to get the world back on track, including

• action already taken by many governments to stabilize financial markets and get credit flowing again;

• fiscal stimulus through a combination of increased government spending and tax cuts to revive consumer demand;

• liquidity support for emerging market countries to reduce the adverse effects of the widespread capital outflows triggered by the financial crisis; and

• help for low-income countries harmed by fallout from the crisis and the lingering impact of last year's spike in food and fuel prices.

 

So far...The IMF has so far committed $47.9 billion in lending to a number of economies affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Serbia, and Ukraine. It announced a precautionary loan for El Salvador this month and an IMF team is also in negotiations with Turkey.

 

see GloboTrends:  Crisis watch

 

The IMF recently recommended a fiscal stimulus effort equivalent to 2% of world GDP. Strauss-Kahn said some countries face external financial difficulties or have high debt burdens that will constrain their efforts.  World GDP (nominal) in 2007 was approximately $65.61 trillion (source), so 2% would be about 1.3 trillion USD.  With the US planning $700-800bn, and many other countries chipping in their share...it seems like we are almost there...no?   NO!

 

US Plans are not enough....according to an excellent post by Martin Wolf..."The excess of income over expenditure in the private sector might be, say, 6 per cent of GDP for a lengthy period. If the structural current account deficit remained 4 per cent of GDP, the overall fiscal deficit would need to be 10 per cent of GDP. Moreover, this would be the structural – or full employment – deficit....It is easy to see, therefore, why the critics argue that the Obama plan for an additional fiscal stimulus of 5 per cent of GDP over two years is too small...It is also easy to understand why many object strongly to tax cuts, since the more likely cuts are to be saved the larger the package must be"

 

In another article , he argues..."In times of collapsing private spending, as now, it is a huge one. It means that US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world. This was a burden that crisis-hit Japan did not have to bear...Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely....And to get to this point the fiscal boost must be huge. A discretionary boost of $760bn (€570bn, £520bn) or 5.3 per cent of GDP is not enough.

 

references:

* The Aftermath of Financial Crises, December 2008; www.economics. harvard.edu/faculty/rogoff/files/ Aftermath.pdf; ** Banking Crises, December 2008, National Bureau of Economic Research Working Paper 14587, December 2008, www.nber.org; *** Prospects for the US and the World, December 2008, www.levy.org

 

note that (from these papers); " the big drivers of debt increases (after the drisis) are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn."

 

 

 

 

 

 

G20 issues / negotiations among countries...

 

US / UK  vs  France / Germany:

 

The Anglo-American side wants Europe to match it (though the United Kingdom has begun tempering its demands). It fears that the heavily export-oriented Germans in particular will use the demand created by U.S. and British stimulus on their economies to surge German exports into these countries as demand rises. Germany and France would thus get the benefit of the stimulus without footing the bill, enjoying a free ride as the United States builds domestic debt.  German Chancellor Angela Merkel argued that Germany could not afford the kind of stimulus promoted by the Anglo-Americans because German demographic problems are such that the proposed stimulus would impose long-term debt on a shrinking population, an untenable situation. Germany and France’s position makes perfect sense, whether it is viewed as Merkel has framed it, or more cynically, as Germany taking advantage of actions Obama already has taken.   source www.stratfor.com

 

 

 

Protectionism:

to rise with fiscal stimulus...as "buy america" demands are heightened...

see our discussion on protectionism

 

 

More money for banks?   = "Politically difficult"

 

Strauss-Kahn recognized that putting more public money into the banking sector to restructure it can be unpopular politically. "But the reality is that one dollar spent in restructuring the banking sector today is much more useful to achieve recovery than the same dollar spent on bridges, hospitals etc."

 

recommendation:  follow the Swedish model for recovery 

 

 

 

 

Paying for Stimulus:  how will stimulus be financed?

 

and....will it lead to crushing deficits in the future?

 

1.  Cost of bailouts

2.  Lost tax revenues from slowdown...

 

Kenneth Rogoff and Carmen Reinhart published a research paper about a month ago which should be mandatory reading for all investors2. They have studied every single banking crisis of the past 100 years and reach some rather unsettling conclusions. As they point out: "Broadly speaking, financial crises are protracted affairs". see our discussion on banking crisis

 

Following a banking crisis, asset prices fall more and for longer than most investors realise (see charts 2a and 2b). So do output and unemployment. Most importantly, though, the real value of government debt explodes (see chart 2c) but not for the reasons you might think. Yes, the bailout costs are significant, but the main driver of rising government debt is actually the subsequent collapse of tax income.

