Friday, February 6, 2009
It's the DEMAND stupid!
By Alan Beattie in Washington
Published: February 6 2009 02:00
The IMF, which has urged faster and bigger restructuring plans for the financial system, also broke a taboo by calling for limited and temporary nationalisation of troubled financial institutions when shareholder equity has been wiped out.
Estimates of the so-called "fiscal multipliers" - the eventual effect on gross domestic product of a given tax cut or increase in government spending - showed that infrastructure investment would add between 0.5 per cent and 1.8 per cent to output per 1 per cent of GDP spent by government.
Tax cuts of equivalent size would add 0.3 per cent to 0.6 per cent, it said.
(Breaking with liberal orthodoxy here but it appears to this humble blogger that there is a strong incentive for tax cuts in this cycle for the simple reason that in order for demand to be restored, household balance sheets need be deleveraged. Folks need to save ... I'm starting to believe that we're going to end up with zombie banks and zombie consumers. This will be a tide that raises no boats.
It seems as if we have it all ass-backwards. At the top of the cycle we gave up our treasure for pointless foreign adventurism and tax policy that resulted in dramatic income discrepancies, when we should have invested for the future. Now at the bottom of the cycle we're, apparently, more interested in trying to repair the dam with water then repair the financial, household, and fiscal balance sheets. This 'hair of the dog' approach will lead to years of stagnation. Socialized guts inevitably leads to diminished glories. I hope Soros has Barry's ear. My concern is that we'll going to get Obama Nancypants instead of Obama Smartypants. - AM)
Should credit remain frozen, that is not necessarily the fault of the banks. A total of 359 institutions have now received Treasury funds. The missing piece of the credit puzzle is consumers' willingness to borrow. Here, much-needed deleveraging has just begun. December's savings as a percentage of disposable income stood at 3.6 per cent compared with near zero in 2007 but still well below the 6.9 per cent average since 1959. Before 1983, the average was above 9 per cent. Lombard Street Research suggests that the need to reduce debt combined with declines in individuals' net worth (which tend to increase the propensity to save), could push the newly frugal US to a savings rate as high as 10 per cent.
(The quicker we get there with a financial system that is valued per the free market ... remember that concept? ... the quicker we get through this. We can drop supply from helicopters ... but it's the DEMAND stupid. - AM)