 

So when we are told that the bailout cost, although large, is still manageable, it is only half the story. The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?

 

 

 

Challenges for the Euro:

 

see our discussion on the Euro

 

Note:  invstors are betting the EU has 20% chance of breakup due to deficits (?) "The bond yields of some European nations surged as governments planned to sell record amounts of debt in 2009 to revive economies battered by the global recession.  The 11 biggest economies in the euro region will increase government debt issuance this year by about 26 percent to 1.05 trillion euros ($1.38 trillion) from 830 billion euros in 2008, London-based Riccardo Barbieri-Hermitte, head of European rates strategy at Bank of America Corp., wrote in a report last month.

 

Investors are betting the euro region will struggle to contain budget deficits that exceed the 3 percent limit outlined in the Stability and Growth Pact. Fiscal deficits will reach 11 percent in Ireland, 6.2 percent in Spain and 3.8 percent in Greece this year, according to ING.

 

 

Borrowing to pay for recovery....is there enough $$ to go around?

 

see our discussion:  Company defaults to rise

 

"Chile may be the next Latin America country to tap international debt markets, borrowing as much as $600 million, Leos said. Mexico, Brazil and Colombia have sold foreign bonds in the past two months. Chile and Peru may issue debt before the end of the first quarter, Leos said.

 

Chilean Finance Minister Andres Velasco said on Jan. 6 the government plans to issue its first foreign bonds since 2004 to help fund a fiscal stimulus plan. Peru may sell about $600 million in 30-year bonds, former Peruvian Finance Minister Luis Valdivieso said Jan. 15.

 

Brazil, which sold $1 billion of 10-year bonds on Jan. 6, may tap international bond markets at least three times this year, Leos said.

 

ING Groep NV estimates foreign bond sales may rise 68 percent to a four-year high of $65 billion in 2009 as developing countries seek to finance deficits and replenish foreign reserves after the financial crisis sparked capital outflows and drove down commodity prices."

 

 

 

 

 

Country-by-country plans for 2009

seeing the response to the current crisis reminds me of a famous song..

Fire all of your guns at once

And explode into space

Like a true nature's child

We were born, born to be wild

We can climb so high

I never wanna die

Born to be wild

 

the question is... will we have enough ammunition?  Fire all our guns at once (cut interest rates to zero...spend all we can....and pray it works)...

 

 

North America:

USA

 

We're talking big money here -- so far over $2.4 trillion. (The entire TARP -- parts I and II -- in combination with the proposed stimulus package come to just over $1.5 trillion.)

 

see more:  USA fiscal stimulus 2009

 

exerpt: 

Obama administration as it prepares an $825 billion stimulus package (or about 3 percent of GDP) that includes $90 billion for public works projects in the U.S....In the U.S., Democrats in the House of Representatives are proposing to spend $30 billion on highway construction and $10 billion on transit and rail projects over two years as part of an $825 billion stimulus package.

 

Asia:

 

After correcting for double counting and unrealistic measures, China, Singapore, South Korea and Taiwan will all enjoy a fiscal stimulus of at least 3% of GDP in 2009. China has signalled that more measures may follow over the next couple of months; it can certainly afford to spend more. On January 22nd, Singapore’s government announced a package of measures equivalent to 8% of GDP. For the first time, this will be financed partly by dipping into the government’s vast reserves.

 

 

China:

 

The IMF’s analysis – which looks at the change in the balance of the general government – puts China’s stimulus at about 2% of its GDP in 2009 and 2010, roughly the same as the US effort in 2009 and less than the US effort in 2010.

 

note:  telling the state banks to lend to support local infrastructure projects could be considered a form of stimulus (the TALF could be considered such a stimulus too; both try to keep the flow of credit going to sectors that will spend or invest).

 

China announced 4 trillion yuan ($585 billion) in spending in November to support the economy amid the global recession. China, the world’s second-biggest energy consumer, may approve a stimulus plan for the oil refining and petrochemicals industries by next week to help spur the slowing economy, two industry officials said yesterday.  bloomberg

 

Beijing is seeking to pay for its own $600 billion economic stimulus:  http://www.iht.com/articles/2009/01/07/business/yuan.php

 

The one country with money to spend is China, but...The exception of course is China, where there is long-standing scope for a stimulus. But the Chinese economy is only about 6% of world GDP and their effective additional stimulus per year is likely to be around 3% of GDP. 3% of 6% is essentially the rounding error in measuring the world’s economy, and you are unlikely to notice the effects of China’s stimulus globally - although it might just keep oil prices higher than they would be otherwise

 

01/2008; speculation the central bank will cut interest rates for the sixth time since September and the government will announce further measure to revive the economy.  Also, China said it’s enacting stimulus plans for nine industries including steelmakers, carmakers and shipbuilders as the world’s third-largest economy enters its deepest slowdown in almost two decades.

 

Japan:

Japan’s government said in December it plans to inject as much as 12 trillion yen ($133 billion) into the nation’s banks to boost their finances and stimulate lending to companies

 

 

S. Korea:

01/2009:  "South Korea has pledged about $30 billion in extra spending and tax cuts since September. China may follow a 4 trillion yuan ($585 billion) spending package announced November with a second plan as early as this month."

 

Thailand:

Thailand's Prime Minister Abhisit Vejjajiva announced the country will roll out a fiscal stimulus package (Bangkok Post) worth around $39 billion over the next three years

 

 

 

Europe:

Germany:

"Germany’s fiscal stimulus to 80.3 billion euros over two years, the Finance Ministry said. At about 1.6 percent of gross domestic product, that’s the biggest stimulus program in Europe"...The decision by Germany’s government to add a second €50 billion ($66 billion) stimulus package is a step forward, though at barely more than 1% of GDP it is still far too small (see article).

 

But to protect companies from potential defaults...Financial Times Deutschland on Wednesday reported that Berlin is weighing the establishment of a €100 billion ($132.7 billion) fund to provide German companies with liquidity should they run into refinancing difficulties. "We can't allow momentary difficulties to drive companies into bankruptcy," an unnamed conservative politician told the paper.

 

 

 

 

 

 

UK

U.K. Prime Minister Gordon Brown has proposed 500 million pounds ($734 million) to spur hiring and will outline measures tomorrow to ease lending for small businesses.

 

While not exactly a fiscal stimulus, the UK has plans to insure bank lending in attempt to get money flowing again.... proposing insurance to underwrite mortgage-backed debt and toxic assets and reversing plans to shrink Northern Rock Plc’s lending. ...The new measures would add at least 100 billion pounds ($149 billion) to the 250 billion pounds committed by Prime Minister Gordon Brown in October to underwrite a financial system choked with bad debt and reeling under the first recession in two decades.

 

France

French President Nicolas Sarkozy is preparing a second package for banks worth 10.6 billion euros and said Jan. 8 that he will emulate German plans to help companies borrow

 

 

 

Switzerland:

tiny stimulus package:  see Switzerland

 

 

 

 

Latin America

 

 

Chile

01/2009-

Chile’s economy probably will expand 2 percent this year as the government rolls out countercyclical measures, tapping an estimated $26 billion in fiscal assets, analyst Francisco Errandonea wrote in a note to clients today.  “Savings accumulated by the Chilean government during the 2004-2008 copper price rally should help Chile to defend itself from the weak external macroeconomic environment,” he wrote.

 

Mexico:

stimulus:  Calderon’s pledge to boost investment from government and private-sector partnerships by 7.5 percent this year....also...President Felipe Calderon’s plan to expand unemployment benefits and provide subsidies to purchase appliances as part of a stimulus program will help boost consumer spending, he said.  Calderon said Jan. 7 the government plans to freeze the price of gasoline and increase spending on infrastructure to help Mexico weather the global slump. The stimulus measures will add about 120 billion pesos to the economy, or about 1 percent of gross domestic product, according to estimates from Miguel Messmacher, the Mexican Finance Ministry’s chief economist.

 

 

Brazil

 

Lula has injected about $100 billion into the banking system and currency markets, cut $3.6 billion in taxes and pledged to take “all needed” steps to ensure 4 percent economic growth this year.

 

 

 

 

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